Corporate debt-restructuring

Corporate Debt
Restructuring at PNB
Submitted To: Prof. Vinay K. Dutta
Submitted By:
Ritu Agarwal 91044
Roshan Sonthalia 91045
Saket Kumar Singh 91046
Samarth Gulati 91047

Corporate Debt Restructuring
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Acknowledgement
It is our privilege to extend our heartiest thanks to all those who have directly or indirectly
contributed significantly to complete this project with utmost accurate, validity and authenticity.
We would like to express my earnest gratitude to Prof. Vinay Dutta, Sr. Professor & Area
Chairperson, FORE School of Management, for the stupendous guidance and support that he
provided to us during the execution of the project.
We would also like to thank Mr. Narendar Thakran for giving us this golden opportunity to work
on CDR in Punjab National Bank. His role in providing a vivid insight into the topic goes
beyond the realms of any text book.
Thanking all

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TABLE OF CONTENTS
Chapter 1 Introduction........................................................................................................................................................... 5
Characteristics of CDR....................................................................................................................................................... 5
Objective................................................................................................................................................................................. 6
Chapter 2 Sources of Data.................................................................................................................................................... 6
Chapter 3 Method of Research........................................................................................................................................... 6
Chapter 4 Literature Review............................................................................................................................................... 7
Chapter 5 Understanding CDR.........................................................................................................................................10
Recovery Mechanism......................................................................................................................................................10
Debt Recovery Process...................................................................................................................................................10
Normal Recovery Procedure...................................................................................................................................10
Difficult recovery process.........................................................................................................................................11
Modes of Recovery...........................................................................................................................................................12
Importance of CDR......................................................................................................................................................13
Present Status of CDR cases .........................................................................................................................................14
Prudential and Accounting Issues.........................................................................................................................15
Chapter 6 CDR Mechanism in India.................................................................................................................................16
Objective ...............................................................................................................................................................................16
Structure ................................................................................................................................................................................16
CDR Standing Forum ..................................................................................................................................................16
CDR Empowered Group............................................................................................................................................17
Eligibility Criterion...........................................................................................................................................................18
Chapter 7 Financial Viability Parameters....................................................................................................................20
Return on Capital Employed........................................................................................................................................20
Debt Service Coverage Ratio........................................................................................................................................20
Gap between Internal Rate of Return and Cost of Capital ...............................................................................21
Extent of Sacrifice.............................................................................................................................................................21
Other Financial Parameters..........................................................................................................................................22
Break-Even Analysis...................................................................................................................................................22
Gross Profit Margin.....................................................................................................................................................22
Loan Life Ratio ..............................................................................................................................................................23
Chapter 8 Live Case Study..................................................................................................................................................24

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Major Problem Areas ......................................................................................................................................................24
Adverse Effect of reviewing accounting policy ....................................................................................................24
Failure to raise funds through Right Issue.............................................................................................................25
Effect of failure of company’s effort for a slump sale of COMAPNY X’s business...................................25
Global Recession and its effect on company’s business....................................................................................26
Future Outlook for the Company ...............................................................................................................................26
Marketing Viability...........................................................................................................................................................26
Demand and Supply Analysis.........................................................................................................................................26
Future Market Demand and Supply..............................................................................................................................27
Term Lenders CDR...........................................................................................................................................................29
Working Capital Lenders (CDR).................................................................................................................................29
Non CDR Lenders..............................................................................................................................................................30
Restructuring Proposal......................................................................................................................................................30
Restructurization of term loans..................................................................................................................................30
Restructuring of Working Capital.................................................................................................................................31
OCCPRS .................................................................................................................................................................................32
WCTL ....................................................................................................................................................................................33
Funding of interest accruing from cut off date to 30.09.2011 by converting the same into Funded
Interest Term Loans (FITL) ............................................................................................................................................33
Total FITL Calculation.....................................................................................................................................................34
Allocation of Drawing Power (DP) ..............................................................................................................................34
Additional WC funding....................................................................................................................................................35
Promoters Contribution ....................................................................................................................................................36
Financial Viability.............................................................................................................................................................37
Ratio analysis......................................................................................................................................................................38
Safeguards provided in the scheme...............................................................................................................................39
Chapter 9 : Learnings and Outcomes.............................................................................................................................41
Chapter 10 References ........................................................................................................................................................42
Chapter 11 Annexures.........................................................................................................................................................43

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CHAPTER 1 INTRODUCTION
In spite of their best efforts and intentions, sometimes corporates find themselves in financial
difficulty because of factors beyond their control and also due to certain internal reasons. For the
revival of the corporates as well as for the safety of the money lent by the banks and FIs, timely
support through restructuring in genuine cases is called for. However, delay in agreement
amongst different lending institutions often comes in the way of such endeavors. Based on the
experience in other countries like the U.K., Thailand, orea, etc. of putting in place institutional
mechanism for restructuring of corporate debt and need for a similar mechanism in India, a
Corporate Debt Restructuring System was evolved. One of the main features of the restructuring
under CDR system is the provision of two categories of debt restructuring under the CDR
system. ccounts, which are classified as ‗standard‘ and ‗sub-standard‘ in the books of the
creditors, will be restructured under the first category (Category 1). Accounts which are
classified as ‗doubtful‘ in the books of the creditors would be restructured under the second
category (Category 2).
Throwing lifelines to defaulting companies, banks are giving fresh loans to enable them to pay
interest on old loans, and converting working capital outstanding into term loans.
Such deals, better known as evergreening of sticky loans, are being struck by almost all
corporates who are taking refuge in the Reserve Bank of India‘s (RBI) new norms that allow
restructuring of loans. Bankers have a name for such activities: ―deep restructuring‖.
Close to a few thousand crore of loans are at various stages of such ―deep restructuring‖. On the
bright side, disbursing new money would keep afloat several companies and help banks hide bad
loans. But the move could backfire on lenders if borrowers continue to find their fortunes
declining.
Typically, while restructuring an account, a bank gives a borrower longer time to repay the loan
and, in certain cases, a borrower is given a special dispensation on payment of monthly
installments for a fixed period — moratorium period. However, during this moratorium period,
the borrower does not require making any payment for the principal component of the loan, but
has to pay the interest component.
Under deep restructuring, borrowers are given a loan for making payment of interest component.
Such loans are known as ‗funded interest term loan‘ (FITL). ―This loan is given only to those
corporates who may not be in a position to service even the interest component,‖ pointed out a
senior banker from a large commercial bank.
CHARACTERISTICS OF CDR
1. Increasing the moratorium of Loan installments
2. Funding of the interest of both term Loans and Working Capital through FITL

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3. Additional funding if required
4. Lowering of interest rates
5. Conversion of debt into equity and mortgaging the equity with the bank.
OBJECTIVE
The objective is to understand the process of Corporate Debt Restructuring(CDR) and to gain an
insight into the various issues involved while considering an organization for the same, compare
India with the CDR mechanism that exists world wide and to understand the various steps taking
by the banks and other financial institutions involved while doing CDR of an organization.
CHAPTER 2 SOURCES OF DATA
The primary has been collected directly from the interaction with the bank‘s official. The
secondary data will be taken from manuals, circulars etc. from Punjab National Bank, RBI
website and CDR Mechanism Cell‘s website.
CHAPTER 3 METHOD OF RESEARCH
The research methodology for the project consists of interviewing of Punjab National Bank
Officials, studying the Policy guidelines laid by PNB and RBI in Corporate Debt Restructuring
and analyzing the learning from this study on a Live Project which has been already allotted to
us.

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CHAPTER 4 LITERATURE REVIEW
Decentralized Creditor-Led Corporate Restructuring Cross-CountryExperience’, Marinela
E. Dado and Daniela Klingebiel talks about the CDR mechanism being followed worldwide.
According to this paper, internationally, the key objectives of corporate debt restructuring
strategies have been to support an economy-wide recovery through:
(i) Facilitating the exit of nonviable firms (i.e., firms without a reasonable prospect of
achieving sustainable profitability);and
(ii) Enabling the timely restructuring of debt and access to sufficient financing to sustain
viable firms.
Corporate debt restructuring can take many forms as discussed above. To be successful in
securing the longer term viability of corporates, debt restructuring will often be accompanied by
operational restructuring addressing the structure and efficiency of the firm‘s business through
closures and reorganization of productive capacity.
The CDR approaches that are being followed worldwide can be grouped under three main heads:
A case by case, market-based, approach has been used in which private sector debtors and
creditors are generally left to determine the nature, scope and terms of the burden sharing on a
case by case basis and principally relying on market solutions (e.g., Hungary and Poland in the
1990s, Korea, Malaysia, and Thailand in the late 1990s).8 While this approach is essentially
market-oriented, the government would still have an important role through implementing legal
reforms to encourage timely market-driven restructuring. Furthermore, fiscal support (if any) in
this approach would be on an indirect basis through support of the financial sector (e.g., use of
public funds to recapitalize domestic banks that meet certain soundness requirements, and
thereby strengthen the capacity of those banks to absorb losses within debt restructuring).
An across the board approach involves direct government involvement that determines the
method and distribution of burden sharing among relevant parties. Under this approach, the
relevant solutions are generally applicable across the board to all economic agents in the pre-
specified category, regardless of individual factors. There are two alternative characteristic
features of this approach. The first is direct fiscal support to corporates, which could range from
a predetermined amount of support for specified purposes (e.g., to protect against foreign
exchange rate risk), to tax and other fiscal-related incentives for firms that engage in
restructuring. The second is a legislatively mandated absorption of losses by creditors; such a
strategy should be avoided given the risks of legal challenge and undermining the credit culture
of a country.

