At BMR Advisors, we have analyzed the provisions and implications of the S4A. In addition, we have defined our views on the pitfalls and opportunities which this scheme may bring forth. This is the latest edition of The BMR View, where we attempt to look at the operational details of the scheme along with specific areas of focus, to manage risks and leverage opportunities.

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The RBI Scheme for
Sustainable Structuring
of Stressed Assets (S4A)
THE BMR VIEW

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INTRODUCTION
The Reserve Bank of India guidelines on the Scheme for
Sustainable Structuring of Stressed Assets (S4A), is the latest
salvo in the battle against India’s ballooning and unwieldly
NPA (Non-Performing Assets / Bad Loans) problem. This
follows assessments from a section of economists, financial
commentators, bankers and analysts who have been clamoring
for more than just the existing provisions, to resolve the issue
of stressed assets and troubled projects across the financial
landscape in India. Like all new things which have captured
imaginations, this scheme has been bestowed with its own
moniker - S4A. It is interesting to note, that within a month of its
release, the banking fraternity has leveraged the S4A to initiate
big ticket NPA cleanups like HCC, Alok Industries and a few
others who have been mentioned in media reports. That being
said, there is limited exposure to the details and implications
of this scheme, for the NPA landscape. This is important, since
a number of banks, investors and interested parties are in the
process of formulating S4A action plans. It is also unclear how
this scheme will play out in combination with other schemes,
provisions, laws and regulations which have been enacted over
the past decade.
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It is estimated that this year will see the overall stressed
advances in the INR 800,000 – INR 900,000 crore range. This
may be a far more relevant estimate as compared to total
NPA (Non-Performing Assets) level which is currently pegged
at INR 600,000 crores, as stressed asset levels are usually
better at showcasing the extent of the problem at hand. As
per the RBI, the GNPA (gross non-performing asset) ratio
might rise to 8.5 per cent by March 2017 from 7.6 per cent in
March 2016. Needless to say, none of these are encouraging
signs for times to come.
Gross NPAs for Indian Banks
24 23 26 27 30 32 35 37 45 55
228 227 235 251 273 278 296 314
405
540
252 251 261 278 303 311 331 351
449
595
Dec 2013 Mar 2014 June 2014 Sep 2014 Dec 2014 Mar 2015 June 2015 Sep 2015 Dec 2015 Mar 2016
Private Banks
Financial Stability Report, June 2016 – Reserve Bank of India
Public Sector Banks Total NPAs
It is expected, that the S4A, will be an improvement on
the efforts being made to manage the current slippages
of NPAs. However, certain bankers & analysts continue
to raise concerns around increasing ‘moral hazards’ as
there exists an element, of extension of timelines towards
the recognition of an eventual bad loan under the existing
management. Hence, there may be certain parallels with
the infamous CDR scheme. In this paper, we attempt to
look at the operational details of the scheme along with
the implications, benefits & areas of focus, to exploit the
relevant opportunities on offer.
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S4A Scheme Overview
2.
The stated purpose of various schemes introduced by RBI, over the last few
years, is to strengthen the lenders’ ability to deal with stressed assets and
to provide an avenue for reworking the financial structure of entities facing
genuine difficulties.
With the S4A scheme, the RBI has made provisions,
for a certain set of lenders & business owners, who
are struggling with stressed large projects which have
commenced commercial operations, but face external
or macro-economic issues. The underlying structure of
the scheme is aligned to the ‘Framework for revitalising
distressed assets in the economy’ (Released by the RBI in
2014) and incorporates enhanced timelines for recognition
of stressed loans by offering an opportunity to resolve them
by way of sale, refurbishment, recapitalization, support or a
combination.
The last 3 years, now known as the ‘Rajan era’ at RBI,
have seen an acceleration in the NPA clean-up undertaken
by the banks. This has been achieved by recognizing
NPAs and stressed accounts in the first place, setting up
SMA reporting, getting the banks to take the hit with NPA
provisions (leading to bad financial results for large banks)
and regular release of tools on incentivizing resolution.
