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Corporate debt restructuring

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Corporate debt restructuring

  1. 1. Presented By: Veena.P Srujan.B.M.
  2. 2. Menu1. Introduction/Background2. Meaning3. Methods of CDR4. Pros5. Cons6. CDR System Evolution - Objectives - Structure - Process - Eligibility7. Present Trends8. Live Cases9. Tax Impact10. Conclusion
  3. 3. o Debt has fixed dates for, a) interest to be paid and b) principal amount to be repaido Inadequate cash flows
  4. 4. CDR is a method used by companiesWith outstanding debt obligationsTo reorganize the terms of debt agreementsIn order to achieve some advantages.“… it is a proactive step to avoid companies from slipping into a mess from where it may become difficult to make any recovery.”
  5. 5. Waiver of part of interestConcessions in paymentConverting the un-serviced portions of interests into term loansRe-phasement of recovery schedulesReduction in marginsReassessment of credit facilities
  6. 6. Restructuring the managementConversion of debts into equityAdditional finance may be sought for bringing about change in the working of the corporation
  7. 7.  Allows a business to gain control of its finances.Improves credit rating Help from third partySatisfy creditors
  8. 8. Places a hold on new credit applicationsPublic image hamperedThe CDR mechanism has not proved to be that effective in redressing loan delinquency by big borrowers
  9. 9.  A Corporate Debt Restructuring System was evolved, and detailed guidelines were issued by RBI on August 23, 2001 for implementation by banks. The revised guidelines were issued on February 5, 2003. www.cdrindia.org , is the official website .
  10. 10. CDR StructureCDR Standingforum & Core CDR Empowered CDR Cell Group group
  11. 11. 1. -> Standing Forum is a self empowered general body -> Platform for creditors and borrowers -> Core Group ensures that companies which have had fraudulent dealings or approach the CDR system with mala -fide intent are excluded.
  12. 12. 2. -> Comprises of Executive Director level representatives from the participatory institutions.-> Decides on the preliminary reports to ascertain where all restructuring is feasible-> Hands over selected cases to the CDR Cell-> The Standing Forum issues guidelines, the Empowered Group executes them
  13. 13. -> This is responsible for assisting the Standing Forum and the Empowered Group with all their tasks-> Prepares the detailed rehabilitation plans for those proposals which are selected by the Empowered Group.
  14. 14. The steps through which a company reaches the Restructuring Mode can be divided into the following steps:Step 1 : The ProposalStep 2 : Preliminary ScrutinyStep 3 : Detailed ReviewStep 4 : The Restructuring Mode
  15. 15. a) Not applicable to accounts involving only one financial institution or one bank.b) Outstanding exposure of Rs.10 crore and above with banks and institutions.c) Loans can be considered for restructure only if => 75% of the creditors by value and => 60% of creditors (by number) agree to a restructuring.d) BIFR(Board for Industrial and Financial Reconstruction) cases are not eligible
  16. 16.  On November 25 2010, the Kingfisher board had approved a debt recast plan under which they would convert some of its debt into equity in its efforts to reduce the interest burden and stem losses. A consortium of 13 lenders to Kingfisher Airlines has taken a 23.37 per cent stake in the airline as part of a debt restructuring deal. Kingfisher had agreed to convert Rs 1,355 crore worth loan into shares
  17. 17.  The company has nearly Rs 660 crores debt on its books, of which Rs 460 crores will go for CDR Rs 250 crore will be infused under the plan approved by the corporate debt restructuring (CDR) committee.
  18. 18.  The amount of loan referred to CDR in: First half of 2011-12 - Rs 34560 crore First half of 2010-11 - Rs 5180 crore The amount of loan referred was the highest amount in the last eight years.
  19. 19. No. of Cos 50No. of Co’s 40 30 47 20 34 31 35 10 10 0 Years
  20. 20. A ) INTEREST Under Section 43B, Interest on Loan is allowed as deduction, if such interest is actually paid. Explanations 3C and 3D in section 43B clarifies that, conversion of arrear interest into a fresh loan by a bank cannot be considered as actual payment. Hence would not be allowed as deduction in the tax computation.
  21. 21.  However, the manner in which the converted interest will be allowed as deduction has been clarified in Circular No.7/2006 dated 17th July, 2006. The unpaid interest, whenever paid to the bank or financial institution, will be in the nature of revenue expenditure deserving deduction in the computation of income. The deduction will be allowed in the previous year in which the converted interest is actually paid.
  22. 22. Waiver of loan Sec 2(24) (v d) & Sec 41 (1) Sec 28 (iv) Capital Revenue Not taxableNot Taxable Taxable
  23. 23. HC Decision If Loan takenIf Loan taken Logitronic p for capital for trading ltd vs CIT assets Jubiliant Not Treated Securities Pvt. Ltd treated as vs CIT as income income
  24. 24. Banks / FIs should also disclose in their published annual Balance Sheets, under "Notes on Accounts", the following information in respect of corporate debt restructuring undertaken during the year: a. Total number of accounts ,total amount of loan assets and the amount of sacrifice in the restructuring cases under CDR. [(a) = (b) +(c) + (d)] b. The number, amount and sacrifice in standard assets subjected to CDR. c. The number, amount and sacrifice in sub-standard assets subjected to CDR. d. The number, amount and sacrifice in doubtful assets subjected to CDR.
  25. 25.  One-stop forum for lenders and creditors to arrive at mutually agreeable terms to secure their interests. CDR has gained even more significance in a time of global financial turmoil. According to an official with large credit rating agency.“The analysis shows that many restructured cases turn into a bad assets over period” A thrust area which needs a further look-in is the post- restructuring phase which demands heavy monitoring.