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An intermediate approach has been applied that relies on case by case negotiations, supported
by government financial incentives, bolstered by legal and regulatory reforms, and establishment
of public entities to galvanize debt restructuring.
A good CDR mechanism must discourage strategic behavior by creditors and debtors and should
not discriminate between foreign and domestic creditors.
The so-called London Approach has influenced the evolution of government sponsored
guidelines for multicreditor out-of-court debt restructurings. Under the leadership of the Bank of
England, UK banks developed the London Approach as a set of informal guidelines on a
collective process for voluntary workouts to restructure debts of corporates in distress, while
maximizing their value as going concerns. Subsequently, countries facing wide scale corporate
debt distress in the late 1990‘s turned to the London Approach as a basis to develop their own
guidelines to encourage out-of-court corporate debt workouts. For instance, in Indonesia, Korea,
Malaysia, and Thailand, the London Approach was modified through enhancing the centralized
role of government agencies to provide incentives for restructurings. Furthermore, in these
country cases, government enhancements were added to establish a more structured framework
to support restructurings.
‘Corporate Insolvency & Debt Restructuring - Examining the value of Voluntary
Administration examines the role of Asset Financing Companies (AFCs) in CDR and tries to
analyse the importance of such organizations in CDR. According to this paper, Around the
world, Asset Management Companies (AMCs) have been used to spearhead the restructuring of
corporate debt (with a view to maximizing asset recovery and supporting rehabilitation of viable
corporates overtime) as well as to support the recovery of the banking sector (through
transferring out bad assets, causing banks to recognize losses and allowing banks to focus on
their core business). AMCs have proved relatively more effective in corporate debt restructuring
episodes when there are a large number of troubled corporations, relatively homogeneous loans,
or where AMCs bring specific restructuring expertise unavailable in the banks.
‗Managing Corporate Distress -- Lessons from Asia’, Michael Pomerleano, Lead Financial
Specialist, Financial Sector Development Department, The World Bank October 19, 2000
talks about a few CDR cases in Asia.

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The Case of Korea: Chaebol restructuring program involves the following:
Commitment by the chaebol to improve transparency and corporate governance in
general, through the adoption of international accounting standards, the adoption of
combined financial statements, the appointment of external directors to corporate boards,
and strengthening of shareholders rights
Eliminating cross debt payment guarantees among subsidiaries;
Improving the financial structure of the conglomerates, through the lowering of debt-
equity ratios (the Korean government set the upper limit at 200%), the liquidation of
unprofitable businesses and assets;
Concentrating on core businesses;
Strengthening the accountability of controlling shareholders and managers; in particular,
controlling shareholders committed to place their personal wealth into recapitalization
and loan guarantees.
‘Framework for Corporate Debt Restructuring in Thailand’, The Board of Trade of
Thailand discusses the CDR mechanism being followed in Thailand. According to this paper,
Corporate Corporate Debt Restructuring Advisory Committee (CDRAC) was set up in June
1998 to encourage debt restructuring process. Framework for Corporate Debt Restructuring in

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Thailand was approved in August 1998. BOT established Office for Corporate Debt
Restructuring in December 1998 to closely monitor the progress of debt restructuring. DCA/ICA
and SA help promote debt restructuring, Set clear procedure and time frame for debt
restructuring cases, Target group of debtors to enter to corporate debt restructuring process and
Set up dispute settlement procedure.
In order to urge debt restructuring process, the Debtor- Creditor Agreement (DCA) and Inter-
Creditor Agreement (ICA) were signed. DCA and ICA were used for debt restructuring cases
with multiple creditors. A Simplified Agreement (SA) was established for the cases with less
creditors or single creditor. ‗Corporate Debt Restructuring and Public Financial Institutions in
Japan -Do Government-Affiliated Financial Institutions Soften Budget Constraints?‘
‗Approaches to Corporate Debt Restructuring in the Wake of Financial Crises‘, Thomas Laryea
CHAPTER 5 UNDERSTANDING CDR
RECOVERY MECHANISM
Banks in past were never so serious in their efforts to ensure timely recovery and consequent
reduction of Non Performing Assets (NPA‘s) as they are today. This is because of the modern,
complex, competitive market conditions that are making banks to undertake this step. It is
important to remember that recovery management, be of fresh loans or old loans, is central to
NPA management. This management process needs to start at the loan initiating stage itself.
Effective management of recovery and NPA comprise two pronged strategy. First relates to
arresting of the defaults and creation of NPA thereof and the second is to handling of loan
delinquencies. The tenets of financial sector reforms were revolutionary which created a sense of
urgency in the minds of staff of bank and gave them a message that either they perform or perish.
The prudential norm has forced the bank to look into the asset quality.
Banks and financial institutions at present experience considerable difficulties in recovering
loans and enforcement of securities charged with them. The existing procedure for recovery of
debts due to banks and financial institutions has blocked a significant portion of their funds in
unproductive assets, the value of which deteriorates with the passage of time.
DEBT RECOVERY PROCESS
Debt recovery processes can be typically of following kinds, each involving different procedure:
NORMAL RECOVERY PROCEDURE

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As mentioned above, this procedure will generally apply to the debtors who are willing to pay
the dues with normal recovery process. Based on the above-mentioned regulatory guidelines,
following procedure may be outlined for such recovery. However the recovery agents should
follow the bank-specific debt recovery procedure as advised by their principal. Below are given
the main rules for making telephone calls and visit to the debtor for recovery of dues:
1) The recovery agent has been authorized by the bank to collect the past due debt from the
particular customer.
2) The customer has been notified by the bank of the details of the recovery agent for
collection of the past-due debt.
3) Making customer calls: This is the first step in recovery procedure.
DIFFICULT RECOVERY PROCESS
It is the recovery process where the debtors are not willing to pay and who intentionally resist or
avoid recovery efforts. The recovery agent has to follow special process of recovery against the
recalcitrant defaulters, in consultation with the bank.
Assets possession process
If the recalcitrant debtors do not eventually pay the dues, the movable assets charged to the bank
by way of hypothecation or pledge, can be possessed by the bank or the recovery agent and
thereafter auctioned or otherwise sold to recover the dues. The detailed procedure for such
recovery is discussed later, after explaining the meaning of pledge, hypothecation etc.
Legal recovery process
The intervention of the court is required to possess mortgaged immovable property by the bank
or its recovery agent. Also if the charged assets do not exist, or the debt is unsecured, the debtor
will have to be sued for recovery of the dues by the bank/recovery agent
1. Giving notice to borrowers
While written communication, telephonic reminders or visits by the bank‘s representatives to the
borrowers‘ place or residence will be used as loan follow up measures, the bank will not initiate
any legal or other recovery measures including repossession of the security without giving due
notice in writing. The Bank will follow all such procedures as required under law for recovery
/repossession of security.
2. Repossession of Security
Repossession of security is aimed at recovery of dues and not to deprive the borrower of the
property. The recovery process through repossession of security will involve repossession,
valuation of security and realization of security through appropriate means. All these would be

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carried out in a fair and transparent manner. Repossession will be done only after issuing the
notice as detailed above. Due process of law will be followed while taking repossession of the
property
3. Valuation and Sale of Property
Valuation and sale of property repossessed by the bank will be carried out as per law and in a fair
and transparent manner. The bank will have right to recover from the borrower the balance due,
if any, after sale of property. Excess amount, if any, obtained on sale of property will be returned
to the borrower after meeting all the related expenses provided the bank is not having any other
claim against the borrower.
4. Opportunity for the borrower to take back the security
The bank resorts to repossession of security only for the purpose of realization of its dues as the
last resort and not with intention of depriving the borrower of the property. Accordingly, the
bank will be willing to consider handing over possession of property to the borrower any time
after repossession but before concluding sale transaction of the property, provided the bank dues
are paid in full. If satisfied with the genuineness of borrower‘s inability to pay the loan
installments as per the schedule which resulted in the repossession of security, the bank may
consider handing over the property after receiving the installments in arrears
MODES OF RECOVERY
1) Assignment/Sale Of Decrees
Assignment/Sale of Decree can be adopted as a measure of recovery in those cases where
borrowers do not pay decreed amount in terms of decree in maximum one Year‘s time.
Transfer/Sale of Financial Assets to Securitizations Companies/Reconstruction Companies
Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act,
2002 (SARFAESI Act) provides also for sale of financial assets (NPAs) by banks / FIs to Asset
Reconstruction Companies (ARCs).Financial assets would be offered for transfer / sale to only
those Securitization Company/ Reconstruction Company who has / have obtained the Certificate
of Registration from RBI under Section 3 of the SARFAESI Act. Only those NPAs, to which
provisions of the SARFAESI Act are applicable, shall be considered for sale.
2) Engagement Of Recovery Agencies
Various Banks including Private/ Foreign and Nationalized Banks have been outsourcing the job
of recovery in small NPA accounts through Recovery Agents by payment of nominal fee to
resolve small NPAs, where multiple complexities are involved i.e. borrowers in scattered areas,
recalcitrant borrowers, advances having no collateral security/guarantee, hindrances in