Schemes such as SDR, 5:25, S4A and the Bankruptcy &
Insolvency Code, incorporate various facilities to extend
timelines for recognition of bad loans by giving lenders
& debtors the ability to enhance, revitalize or restructure
operations/businesses while opening opportunities for
investors & ARCs. However, concerns remain, such as
the process for removal of management, timelines for
on-ground execution, cooperation by the borrowers for a
comprehensive assessment & due diligence as well as how
regulatory/relevant bodies deal with resolution failures. In
addition, investors and ARCs have raised issues associated
with the practicalities around changing the management,
relationship with lenders/JLF and legal implications for the
sale and active management of the business.
The S4A has been formulated as an optional framework
for the resolution of large stressed accounts and has been
introduced as an enabling tool to further the purpose of
the Strategic Debt Restructuring Scheme (SDR). The basic
premise is based on the determination of sustainable debt
level of a stressed borrower and segregation of the debt
into sustainable debt (Part A) and equity or equivalent
instruments (Part B). The key difference between SDR
and S4A lies in that while the former prescribes a change
in existing promoters, S4A allows a resolution plan to be
executed without such a change. These provisions should,
in theory, allow the borrower to continue servicing Part A
from existing cash flows while allowing the lenders to look at
restructuring and resolving Part B of the loan. This however,
does come with its share of legal & practical limitations,
which have been discussed in detail in this paper.
It is important to note, that S4A has been developed
keeping in mind those big ticket projects, which may have
a. Certain inherent value and cash flows
b. Promoters who have managed the business with the
appropriate intent, standards and ethical arrangements
c. Unable to pay loans due to factors beyond their control
d. Have redeeming features to interest investors and
agencies
Considering the structure and guidelines, this scheme
seems to have been built, keeping in mind certain sectors
which have showcased capital intensive requirements and
may have lagged due to macro-economic factors rather
than internal inadequacies. With the change due at the helm
of RBI, it remains to be seen how the S4A will play out.

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Details of the S4A scheme
Name
Scheme for Sustainable Structuring of Stressed Assets (S4A)
Regulator
Reserve Bank of India (RBI)
Date
13 June 2016
Overview
The basic premise is based on the determination & servicing of sustainable debt level of a stressed borrower
and segregation of the debt into sustainable debt (Part A) and equity or equivalent instruments (Part B)
Lenders
a. The Joint Lending Forum (JLF)/consortium, will determine the debt segregation
b. Agree on a plan for rectification
c. Provisions to the extent of 20% of the total outstanding amount or 40% of the amount of debt that is seen
as unsustainable, whichever is higher
Pre-Requisites
a. Applicable for projects with an aggregate exposure of above INR 500 Cr.
b. Commercial operations should have been initiated
c. Promoters to continue active management if not implicated in the forensic review
d. Agreement on resolution plan & Part A debt by the JLF
e. Overseeing Committee (OC) constituted by the Indian Banks’ Association (IBA) to act as advisory body
Resolution Plan | Part A
a. Sustainable level of debt, serviceable by current free cash flows
b. Sustainable debt should be no less than 50% of current funded liabilities
c. Agreed upon by a minimum of 75% of lenders by value & 50% by number of JLF
d. No fresh moratorium to be granted on interest or principle repayments
e. No reduction in interest rate or repayment schedule
f. Security cover to be the same, if not more than Part A
Resolution Plan | Part B
a. Difference between the aggregate outstanding debt from all sources & Part A
b. Converted into either equity or redeemable cumulative optionally preference shares
c. Promoters may continue to hold shares to exercise control over the borrowing entity
d. Lenders may choose to convert a portion of Part B into optionally convertible debentures
Current Promoters
a. Under an ideal scenario, no change in management is envisioned
b. Promoters may continue to hold enough shares to exercise control
c. Dilute shareholdings in at least the same proportion as that of part B to total existing debt
d. Promoters to provide a personal guarantee to the JLF/Consortium for the Part A amount
e. Resolution plan & control rights structured to ensure sale of firm or company is not possible without
approval & sharing the upside with lenders (if any) towards loss in Part B
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Change in Management
a. Current promoters may be replaced with new promoters under the SDR scheme
b. Replacement based on Prudential Norms on Change in Ownership of Borrowing entities
c. Lenders may acquire majority shareholding and change management to a professional
agency/management
Asset Classification & Provisioning
a. When change of promoter takes place, these will be as per SDR or ‘Outside SDR’ scheme, as applicable
b. For same promoters, asset classification to be at standstill for 90 days from decision date (reference date)
c. If resolution plan is unimplemented post 90 days, classification aligns to extant asset classification norms
d. Account to be treated as standard, if it is as such on reference date and relevant provisions are made
e. Account To be treated as NPA, if it is as such on reference data. Part A & B classified/provisioned as NPA
f. Part A & B may be upgraded to standard post 1 year of satisfactory performance
g. For existing moratorium, upgrade to be subject to performance and may happen post 1 year of the longest
moratorium term
h. If Part A slips into NPA, account to be classified appropriately and provisions made
i. Provisions on account of difference between book & fair value of Part B, if considered in excess of
minimum provisions prescribed, shall ideally be made at min 25% each quarter, for 4 quarters
Allied Requirements
a. Techno-Economic Viability (TEV) Study
b. Forensic Or Fraud Review
c. Due Diligence – Tax, Financial, Legal, Compliance etc.