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repayment due to local leaders etc. Bank‘s policy in this regard provides that NPA
accounts(whether non-suit filed, suit filed or decreed) with ledger outstanding up to Rs. 10 lakh
are eligible under the scheme, except accounts where compromises have been approved
(including those reached at in Lok Adalats) and have not been treated as failed. Moreover,
written off accounts can also be entrusted to Recovery Agencies to effect recovery.
3) One Time Settlement:
Resolution of Non Performing Assets through one-time settlement (OTS) has been recognized
asan effective non-legal remedy by the Bank due to twin advantages of faster recovery of dues
andincome generation by recycling of funds otherwise likely to be blocked for a long time. One
timesettlement of dues refers to a negotiated settlement under which the bank endeavors to
recovermaximum amount within least possible time, with least possible expenses.
4) Recovery camps
In case of accounts under small segment the platform of Recovery Camps be used by the field
functionaries with proper spade work. For on the spot decision on One Time Settlement
proposals received in such recovery camps, participation of officials from controlling offices is
advisable.
5) Write Off:
When all recovery measures have failed to yield any result, there is no primary/collateral security
and means of borrower/ repaying capacity are negligible/remote Bank may be left with no option
but to write off such advances. Recovery efforts should be continued even in the written off
accounts.
IMPORTANCE OF CDR
Banks involved in extended FITL loans fear that if the corporate defaults post restructuring, RBI
is unlikely to issue a similar scheme on restructuring in the near future. A default will increase
the ratio of bad loans and force banks to make higher provisions, which means lower
profitability.
At the same time, few bankers do not think there is anything unusual about FITL. ―The only
difference is that banks are more active in giving such loans now as compared to anytime in the
past. The RBI rule says that banks have to make full provisions for FITL, which goes to indicate
that RBI is aware of such practices in the banking system,‖ said a senior banker.
However, to avert provisions on FITL, some banks are carving out working capital loans into
term loans. A borrower‘s drawing limits on working capital loans are linked to receivables and
inventories. But, in the case of term loans, the borrowing need not be backed by inventories. This
helps even the borrowers with poor inventory position to tap bank funds for the shorter-term.

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Following the global meltdown, not only have receivables come down, inventory valuations have
also dipped. This means that a borrower‘s drawing limits too would fall in the same proportion.
Hence, banks are converting a portion of working capital limits into term loans . This gives the
borrower more flexibility in accessing the loan. For banks, it prevents accounts from turning
bad.
Meanwhile, banks have received huge response under the special dispensation on restructuring
of loans. Under the scheme, the RBI has said that if a bank restructures a loan which is a
standard loan as on September 1, ‗08 it can continue to classify it as standard asset, even after
restructuring the loan.
This means that if client is regular in his payments to banks as on September 1 ‗08 but may be on
the verge of defaulting in subsequent months, this account could be restructured and banks can
continue to classify it as standard asset.
Banks have to make provisioning on bad loans as well on restructured loans. However, as per
this scheme, if an account is restructured well in time, banks can prevent it from slipping into a
bad loan category and thereby make lower provisions.
PRESENT STATUS OF CDR CASES
CDR Mechanism should not be seen as a stigma by the corporate and sufficient time should be
devoted on analyzing and assessing the basic viability of the projects, said Shri Nirmal Gangwal,
Founder and Managing Director, Brescon Corporate Advisors Limited. Thousands of firms
suffer due to deadlock between banks and clients due to asset classification problems at the first
restructuring stage. It is more important to recover principal than the interest and there should be
flexibility in interest rates for CDR cases, he further informed.
Out of a total number of 256 cases with an aggregate debt of Rs. 116194 crore as on March 31
2010, 215 cases with an aggregate debt of Rs 104299 crore have been approved by the CDR Cell
of IDBI Bank Limited. The maximum number of cases approved by the CDR Cell belongs to the
textile sector while the maximum share of the aggregate debt approved by the CDR Cell belongs
to the Iron and Steel sector at 35.16%
The proposals for CDR reference by the corporate do not address issues like reasons for the
present state of the Corporate, areas of Management failure, steps proposed to ensure non-
repetition, promoter‘s sacrifice, assumptions of CDR package and basis thereof, what happens if
the entire debt is considered sustainable and sensitivity analysis at different interest rates which
needs to be looked into, informed Shri Sona Lal Datta, Assistant General Manager, Consultancy
Services, State Bank of India, Essar Steel, Essar Oil, Jindal Steel, Jsw, Ispat Industries, Mukund,
Neelanchal Ispat, India Cements, Saurastra Cements, Arvind Mills, Dhampur Sugars, Mawana
Sugar, Nfcl, Cesc, Wockhardt, Vishal Retail were some of the companies that went through CDR

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Mechanism, informed Shri Ravindra Loonkar, Vice President, SBI Capital Market Limited at the
PHD Chamber Workshop.
It was highlighted by the industry representatives at PHD Chamber that the CDR cell does not
address the needs of the small scale sector and a rethinking is required to wards that aspect by the
CDR Cell.
PRUDENTIAL AND ACCOUNTING ISSUES
As per RBI guidelines, the regulatory concession in asset classification and provisioning will be
available if there is compliance of six conditions stipulated in RBI guidelines viz.
1. The dues to the bank are ―fully secured‖. The condition of being fully secured by tangible
security will not be applicable in the infrastructure projects, provided the cash flows
generated from these projects are adequate for repayment of advance, the financing banks
have in place an appropriate mechanism to escrow the cash flows, and also have a clear and
legal first claim on these cash flows.
2. The unit becomes viable in 10 years, if it is engaged in infrastructure activities and in 7 years
in the case of other units.
3. The repayment period of the restructured advance including moratorium period, if any, does
not exceed 15 years in the case of infrastructure advances and 10 years in the case of other
advances.
4. Promoters‘ sacrifice and additional funds brought by them should be minimum of 15% of the
banks’ sacrifice.
5. Personal Guarantee is offered by the promoter except when the unit is affected by the
external factors pertaining to the economy and industry,
6. The restructuring under consideration is not a repeated restructuring.

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CHAPTER 6 CDR MECHANISM IN INDIA
OBJECTIVE
The objective of the Corporate Debt Restructuring (CDR) framework is to ensure timely and
transparent mechanism for restructuring the corporate debts of viable entities facing problems,
outside the purview of BIFR, DRT and other legal proceedings, for the benefit of all concerned.
In particular, the framework will aim at preserving viable corporates that are affected by certain
internal and external factors and minimize the losses to the creditors and other stakeholders
through an orderly and coordinated restructuring programme.
STRUCTURE
CDR system in the country will have a three tier structure:
1. CDR Standing Forum and its Core Group
2. CDR Empowered Group
3. CDR Cell
CDR STANDING FORUM
The CDR Standing Forum would be the representative general body of all financial institutions
and banks participating in CDR system. All financial institutions and banks should participate in
the system in their own interest. CDR Standing Forum will be a self-empowered body, which
will lay down policies and guidelines, and monitor the progress of corporate debt restructuring.
The Forum will also provide an official platform for both the creditors and borrowers (by
consultation) to amicably and collectively evolve policies and guidelines for working out debt
restructuring plans in the interests of all concerned. The CDR Standing Forum shall comprise of
Chairman & Managing Director, Industrial Development Bank of India Ltd; Chairman, State
Bank of India; Managing Director & CEO, ICICI Bank Limited; Chairman, Indian Banks'
Association as well as Chairmen and Managing Directors of all banks and financial institutions
participating as permanent members in the system. Since institutions like Unit Trust of India,
General Insurance Corporation, Life Insurance Corporation may have assumed exposures on
certain borrowers, these institutions may participate in the CDR system. The RBI would not be a
member of the CDR Standing Forum and Core Group. Its role will be confined to providing
broad guidelines.
The Forum would also lay down the policies and guidelines including those relating to the
critical parameters for restructuring (for example, maximum period for a unit to become viable
under a restructuring package, minimum level of promoters‘ sacrifice etc.) to be followed by the
CDR Empowered Group and CDR Cell for debt restructuring and would ensure their smooth
functioning and adherence to the prescribed time schedules for debt restructuring. It can also
review any individual decisions of the CDR Empowered Group and CDR Cell. The CDR

17
Standing Forum may also formulate guidelines for dispensing special treatment to those cases,
which are complicated and are likely to be delayed beyond the time frame prescribed for
processing.
CDR EMPOWERED GROUP
The individual cases of corporate debt restructuring shall be decided by the CDR Empowered
Group, consisting of ED level representatives of Industrial Development Bank of India Ltd.,
ICICI Bank Ltd. and State Bank of India as standing members, in addition to ED level
representatives of financial Institutions and banks who have an exposure to the concerned
company. The level of representation of banks/ financial institutions on the CDR Empowered
Group should be at a sufficiently senior level to ensure that concerned bank / FI abides by the
necessary commitments including sacrifices, made towards debt restructuring. There should be a
general authorisation by the respective Boards of the participating institutions / banks in favour
of their representatives on the CDR Empowered Group, authorizing them to take decisions on
behalf of their organization, regarding restructuring of debts of individual corporates. The CDR
Empowered Group will consider the preliminary report of all cases of requests of restructuring,
submitted to it by the CDR Cell. After the Empowered Group decides that restructuring of the
company is prima-facie feasible and the enterprise is potentially viable in terms of the policies
and guidelines evolved by Standing Forum, the detailed restructuring package will be worked out
by the CDR Cell in conjunction with the Lead Institution. The CDR Empowered Group would be
mandated to look into each case of debt restructuring, examine the viability and rehabilitation
potential of the Company and approve the restructuring package within a specified time frame of
90 days, or at best within 180 days of reference to the Empowered Group. The CDR Empowered
Group shall decide on the acceptable viability benchmark levels on the following illustrative
parameters, which may be applied on a case-by-case basis, based on the merits of each case:
Return on Capital Employed (ROCE),
Debt Service Coverage Ratio (DSCR),
Gap between the Internal Rate of Return (IRR) and the Cost of Fund (CoF),
Extent of sacrifice.
The decisions of the CDR Empowered Group shall be final. If restructuring of debt is found to be
viable and feasible and approved by the Empowered Group, the company would be put on the
restructuring mode. If restructuring is not found viable, the creditors would then be free to take
necessary steps for immediate recovery of dues and / or liquidation or winding up of the
company, collectively or individually CDR Cell
The CDR Standing Forum and the CDR Empowered Group will be assisted by a CDR Cell in all
their functions. The CDR Cell will make the initial scrutiny of the proposals received from

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borrowers / creditors, by calling for proposed rehabilitation plan and other information and put
up the matter before the CDR Empowered Group, within one month to decide whether
rehabilitation is prima facie feasible. If found feasible, the CDR Cell will proceed to prepare
detailed Rehabilitation Plan with the help of creditors and, if necessary, experts to be engaged
from outside. If not found prima facie feasible, the creditors may start action for recovery of their
dues.
All references for corporate debt restructuring by creditors or borrowers will be made to the
CDR Cell. It shall be the responsibility of the lead institution / major stakeholder to the
corporate, to work out a preliminary restructuring plan in consultation with other stakeholders
and submit to the CDR Cell within one month. The CDR Cell will prepare the restructuring plan
in terms of the general policies and guidelines approved by the CDR Standing Forum and place
for consideration of the Empowered Group within 30 days for decision. The Empowered Group
can approve or suggest modifications but ensure that a final decision is taken within a total
period of 90 days. However, for sufficient reasons the period can be extended up to a maximum
of 180 days from the date of reference to the CDR Cell.
The CDR Standing Forum, the CDR Empowered Group and CDR Cell is at present housed in
Industrial Development Bank of India Ltd. However, it may be shifted to another place if
considered necessary, as may be decided by the Standing Forum.
It is observed that borrower-Corporates get into a stress situation because of various external and
internal factors. The restructuring schemes are accordingly formulated envisaging various
actions on the part of the borrowers and participating lenders. Based on experience and various
features of the borrower-corporates and their promoters/sponsors, the borrower-corporates are
categorized into four Classes for the purpose of stipulation of standard terms & conditions under
the CDR Mechanism. The classification is as under:
Borrower Class 'A': Corporates affected by external factors pertaining economy and Industry.
Borrower Class 'B': Corporates/promoters affected by external factors and also having weak
resources, inadequate vision, and not having support of professional management.
Borrower Class 'C': Over-ambitious promoters; and borrower-corporates which diverted funds
to related/unrelated fields with/without lenders' permission.
Borrower Class 'D': Financially undisciplined borrower-corporates.
ELIGIBILITY CRITERION
The CDR Mechanism is not applicable to accounts involving only one financial institution or one
bank. The CDR mechanism will cover only multiple banking accounts / syndication / consortium
accounts of corporate borrowers with outstanding fund-based and non-fund based exposure of
Rs.10 crore and above by banks and institutions.
Category 1 CDR system

19
It is applicable only to accounts classified as 'standard' and 'sub-standard'. There may be a
situation where a small portion of debt by a bank might be classified as doubtful. In that
situation, if the account has been classified as ‗standard‘/ ‗substandard‘ in the books of at least
90% of creditors (by value), the same would be treated as standard / substandard, only for the
purpose of judging the account as eligible for CDR, in the books of the remaining 10% of
creditors. There would be no requirement of the account / company being sick, NPA or being in
default for a specified period before reference to the CDR system. However, potentially viable
cases of NPAs will get priority. While corporates indulging in frauds and malfeasance even in a
single bank will continue to remain ineligible for restructuring under CDR mechanism. BIFR
cases are not eligible for restructuring under the CDR system. However, large value BIFR cases,
may be eligible for restructuring under the CDR system if specifically recommended by the CDR
Core Group.
Category 2 CDR System
There have been instances where the projects have been found to be viable by the creditors but
the accounts could not be taken up for restructuring under the CDR system as they fell under
‗doubtful‘ category. Hence, a second category of CDR is introduced for cases where the accounts
have been classified as ‗doubtful‘ in the books of creditors, and if a minimum of 75% of
creditors (by value) and 60% creditors (by number) satisfy themselves of the viability of the
account and consent for such restructuring, subject to the following conditions:
i. It will not be binding on the creditors to take up additional financing worked out
under the debt restructuring package and the decision to lend or not to lend will
depend on each creditor bank / FI separately. In other words, under the proposed
second category of the CDR mechanism, the existing loans will only be restructured
and it would be up to the promoter to firm up additional financing arrangement
with new or existing creditors individually.
ii. All other norms under the CDR mechanism such as the standstill clause, asset
classification status during the pendency of restructuring under CDR, etc., will
continue to be applicable to this category also.

20
CHAPTER 7 FINANCIAL VIABILITY PARAMETERS
The following financial ratios are essential when a debt restructurization has to be done along
with the adjustments that have to be considered while calculating the individual components of
the formulas:
RETURN ON CAPITAL EMPLOYED
The Return on Capital Employed (ROCE) reflects the earning capacity of assets deployed.
ROCE is expressed as a percentage of total earnings (return) net of depreciation to the total
capital employed. ―Total Earnings” is PBT plus total interest plus lease rentals.
―Capital Employed‟ is the aggregate of net fixed assets excluding capital work in progress, lease
rentals payable, investments, and total current assets less creditors and provisions.
Normally, intangible assets are excluded for calculation of ROCE. Having regard to the fact that
stressed standard assets as well as sub-standard and doubtful assets are considered for
restructuring, it may be possible that fixed assets in such cases might be depreciated to a large
extent due to accounting practices although the facilities might not have been utilized. Similarly,
interest on loans accrued and fallen due but not paid, might have been used to finance cash
losses. In other words, the fund is reinvested in the project. These normally get reflected in
accumulated loss, which is treated as intangible asset. Therefore, while working out the total
capital employed, suitable adjustment may be made for unabsorbed depreciation and unserviced
interest to lenders. A minimum ROCE equivalent to 5 year G-Sec plus 2% may be considered as
adequate.
DEBT SERVICE COVERAGE RATIO
The Debt Service Coverage Ratio (DSCR) represents the debt servicing capability of the
borrower. In the normal course, DSCR is the ratio of gross cash available to meet the debt-
servicing requirement. Gross cash available is the sum of gross cash accrual plus interest on term
debt plus lease rentals. Debt servicing requirement is sum of repayment of term debt, interest on
term debt plus lease rent payable.
Gross cash accrual may not be considered as a true representation of available cash flow to
service debt as gross cash accrual does not take into account the actual cash available after
netting out the variation in stocks/inventory position. [It has to be acknowledged that, interest
and principal cannot be serviced out of earnings, which is an accounting concept‟.] Debt
servicing has to be made in cash. Many transactions and accounting entries can affect earnings,
but not cash. Therefore, for calculation of DSCR, actual cash available with the borrower should
be taken into consideration and accordingly the DSCR calculation for restructured assets should
be as under:

21
Available Cash Flow (ACF) will be net cash position during the year (total gross profit plus
outside funds if any available less total requirement including build-up of inventory/debtor /
normal capital expenditure etc.) repayment of public deposits should be included for calculation
of DSCR.
The adjusted Debt Service Coverage Ratio (DSCR) should be >1.25 within the 7 years period in
which the unit should become viable and on year-to-year basis DSCR to be above 1. The normal
DSCR for 10 years repayment period should be around 1.33:1.
GAP BETWEEN INTERNAL RATE OF RETURN AND COST OF CAPITAL
The Internal Rate of Return (IRR) is computed as the post-tax return on capital employed during
the project life based on discounted (net) cash flow method. Cash outflows each year would
include capital expenditure on the project and increase in gross working capital. Cash inflows
each year would include inflows from the operations of the project each year, recovery of
working capital in the last year of project life and residual value of capital assets in the last year
of project life.
While the above definition may be relevant for project finance, for restructured cases, the
investment would have already taken place and the fixed assets would have depreciated to a
large extent for such existing cases. While the year of restructuring could be considered as the
zero year, aggregate of net fixed assets, net working capital and investments could be treated as
total assets deployed. Cash inflows would have the same definition as for project finance. Project
life should be considered as 15 years irrespective of the vintage of the facilities but depending on
economic life.
Cost of capital is the post-tax weighted average cost of the funds employed. Since the basic
purpose of the restructuring exercise is to recover the lenders‟ dues, it is felt that zero cost could
be assigned to equity funds (equity and reserves). Cost to be assigned to the debt would be the
actual cost proposed in the restructuring package. Calculation of tax shield for the purpose of
working out the effective cost of debt funds will be as per usual institutional guidelines.
The benchmark gap between Internal Rate of Return and Average Cost of Funds should be at
least one percent.
EXTENT OF SACRIFICE
Waivers and sacrifices in a stressed asset which approaches lenders for restructuring would
depend on the state of affairs and the viability of the borrower-corporate as well as the possibility