d. Resolution Plan
e. MIS/Reporting mechanism
f. Joint Lending Forum (JLF)
Limitations
a. Applied to only operational projects
b. No rescheduling of original tenure or change in interest rates of repayment of debt
c. Projects with over INR 500 Cr. outstanding advances
d. Sustainable debt under this scheme to be over 50% of total aggregate loans
e. Provisioning of 20% of total debt or 40% of Part B, whichever is higher
End Goal
a. No change in management unlike under SDR
b. Chance to turn-around bad projects
c.Equity & equivalent instruments to provide upside to lenders
d. Once Part B debt is converted to equity, banks can sell their stake to a new owner
The resolution plan will be prepared by credible professional
agencies in order to make sure that entire exercise is carried
out in a prudent and transparent manner. An Overseeing
Committee (OC) comprising of eminent experts will be set
up by the Indian Banks Association (IBA) in consultation
with the RBI. The committee will independently review
the process involved in preparation of the resolution plan
under the S4A. The IBA will collect a fee from the lenders
as a prescribed percentage of the outstanding debt to the
consortium/JLF/bank and create a corpus fund to meet the
expenses of the OC.

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While this scheme has been introduced with an aim of furthering the clean-up
and reinvigoration of stressed assets for the Indian economy, there are notable
and far reaching implications.
It is interesting to note that similar to most RBI guidelines
releases, the S4A is rich in detail but short on laying out the
broader picture on expectations, projections and outcomes.
However, we now have the benefit of 8-10 weeks of post
scheme release activity, discussions with industry leaders
and the guiding ‘RBI framework for revitalizing distressed
assets in the economy’ to bring to light, certain noted issues.
1. S4A and Current promoters: The scheme has
been created for those projects where the current
management is deemed as appropriate and capable,
to manage the affairs under the corrective action plan
(CAF).
2. Techno-Economic Viability Report: The TEV
has always been a pre-requisite for stressed asset
restructuring. However with current timelines & norms,
the comprehensiveness of a TEV based assessment
of the business, its realities and core fundamentals
have become even more critical. This is especially
since, certain critical failures of restructuring in the past
(especially under CDR) had its origins in this stage.
3. Forensic Review and Sale of Assets: In addition
to the TEV, a forensic review has become a critical
pre-requisite under various schemes introduced by
the RBI (as well as under the Bankruptcy & Insolvency
Code, 2016). This is because the outcome of this
report will determine certain rules of engagement and
applicability, regarding the resolution plan & change
in management. However, the real implication may be
related to the desired sale of acquired equity & assets
by lenders, to ARCs, Investors and AIFs, as they
may want assurances related to the extent & quality
of management control & inherent business/project
value.
4. Hunt for the right projects: The S4A scheme has
led to an intensive hunt for commercially operational
but distressed projects i.e. the ideal targets. While
this has been given impetus by lenders, debtors &
regulatory agencies for now, increasingly a number
of ARCs and Investors are hoping to identify these
targets, even before they formally enter the distressed
zone. Certain projects are being considered by
investors even though their classification is standard,
since research & market information have indicated
critical performance red flags.