22
of its revival/survival. Since the basic objective of the restructuring exercise is to recover the
lenders‟ dues and ensure productive use of assets, the extent of sacrifice would be a function of
the quantum of loan, past payment record, interest rates charged and booked to profit in the past,
as also alternative avenues available for recovery. Considering the very low probability of
recovering the entire amount of dues through legal and other routes, the chances of recovering
the dues might be better in a restructuring exercise, which also helps other stake-holders such as
labour, equity holders, the exchequer and the economy in general.
In this background, it is very difficult to evolve a benchmark for the extent of sacrifices. Going
by CDR experience, the sacrifice on the part of lenders would be waiver of liquidated damages
and in some cases compound interest. Waiver of simple interest and principal should be resorted
to in deserving cases only. Economic sacrifices in the form of reduction in interest/coupon rate
should be avoided. While the thrust of the restructuring exercise should be on recovering the
maximum possible amount from the borrowers, conversion of a part of the sacrifice into equity
or any other instrument should also be explored. This would be beneficial from the point of view
of sharing the upside when the fortunes of the company improve pursuant to restructuring.
OTHER FINANCIAL PARAMETERS
BREAK-EVEN ANALYSIS
Break-even analysis should be carried out. Operating and cash break-even points should be
worked out and they should be comparable with the industry norms.
GROSS PROFIT MARGIN
Gross Profit or Earnings Before Interest, Depreciation, and Tax (EBIDTA) is considered a good
measure to compare the performance of a corporate in relation to the industry. Gross Profit
Margin (GPM) for the industry as a whole, to which the company belongs, is available in
published documents/databases (like 'Cris-Infac', 'Prowess' or similar database ventures). Wide
variation, if any, of company‘s GPM from the industry average would be required to be
explained with qualitative information.
While GPM is considered as a good indicator of the reasonableness of the assumptions
underlying the profitability projections, it is necessary that various elements of profitability
estimates such as capacity utilization, price trend and price realization per unit, cost structure,
etc. should be comparable to those of the operating units in the same industry. It is also
suggested that the company‘s past performance for say last 3-5 years and future projections for
next 5 years should be given in the restructuring package on the same worksheet to have
comparison of sales, sales realization, cost components, GP, GPM, interest cost, etc.

23
LOAN LIFE RATIO
Loan life ratio (LLR) is a concept, which is used internationally in project financing activity. The
ratio is based on the available cash flow and present value principle.
The discounting factor may be the average yield expected by the lenders on the total liabilities,
or alternatively, the benchmark ROCE. This ratio is similar to the DSCR based on the modified
method (Actual Cash Flow method). In project financing, sometimes LLR is used to arrive at the
amount of loan that could be given to a corporate. On the same analogy, LLR can be used to
arrive at sustainable debt in a restructuring exercise as also the yield. A benchmark LLR of 1.4,
which would give a cushion of 40% to the amount of loan to be serviced, may be considered
adequate.

24
CHAPTER 8 LIVE CASE STUDY
The Company X (due to confidentiality the original name of the company is not declared) is a
Non Banking Financial Company registered with RBI as Category A - Hire Purchase and
Leasing Company. It is primarily engaged in the business of financing of tractors, construction
equipments, commercial vehicles and other passenger carrying multi utility vehicles, cars, etc.
The company‘s main focus has been to finance used asset in the above segments at a gross yields
in the range of 24% to 26%. The company has built a position of distinct advantage over other
NBFC's in its core segments of semi urban and rural markets by virtue of having been present for
more than two decades & thereby catering to the needs of farmers for purchase of tractors and
farm equipment.
The company operates through a network of 48 branches located in semi urban and rural markets
of Andhra Pradesh, Tamil Nadu, Kerala, Karnataka and Maharashtra.
The two most important things that the bank considers before referring the case to the CDR
Mechanism are:
1. Reasons for the inability of loan – the case is considered only if the reason is external
like recession, change in policies or regulations like banning of imports/ exports of
particular commodity etc. which is actually not in the hands of the promoters. If the
reasons are pertaining to the faulty business model or willful default of the promoters
then the bank rejects the plea and initiates the traditional recovery process discussed
in the beginning of the report.
2. Future Outlook of the Company – Now the bank sees that what will happen to the
company if they lend or restructure the loan. They see the past financials of the
company and project the future cash flows of the company. If the lenders are satisfied
with the kind of assumptions and future revenue generation capacity of the company
only then they move forward to restructure the loan. This also involves the quality of
the tie ups that the company has roped in. Suppose the Company tie ups includes
M&M, Sonalika etc then there will be more business for the Company X and chances
of revival are much higher.
Now in the following points we will see the reasons of the failure of the debt servicing capacity
of the Company X.
MAJOR PROBLEM AREAS
COMAPNY X financial position has been deteriorated due to some unavoidable external
reasons, which are enumerated as below:
ADVERSE EFFECT OF REVIEWING ACCOUNTING POLICY
During the course of finalization of the annual accounts of COMAPNY X for FY 2006-07, the
new management team decided to review accounting practices followed by erstwhile

25
management. The details of the change in the accounting policies and their impact on the
profitability are as under.
1. The accounting basis for Additional Finance Charges was changed from receipt basis
to accrual basis leading to increase in income by Rs 237.16 lacs.
2. The income on account of securitization/ assignment of receivables, which was
being amortized over the tenor of receivables, was booked upfront leading to
increase in income by Rs 324.13 lacs.
3. Collection charges were being booked in income on accrual basis earlier. It was
changed to accounting on receipt basis. This led to a reduction in profit by Rs
2,278.58 lacs.
4. Certain lease transactions done in 2001 were rescheduled. The balance outstanding
in such accounts was Rs 930 lacs. As there was no realizable value, these assets
were written off.
5. Certain accounts where the outstanding was Rs 1,787 lacs were assigned to the
earlier promoters for Rs 1,400 lacs and the difference was booked as loss.
6. The cumulative impact of these actions was a loss of Rs 3,034.29.
As a result of the same, the company had to declare losses to the tune of Rs.26.84 Crores. The
board adopted this review in the board meeting held on 26th
Jun‘07, subject to results of the
ongoing verification of books of accounts.
These losses arising out of legacy issues have put the company in a tight spot in raising further
borrowings and effecting operations.
FAILURE TO RAISE FUNDS THROUGH RIGHT ISSUE
During the month of September 2007, the Board considered a rights issue for a size of Rs.50
crores and Draft Letter of Offer was also filed with SEBI for approval. Though SEBI cleared
the issue in January 2008, the issue had to be aborted due to fall in equity markets.
EFFECT OF FAILURE OF COMPANY’S EFFORT FOR A SLUMP SALE OF COMAPNY
X’S BUSINESS
In April 2008, subsequent to abortion of rights issue, a slump sale of COMAPNY X‘s
business on a going concern basis to Zwirn Pragati Capfin Private Limited was initiated to
ensure that operations of COMAPNY X run smoothly.
Company entered into Business Transfer Agreement (BTA) with ZP on 30th September
2008 for the transfer of Business of the Company, including all its tangible & intangible
assets and non-tax liabilities, by way of slump sale for a consideration of Rs. 41.10 crores.
However, ZP later offered only a reduced sale consideration of Rs. 28 Crores due to several
reasons including substantial downward revision in the future business potential of NBFCs

26
on account of rapid changes in the internal and external market conditions adversely
affecting their viability.
But subsequently during the quarter ending 30.06.2009, Zwirn Pragati Capfin Private
Limited, terminated the Business Transfer Agreement (BTA) on account of delay from
COMAPNY X in securing sanction from banks for the slump sale within the stipulated
period. Thus the company‘s plan to rejuvenate its operations failed.
GLOBAL RECESSION AND ITS EFFECT ON COMPANY’S BUSINESS
COMAPNY X‘s revenue generation for the year 2008-09 was severely affected due to global
meltdown. Recovery/repayment from customers was also affected due to the slump in the
market resulting in higher default than normal. Due to slow down in the economic activity,
the realizations from the repossessed assets also came down. All these factors resulted in
losses thereby affecting the financial stability of the company
As a consequence of the termination of BTA in July 2009, all the assets and liabilities
proposed to be transferred to ZP now remained with COMAPNY X and had to be accounted
for in COMAPNY X‘s books with effect from 1st
October 2008. As a result, the Board
advised the executive management to carry out a review of the assets and liabilities so as to
resume the exercise of detailed review which was conducted in 2007 and to conclude the
same and to come up with a final report.
FUTURE OUTLOOK FOR THE COMPANY
Now the second point is focused where the banks see the following things:
1. The sector analysis in which the Company X is operating and study the demand
supply analysis and growth in the considered industry.
2. The focus on the future revenue generation capacity based on the relevant
assumptions.
MARKETING VIABILITY
In our case study PNB did a Market Appraisal for the Company X to ensure future cash flows.
Though the report was not accessible but few points are stated below as per our research done on
this industry:
DEMAND AND SUPPLY ANALYSIS
The Indian economy continued to grow at an enormous pace and recorded a compounded
annual growth rate (CAGR) of 8.6% between 2002-03 and 2006-07. But the recent

27
developments in global and domestic markets seem to force this trend to reverse because
as per the recent facts India has reached the GDP of more than 8% and the various
analysts and economists continue to remain bullish on the Indian GDP.
The severe liquidity crunch has affected the fresh disbursements of majority of asset
financing NBFCs since these companies depend on regular inflow of funds mainly from
Banks and other financial institutions.
FUTURE MARKET DEMAND AND SUPPLY
Huge potential is envisaged in this sector as majority of this business segment is with un-
organized financiers
The major source of revenue is from the customers who are farmers (who purchase
tractors) and logistic companies (who purchase trucks). The agriculture sector which has
shown poor in terms of growth 2008-09 remains a cause of concern for the growth but
the waivers given by the GOI to farmers on financing of agriculture equipments and
machineries will give a filip to this sector. Logistic Sector grows at approximately 1.2X
the GDP of India which means that if India grows at 9-10% (as per forecasted by various
organizations), logistic sector is bound to grow at a healthy 18-20% in future which will
create more need for trucks and other vehicles and thus more business for the Company
X.
Presence of Few players due to complexity of business would mean high entry barrier
and thus fertile ground to operate for the company
Low cost of operations due to various factors like employing local manpower, offices in
rural/semi urban areas etc.
Good margins/spreads expected in future as well because of persistent demand of tractors
& construction equipments.
Now on based on certain assumptions in the following table the cash flow statement was
generated (refer: annexure 2).
Particulars 2009-10 2010-11 2011-12 2012-13 2013-14
Interest Rate 15.0% 15.0% 15.0% 15.0% 15.0%
Interest Rate -IRR 27.5% 27.5% 27.5% 27.5% 27.5%
Interest Rate (Flat):commission 8.0% 8.0% 8.0% 8.0% 8.0%
Upfront processing charges 2% 2% 2% 2% 2%

28
New customers per month 20 150 155 155 155
Ticket Size -1 (Loan Size)in lakhs 3 3 3 3 3
Ticket Size -2 5 5 5 5 5
Ticket Size -3 8 8 8 8 8
%age customers in Ticket Size - 1 70% 50% 50% 50% 50%
%age of customers in Ticket Size - 2 20% 15% 15% 20% 20%
%age of customers in Ticket Size - 3 10% 35% 35% 30% 30%
No. of Months 36 36 36 36 36
No. of Collection in a month (per customer) 1 1 1 1 1
No. of Months 31 31 31 31 31
Cash collateral as a % age of disbursements 10% 10% 10% 10% 10%
Interest on cash Collateral 12% 12% 12% 12% 12%
No of customers defaulting 8% 8% 8% 8% 8%
Period in which defaulters making payment
(Months) 3 3 3 3 3
Defaulting customers turning into NPA 10% 10% 10% 10% 10%
NPA Provisioning (as a percentage of NPA
Assets) 50% 50% 50% 50% 50%
Period of NPA becoming Loss assets(Months) 12 12 12 12 12
Provision on loss Assets 100% 100% 100% 100% 100%
Loss assets( as a percentage of total NPA Asset) 8% 8% 8% 8% 8%
Repossessed assets(as a percentage of total
NPA Asset) 60% 60% 60% 60% 60%
After the analysis of the cash flow statement (refer: annexure 2) we came to the following
finding that the cash flow has increased from INR 3178.21 lacs in 2010-11 to INR 3359.45 lacs
in 2016-17 indicating a better and financial stable future of the Company X. The major source
will remain the cash accrual from installments and EMI‘s. The long term earning capacity is
affected by the company‘s legal binding to buy the Preference shares issued initially against the

29
term loan given by the bank at a premium of 3%. The increase/decrease in current liabilities from
2014-15 is zero which is questionable.
Now the bank proceeds with the debt restructuring process and decides the cut off date i.e.
March 2010 in our case.The status of loans before loan restructurization is as follows (all
figures in lacs):
TERM LENDERS CDR
FIs Sanctioned
Amount Typ
e
Repayment
Up to
31.03.10
O/S
As on 31.03.10Ing Vysya Bank
Ltd.
2,500.00 TL 2,108.22 391.78
DCB 800.00 TL 703.25 96.75
ICICI Bank 5,884.26 USL 5,850.55 33.71
Total 9,184.26 8,662.02 522.24
WORKING CAPITAL LENDERS (CDR)
Name of the Bank Sanctioned Limit Outstanding As on 31.03.10
Punjab National Bank 1,000.00 930.08
The Dhanalakashmi Bank Ltd 500.00 493.41
Bank of Baroda 216.00 15.36
Canara Bank 1,200.00 1,214.90
Indian Overseas Bank 900.00 828.84
Bank of India 1,500.00 1,470.55
The Federal Bank Ltd 1,300.00 1,261.43
State Bank of Hyderabad 500.00 469.37
Ing Vysya Bank Ltd 800.00 785.85
UCO Bank 950.00 937.78

30
State Bank of Travancore 1,000.00 962.32
YES Bank 1,500.00 1,428.29
TOTAL 11,366.00 10,798.18
NON CDR LENDERS
Term debtors Sanctioned Limit Outstanding As
on 31.03.10
Tamilnadu Industrial Corporation Ltd 1,000.00 254.70
Total 1,000.00 254.70
Working Capital Lenders
The Catholic Syrian Bank Ltd 850.00 835.01
HSBC 1,000.00
937.80Total 1,850.00 1,772.81
Unsecured LoansCentral Electronics 78.18
Fullerton 652.71
Grand Total 730.89
RESTRUCTURING PROPOSAL
As per the Guidelines in this proposal all the banks whose exposure were less than INR 1 crore
had the option of this exiting the scheme at a discount of 40%. Under this clause the following
three banks exited the Restructuring Scheme.
Lenders Total O/S 60% 40%
ICICI (TL) 33.71 20.226 13.484
Bank of Baroda (WC) 15.36 9.216 6.144
Development Credit bank Ltd
(TL)
96.75 58.05 38.7
For the rest of the lenders the restructurization of debts was done in the following manner:
RESTRUCTURIZATION OF TERM LOANS
The total outstanding term loans for the company X (NBFC) as on the cut off date 31st
March
2010 is as follows:
Sno. Banks Amount
1. Ing Vysya Bank Ltd 391.78
2. The Tamilnadu Industrial Investment Corporation Ltd 254.70

31
TOTAL 646.48
The revised repayment of the installments and interest is shown in the following chart.
It can be seen that no principal payment will be taken by the banks during the moratorium period
which has been increased from the cutoff date i.e. 31st
March 2010 for a period of 18 months till
31st
September 2011.
Repayment in 72 monthly installments commencing from 01.10.11 and ending on 30.09.2017
Term loan to carry ballooning interest rate of 7% p.a.in the year 2009-10 which shall be
increased by 1% each year till it reaches a level of 10% in the year 2012-13 after which it shall
be increased by 2% for the year 2013-14 & 2014-15 and again 1% from 2015-15 till it reaches
16.50% in 2016-17 providing an ROI of 10.54% p.a. approx.
Interest From 1.04.2010 to 30.09.2011 shall be funded through FITL which sums to a total of
INR 72.35 lacs.
Repayment Schedule of Term Loan (Rs. in Lacs)
Particulars
2009-
10
(01.04.
10-
30.09.1
0)
2010-
11
2011-
12 2012-13 2013-14 2014-15 2015-16 2016-17
Repayable
yearwise
Nil Nil 5.00% 7.50% 12.50% 20.00% 25.00% 30.00%
Opening
Balance
646.48 646.48 646.48 614.16 565.67 484.86 355.56 193.94
Installment
-
-
32.32 48.49 80.81 129.30 161.62 193.94
Closing
Balance
646.48
646.48
614.16 565.67 484.86 355.56 193.94
-
Interest
22.63 51.72 56.73 58.99
63.03
58.83 41.21 16.00
Interest rate 7% 8% 9% 10% 12% 14% 15% 17%
FITL 22.63 51.72
RESTRUCTURING OF WORKING CAPITAL

32
The existing working capital outstanding as on cutoff date and proposed restructuring thereof is
as follows:-
Stock on hire 8,306.32
Repossessed Assets 530.05
Net Current Assets available for DP 8,836.37
Margin (25%) 2,209.09
Drawing Power (Available) 6,627.28
Bank Limit
Total 12,555.63
Overdrawn/Shortfall in DP ( b-a) 5,928.35
As the total outstanding Working Capital loan as on cutoff date is INR 12,555.63 lacs and the
available drawing power is INR 6,627.28 lacs there is a net shortfall of INR 5,928.35 lacs. This
is termed as the irregular portion.
Out of the Irregular Portion 70% shall be converted into Optionally convertible Cumulative
redeemable Preference shares and Balance 30% shall be converted into Working Capital Term
Loan in the following manner:-
OCCPRS
a) OCCRPS to carry dividend @ 9% p.a.
b) OCCRPS would have to be issued within 6 months from the date of implementation of the
CDR package.
c) OCCRPS will be issued to the lenders for a period of 8 years to be redeemed in 4 equal annual
installments at a Premium of 3.00% from 2013-14 to 2016-17 in the following manner:
70% To be converted into – ‘9%
OCCRPS’
4,149.85
30% To be converted into WCTL 1,778.51
Year
Repayment Schedule (OCCRPS of Rs. 4,149.85 lacs)
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Percentage 25.00% 25.00% 25.00% 25.00%
Amount (Rs.
In lacs) (p.a.)
1,037.46 1,037.46 1,037.46 1,037.46
Premium @
3% (P.a.)
31.12 31.12 31.12 31.12