5. Delaying the Pain: A whole host of schemes aimed
at resolving NPAs have been structured, so as to
extend the timelines, towards complete recognition of
bad loans on books and offer lenders the opportunity
to make amends. In itself, this is laudable and
necessary. However, certain parallels with the failed
CDR scheme are inevitable (and have been drawn
already) as the sheer quantum of stressed loans and
the current macro-economic scenario, may mean
that most of these assets will ultimately have to be
recognized as bad loans. This is a real possibility,
unless the market is appropriately motivated and
incentivized to invest and take up these assets. While
such market conditions, may be the stated intent of the
authorities, it is far from the current reality.
Implications
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The ease and opportunities which this scheme brings to the banking and
lending community has meant that there has been significant traction
seen towards this scheme. Our research has determined that a number of
organizations and lenders have been actively considering the S4A scheme
post its announcement.
The Landscape & Activities
5.
Total debt Company name Sector
Jaiprakash Associates Infrastructure61,285
GMR Infrastructure and Power Ltd Power & Infrastructure42,202
Bhushan Steel Steel39,078
Essar Steel Steel34,928
Steel Authority of India (SAIL) Steel28,221
Jaiprakash Power Ventures Ltd Power27,218
GVK Power and Infrastructure Ltd Power & Infrastructure24,914
Alok Industries Textiles19,921
Adani Enterprises Infrastructure19,298
Suzlon Ltd Power15,362
Monnet Ispat Energy Ltd Power & Steel11,075
Electrosteel Steel10,235
HCC* Infrastructure9,340
IVRCL Ltd Infrastructure8,668
Jaypee Infratech Infrastructure6,769
Unitech Real Estate3,801
Visa Steel Steel3,094
Total Debt is in INR Crores. Figures have been taken from Consolidated statements (wherever relevant)
* Research has been conducted across known media sources
HCC has already initiated the process of rectification under the S4A scheme
Sectors
S4A has project specific applicability and looks at
supporting those who have faced the brunt of macro-
economic, supply-demand or cash-flow issues. Hence,
projects in certain sectors may be considered most
relevant. Based on our research we have found that
stressed projects in sectors such as Iron & Steel, EPC,
Infrastructure, Real Estate, Textiles & Power may be in the
best position and will showcase willingness in considering
this scheme as one of the tools to be leveraged. Projects
which have demonstrated cash-flow mismatches, especially
due to pending payments may be prime targets especially
since it is found that such payments are due from PSUs,
government agencies and other stable customers.
Lenders
Banks & Financial Institutions would do well to start
assessing their NPA & Stressed Asset positions, to
motivate the relevant borrowers from actively considering
their positions with regards to the projects which meet the
necessary criteria. It is important to underline the criticality
of agencies & catalysts, used for pre-requisites such as the
TEV and forensic review, and their role in the development
of the resolution plan by the JLF. In the past, expansive

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scope of work, aggressive timelines and limited budgets
have negatively affected the final quality and outcome
of these assessments. The RBI, has been particular in
mentioning the criticality of these assessments, as they will
determine, in many ways, the future course of action and
application of schemes, management control, measures
and resolution plan. In addition to this, lenders should also
look at operationalizing, advanced analytics capabilities,
MIS, Reporting & monitoring standards, to ensure that they
have adequate oversight on critical operational, financial
& administrative parameters. This will be critical for timely
decisions, which may need to be taken, in the event that a
change in course is deemed necessary.
Borrowers
Organizations who are currently faced with the prospect of
high & unsustainable liabilities, should ideally take the first
step towards assessing their projects in alignment with the
S4A requirements. The guidelines envisage specific and
limited timelines for each stage and assessment. In this
regard, organizations would do well to ensure complete &
absolute transparency in access and delivery of information
for various assessments & reporting requirements. Though
this is a basic requirement, in the Indian context this usually
becomes a huge bone of contention, especially when
it comes to the forensic review and TEV. Inadequacies
at this level may mean that resolution plans may not go
through, either at the JLF or the OC stage. The scheme
outline is such, that most timeline dependencies are lender
agnostic but borrower specific. In this context, the OC may
(in the future) recommend drastic fines or penal action to
motivate organizations to provide the required cooperation,
information and transparency of information.
Investors and Agencies (AIF &
ARCs)
While the potential & opportunities may be extensive,
investors today are wary of committing themselves to
stressed asset investments, where the control of promoters
may continue to exist. Most players plan to keep their eyes
open and ears to the ground. But actual deals of equity
sale, asset sale or transference of management control may
take some time. Regulatory clarity, recognition of on-ground
realities & the initial success of the first few cases will
precede substantial market activity

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Conclusion
6.