33
WCTL
a) 30% of the irregular portion to be converted into WCTL
b) Principal payment moratorium up to 30.09.2011.
c) Repayment in 72 monthly installments commencing from 01.10.11 and ending on 30.09.2017
in the following manner:-
d) Working Capital Term loan to carry ballooning interest rate of 7% p.a.in the year 2009-10
which shall be increased by 1% each year till it reaches a level of 10% in the year 2012-13
after which it shall be increased by 2% for the year 2013-14 & 2014-15 and again 1% from
2015-15 till it reaches 16.50% in 2016-17 providing an ROI of 10.54% p.a. approx.
e) Interest From 1.04.2010 to 30.09.2011 (moratorium period) shall be funded through FITL.
FUNDING OF INTEREST ACCRUING FROM CUT OFF DATE TO 30.09.2011 BY
CONVERTING THE SAME INTO FUNDED INTEREST TERM LOANS (FITL)
a. Funding of interest on Term loan (Secured & Unsecured), Working Capital and Working Capital
Term Loans for 18 months from cutoff date i.e. 1.04.2010 to 30.09.2011 by converting the same
into FITL.
b. Computation of FITL: (Rs lacs)
INTEREST ON: 2009-10 2010 - 11 TOTAL
Term Loan 22.63 51.72 74.35
Working Capital 662.73 662.73 1,325.46
WCTL 124.50 142.28 266.78
TOTAL FITL 809.85 856.73 1,666.58
Total
Amount
1,068.59 1,068.59 1,068.59 1,068.59
Year
Repayment Schedule [Working Capital Term loan = Rs 1,778.51 lacs]
2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
Percentage 5.00% 7.50% 12.50% 20.00% 25.00% 30.00%
Amount (Rs. In lacs) (p.a.) 88.93 133.39 222.31 355.70 444.63 533.55

34
c. FITL to be repaid in 36 monthly installments commencing from 31.10.11 and ending on
30.09.2014 in the following manner:-
FITL to carry ballooning interest rate of @ 6% p.a.in the year 2009-10 which shall be increased
by 2% in first year and 1% each year thereafter till it reaches a level of 11% i.e. in the year 2013-
14.
TOTAL FITL CALCULATION
INTEREST ON: 2009-10
(01.04.10-
30.09.10)
2010 - 11 TOTAL
a Term Loan 22.63 51.72 74.35
c Working Capital 662.73 662.73 1,325.46
d Unpaid interest on TL - - -
e WCTL 124.50 142.28 266.78
f Unsecured Term loan - - -
TOTAL FITL 809.85 856.73 1,666.58
ALLOCATION OF DRAWING POWER (DP)
The DP was also revised and allocated to each lender in the same contribution as the % share of
each lender in the sanctioned working capital limit (not outstanding WC limit). The remaining
portion of the amount lended was considered to be irregular portion and divided into OCCRPS
and WCTL as per discussed above.
Sl.
No Name of the Bank
O/S
WORKI
NG
CAPIT
AL
SANCTI
ONED
WORKI
NG
CAPITA
L
% share
(% of
sanction
ed lt)
DP
allocatio
n
Availabl
e DP
(secured
W.cap)
Irregular
Portion WCTL
OCCR
PS
- - - - - -
Year Repayment Schedule [FITL=Rs 1,666.58 lacs]
2011-12 2012-13 2013-14
Percentage 10.00% 45.00% 45.00%
Amount (Rs. In
lacs) (p.a.)
166.66 749.96 749.96

35
11 Ing Vysya Bank Ltd 785.85 800.00 6.15% 407.83 407.83 378.02 113.41 264.61
22 YES Bank 1,428.29 1500.00 11.54% 764.69 764.69 663.60 199.08 464.52
33 Bank of India 1,470.55 1500.00 11.54% 764.69 764.69 705.86 211.76 494.10
44 The Federal Bank Ltd 1,261.43 1300.00 10.00% 662.73 662.73 598.70 179.61 419.09
55 Canara Bank 1,214.90 1200.00 9.23% 611.75 611.75 603.15 180.95 422.21
66 State Bank of travancore 962.32 1000.00 7.69% 509.79 509.79 452.53 135.76 316.77
77 Punjab National Bank 930.08 1000.00 7.69% 509.79 509.79 420.29 126.09 294.20
88 UCO Bank 937.78 950.00 7.31% 484.30 484.30 453.48 136.04 317.44
99 Indian Overseas Bank 828.84 900.00 6.92% 458.81 458.81 370.03 111.01 259.02
110 The Dhanalakashmi Bank Ltd 493.41 500.00 3.85% 254.90 254.90 238.51 71.55 166.96
111 State Bank of Hyderabad 469.37 500.00 3.85% 254.90 254.90 214.47 64.34 150.13
112 Bank of Baroda - 0.00 0.00% - - - - -
1 HSBC 942.10 1000.00 7.69% 509.79 509.79 432.31 129.69 302.62
The Catholic Syrian Bank Ltd 812.58 850.00 6.54% 433.32 433.32 379.26 113.78 265.48
TOTAL
12,537.5
0 13,000.00
100.00
% 6,627.28 6,627.28 5,910.22 1,773.07
4,137.1
6
ADDITIONAL WC FUNDING
The company had a cash loss adjusted of depreciation and provision for impairment to the tune
of INR 1,664 lacs which needs to be financed for the smooth working of the company. The
calculation for the funding amount is shown hereunder.
PAT (2008-09) 6,860.03)

36
Add Depreciation 66.35
Add Extraordinary provisions Impairment 5,129.54
Cash Loss (1,664.14)
Funding 1,664.14
PROMOTERS CONTRIBUTION
The promoters also have to infuse in additional funds along with the lenders to compensate for
both the losses and additional current asset build up. It can be seen that the total cost of scheme is
INR 3,364.14 lacs and the lenders are giving INR 1,664.14 lacs. The difference of INR 1,700
lacs is infused by the promoters. This amount contains two component which is explained
further.
(Rs. In Lacs)
Cost Of scheme Amount
Cash losses funding 1,664.14
Currrent Asset build up 1,700.00
Total 3,364.14
Means of finance
Promoter's contribution/New Investors 1,700.00
Additional Working Capital 1,664.14
Total 3,364.14
In this case the promoters are infusing money in the following manner:
1. As per the RBI guidelines the promoters has to bring in 15% of the sacrifices by lenders
which is coming out to be INR 404.07 lacs. Sacrifices are the losses to lenders that arise
out of reduction in the rates of interest and rescheduling of installments with effect from
the cut-off date.
2. The remaining amount of promoters‘ contribution i.e. INR 1,295.93 lacs which brought
in by the promoters through strategic investors.

37
FINANCIAL VIABILITY
Parameters Results Remarks
ROCE 17.04%
5years G-Sec rate
6.04%
Benchmark-2%
above 5 yrs G-sec
rate
Average ROCE is above the benchmark.
DSCR
(adjusted)
1.31
Benchmark 1.25
Adjusted DSCR is above the benchmark rate.
DSCR
(Average)
1.44
Benchmark 1.33
Average DSCR is more than the benchmark
rate.
IRR Vs.
CoC
IRR 14.73%
CoC 6.94%
Gap 7.78%
Gap between CoC and IRR is 7.78% which is
above the benchmark. (Benchmark 1.00%)
BEP Operating BEP-
23.53%
Cash BEP 21.37%
Considered for the year 2013-14 which is
optimum year of operation
GP Margin 81.09% Considered for the year 2013-14 which is
optimum year of operation
Loan Life
Ratio –LLR
LLR 1.37
Bench Mark 1.40
Almost in line with the Benchmark rate.

38
RATIO ANALYSIS
S.
NO RATIO
2009-10
(Oct'09
to Sept
10) 2010-11 2011-12 2012-13 2013-14 2014-15 2015-16 2016-17
1 EBIDTA Margin 23.97% 38.68% 70.78% 77.78% 81.09% 77.52% 73.23% 68.08%
OPBDT
220.83
%
-
109.45
%
-
49.52% 15.60% 41.32% 55.25% 53.00% 50.25%
2
Net Profit Margin
(PAT / Gross T.O.)
-
113.69
%
-
54.56% 10.15% 31.79% 43.51% 41.69% 39.46% 37.09%
3
Current Ratio
(Including Bank
borrowings in current
Liablities) 1.40 1.47 1.51 1.48 1.40 1.41 1.40 1.38
4
Interest Coverage
Ratio 0.18 0.44 1.28 2.13 3.14 3.16 3.19 3.28
5
Fixed Assets Coverage
Ratio 0.55 0.42 0.43 0.55 0.84 1.09 1.91
#DIV/0
!
6 Debt Equity Ratio 1.64 2.21 1.81 1.15 0.68 0.43 0.20 -
7 Earning Per Share (17.80) (4.49) 1.18 4.85 8.16 7.81 7.40 6.95
8 Yearly D.S.C.R. #DIV/0! (1.79) 1.00 1.12 1.67 2.95 2.52 2.19
9
Average D.S.C.R.(10
years) 1.44
10
Average Adjusted
DSCR (7 years) 1.31
11
Return on Capital
Employed -Minimum
17.04%