The S4A is at best, an evolutionary step forward and fills
a specific need for a specific set of stressed assets. Our
research indicates that it may, if operationalized in spirit &
purpose, assist in the much required clean-up of sectors
& projects with massive debts but redeemable qualities.
It offers promoters an opportunity to resuscitate their
businesses and service debt while requiring adequate
sacrifices. It also allows for lenders and promoters to take
the benefit of a potential upside in the future, post the
successful implementation of the resolution plan.
However, it is a matter of concern that certain aspects of
the scheme are similar to CDR. Industry experts have been
unified in their views regarding the failure of CDR which
essentially led to evergreening of loans, increase in NPAs,
minimal ramifications for promoters and finally, extension
of timelines for recognition of stressed assets. In a sense,
regulators, bankers and law-makers had identified the
cancerous development of NPAs, a decade ago. However,
their treatment consisted of placebos and mismanaged
schemes. It remains to be seen if S4A will be able to break
away from this legacy.
Measures
Across a majority of stressed asset resolution cases,
lenders, investors & stakeholders, have been unable to
take the right decisions, make changes in resolution plans
or give the right directives. The primary reason for this has
been an absence of the relevant information & insights, to
validate decisions & assertions. This is key to the success
of any restructuring.
1. Deficiencies in Techo Economic Viability
(TEV) will lead to failures: The emphasis on
TEV is critical since inadequate coverage or limited
assessment at this stage has led to a number of
unsuccessful recasts in the past, especially under
the CDR norms. Operational parameters, cash flows,
soundness of business, capacity utilization and other
factors need to be assessed, validated and factored
in for Part A & B debt. Hence, gaps at this stage may
lead to unmitigated issues going ahead, as there
doesn’t seem to be a re-assessment provision, which
may open a window for a second chance.
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2. Forensic Review to determine application of
the scheme and involvement of promoters:
This review is critical for all recasts, as the current
norms and guidelines under SDR allow for the
change of active management of businesses and
projects under stress. The saying - ‘Never reinforce
a failure’ has somewhat been lost in notable cases
where a comprehensive forensic review has not been
conducted which has led to failures due to unearthed
frauds, inappropriate accounting or other reasons..
Assessment of potential issues, unethical behavior,
management control, frauds and systems, are critical
to decisions made in developing the resolution plan
and in determining the need for changing promoters.
The forensic review is a definitive requirement in the
application of S4A norms, as the outcome of this may
decide who exercises control over the stressed asset.
3. Analytics Support & Dashboards are critical
for stakeholder confidence & successful
recasts: Monitoring operations, financials & systems
of the stressed assets & related entities, to track
compliance with the resolution plan, expectations of
the JLF and state of Part A & B debt is important for
classification and provisioning norms. Stakeholder
expectations of stay well informed, will require the
appropriate analytics, technology and reporting
tools to track critical parameters of performance.
This will enable the JLF/Lenders to take measures
on asset classification& provisioning, since these
are dependent on the performance of the project,
progress against milestones & the MTM value of the
Part B instruments. Continuous monitoring and timely
actions are important follow-throughs for a successful
recast.
S4A is meant for projects run with competency & faith,
but facing bad times due to factors beyond the control of
the promoters. However, it is our view that stakeholders &
lenders will have to make the right judgements related to the
execution of critical operational elements of the restructuring
exercise (TEV, Forensic Review, Dashboards, Resolution
Plans, Due-Diligence etc.) since the S4A scheme requires
the management & promoters to stay on. In such cases,
while faith and trust are necessary, they are not always
adequate in the Indian context, to ensure success.
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Sarabjeet Singh
Partner
+91 124 669 5044
sarabjeet.singh@bmradvisors.com
Sanjay Mehta
Partner
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sanjay.mehta@bmradvisors.com
Abhishek Bali
Senior Vice President
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abhishek.bali@bmradvisors.com
Connect with the team
We look forward to hearing your views on the Scheme for Sustainable Structuring of Stressed Assets (S4A) and how the scheme
may affect your organization, reveal opportunities and have implications in the future. Please connect with our specialists and
advisors, who have been involved in assessing, researching and developing practical applications, based on the S4A guidelines.