39
12 Internal Rate of Return 14.73%
13 Cost of Capital 6.94%
14
Gap between IRR &
COC
7.78%
15 Loan Life Ratio 1.37
16 Operating BEP Loss Loss 65.26% 35.10% 23.53% 24.74% 26.38% 27.88%
17 Cash BEP Loss Loss 58.96% 31.85% 21.37% 22.53% 24.09% 25.51%
18
(Inventory+receivables
)/sales 7.79 9.53 5.96 3.63 2.53 2.52 2.52 2.52
SAFEGUARDS PROVIDED IN THE SCHEME
1. All Terms loans to have first pari-passu charge on fixed assets and second pari-passu
charge on current assets of the Company.
2. All working capital borrowings to have first pari-passu charge on current assets and second
pari-passu charge on fixed assets of the Company
3. WCTL and FITL will be secured by Ist pari-passu charge on current and fixed assets of the
Company
4. Promoters to bring contribution of Rs. 404.07 lacs (15% of sacrifices) towards proposed
restructuring scheme. In addition they would be infusing additional capital through a
strategic investor which will ensure the much needed financial and managerial support.
5. The company shall raise its authorized share capital to Rs 100 crores so that in the event of
any or all lenders deciding to convert the OCCRPS into equity there are no legal
constraints.
6. Appointment of concurrent auditor for periodical monitoring of the Account in terms of
CDR guidelines.
7. The collateral security shall be available to the lenders to secure their WCTL by way of
first pari-passu charge and to secure other debt by way of second pari-passu charge.
8. The proposed new promoters shall extend their personal guarantee. They shall also pledge
51% of the share capital of the company or 100% of their shareholding in favor of lenders,
whichever is low.
9. Company to open a Trust & Retention Account (TRA) and route all its cash flows through
the account to ensure funds utilization as per the scheme.
10. Formation of the Monitoring Committee (MC).

40
11. Debt servicing has been restructured to provide an Adjusted DSCR of 1.31 providing
sufficient cushion against variability in earnings.

41
CHAPTER 9 : LEARNINGS AND OUTCOMES
The following have been our learning from the above project:
Whenever there is an economic crisis, the rehabilitation of the financial sector is a first
order priority - macroeconomic stability is critical.
The process of CDR followed by a bank and the important factors that have to be
considered before initiating for the restructuring.
Determining of projected financial statements based on key assumptions.
The various guidelines that are mandatory for CDR.
Analysis of viability ratios and the financial statements.
We have also learned the working of CDR Mechanism Cell in India
We have also learned the International Norms of CDR followed in various countries.

42
CHAPTER 10 REFERENCES
‗Decentralized Creditor-Led Corporate Restructuring Cross-CountryExperience‘,
Marinela E. Dado and Daniela Klingebiel
‗Corporate Debt Restructuring in Southeast Asia‘, Country Panel IV, Harvard Asia
Business Conference, Feb. 2-3, 2001
‗Corporate Insolvency & Debt Restructuring - Examining the value of Voluntary
Administration
‗Informal Work Outs for Corporate Debt Restructuring in Thailand‘, Mr. Tumnong Dasri,
Bank of Thailand, Thailand, The Second Forum for Asian Insolvency Reform (FAIR),
Bangkok, Thailand 16 – 17 December 2002
‗Financial and Corporate Restructuring in South Korea‘, Bank of Japan Research Papers,
June 20, 2003, Hiroshi Akama, Kunihisa Noro, Hiroko Tada
‗Managing Corporate Distress -- Lessons from Asia‘, Michael Pomerleano, Lead
Financial Specialist, Financial Sector Development Department, The World Bank
October 19, 2000
‗Framework for Corporate Debt Restructuring in Thailand‘, The Board of Trade of
Thailand
‗Corporate Debt Restructuring and Public Financial Institutions in Japan -Do
Government-Affiliated Financial Institutions Soften Budget Constraints?‘
‗Approaches to Corporate Debt Restructuring in the Wake of Financial Crises‘, Thomas
Laryea
Ministry of Justice of Thailand, ―The Second Forum for Asian Insolvency Reform
(FAIR)‖, visited the site on 18th
August 2010 at 2140 hrs.
http://cdrindia.org/downloads/readings/CDR%20in%20Thailand-
chairman's%20speech.pdf
Master Circular – Disclosure Norm for Financial Institution - 1st
July 2009, visited on
22nd
August 2010 at 1256hrs
http://www.rbi.org.in/scripts/NotificationUser.aspx?Mode=0&Id=5153
Special Regulatory Relaxations for Restructuring - June 30th
2009, visited on 23rd
August 2010 1424hrs
http://rbidocs.rbi.org.in/rdocs/Content/PDFs/74MCIR220710_8.pdf
Prudential Guidelines on restructuring of advances – April 17th
2009 – RBI, visited on
August 23th
2010 at 1449hrs
http://cdrindia.org/downloads/RBI%20Cirular%20dated%20April%2017%202009.pdf

43
CHAPTER 11 ANNEXURES
1. Profit And Loss account
Particulars 2003-04 2004-05 2005-06 2006-07
April’07
to Sept -08
2008-09
Net Income 2,587.85 2,761.03 2,887.98 3,578.91 5,658.09 3,075.17
EBIDTA
2,115.12 2,273.70 2,372.07 2,035.61 2,547.48 (4,239.43)
Interest 1,214.52 1,427.71 1,464.39 1,656.13 4,046.44 2,551.47
Depreciation 146.29 76.93 92.79 87.93 213.96 66.35
Operating
Profit/(Loss) 754.31 769.06 814.89 291.55 (1,712.92) (1727.71)
Non operating
Incomes
- - - - - -
Non operating exp - - - (930.00) (287.78) 5,129.54
Profit before Tax 754.31 769.06 814.89 (638.45) (2,000.70) (6,857.25)
Tax 288.10 313.89 323.82 16.71 114.63 2.78
Profit after Tax 501.11 534.72 516.73 (656.00) (1,918.07) (6,860.03)
Net Cash Accruals
629.95 571.83 596.69 362.35 (1,514.96) (1,664.14)
PBIDT to NI (%) 81.73% 82.35% 82.14% 56.88% 45.02% 28.95%
OP to NI (%) 29.15% 27.85% 28.22% -17.84% -35.36% -222.99%
NP to NI (%) 19.36% 19.37% 17.89% -18.33% -33.90% -223.08%
Interest Coverage 1.62 1.54 1.56 1.18 0.58 0.32

44
2. Projected Cash Flow Statement
Particulars
2009-
10(01.
04.10-
30.09.
10)
2010-
11
2011-
12
2012-
13
2013-
14
2014-
15
2015-
16
2016-
17
(Projec
ted)
(Projec
ted)
(Projec
ted)
(Projec
ted)
(Projec
ted)
(Projec
ted)
(Projec
ted)
(Projec
ted)
Cash Inflows
Cash Accruals
(504.2
8)
(652.0
9) 66.59 210.69
1,087.8
6
1,555.7
1
1,569.0
2
1,576.6
0
Increase / Decrease in
share capital 404.07 600.00 250.00 250.00 195.93 - - -
CRPS - - - -
(1,037.
46)
(1,037.
46)
(1,037.
46)
(1,037.
46)
share premium etc. - - - - - - - -
Working Capital (0.00)
1,664.
14 - - - - - -
Term Loan 0.00 - (32.32) (48.49) (80.81)
(129.3
0)
(161.6
2)
(193.9
4)
New Term Loan - - - - - - - -
FITL 809.85 856.73
(166.6
6)
(749.9
6)
(749.9
6) - - -
WCTL - - (88.93)
(133.3 (222.3 (355.7 (444.6 (533.5

45
9) 1) 0) 3) 5)
Unsecured Loans - - - - - - - -
Current Liabilities 232.58
(149.0
9) (93.77) (99.58) 7.92 - - -
Provisions 525.34
(1,202.
75)
(659.0
6)
(353.7
5)
(189.9
8) - - -
Total Inflows
1,467.
55
1,116.
93
(724.1
5)
(924.4
7)
(988.8
1) 33.25 (74.69)
(188.3
6)
Cash Outflows
Gross Block - - - - - - - -
capital WIP - - - - - - - -
Investments - - - - - - - -
Assets on hire
3,611.
27 306.37 296.94
(1,207.
12)
(764.6
7) - - -
Repossessed Assets
(265.0
3) 46.65 10.22 (32.74) 49.49 (50.00) - -
Trade Bills purchased - - - - - - - -
Bank Balance(with
scheduled bank)
(553.2
0) 747.05
(534.2
5) 499.94 13.73 -
(105.0
0)
(225.0
0)
Loans & Advances
(1,150.
00) -
(500.0
0)
(200.0
0)
(300.0
0) - - -

46
Other Recievables (75.00) - - - - - - -
Total Outflows
1,568.
04
1,100.
06
(727.0
9)
(939.9
3)
(1,001.
44) (50.00)
(105.0
0)
(225.0
0)
Opening Balance 125.75 25.25 42.12 45.06 60.52 73.15 156.41 186.72
Cash
(100.4
9) 16.87 2.94 15.46 12.63 83.25 30.31 36.64
Closing Balance 25.25 42.12 45.06 60.52 73.15 156.41 186.72 223.36

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