The document discusses corporate debt restructuring (CDR) in India, including what CDR is, why companies pursue it, the CDR structure, legal basis, objectives, and case studies of companies that underwent CDR including KSL Industries and Kingfisher Airlines. It provides an overview of the key mechanisms and considerations for corporate debt restructuring in India.

1. A Presentation On
Corporate Debt Restructuring
Mechanism
By
CA Rajesh Chaturvedi
February 4 , 2012

2. What is CDR
Corporate Debt Restructuring is basically a mechanism by way of
which company endeavors to reorganize its outstanding
obligations.
The reorganization of the outstanding obligations can be made by
any one or more of the following ways:
Increasing the tenure of the loan
Reducing the rate of interest
One time settlement
Conversion of debt into equity
Converting unserviced portion of interest into term loan
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3. Why CDR
When a corporate is having severe financial crisis in
terms of :
Trouble in repaying it’s debt obligation
Inability in timely servicing of it’s interest
It generally resorts to Corporate Debt Restructuring
Mechanism
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4. CDR – Borrower’s Point of View
When a company is having outstanding debts which
cannot be serviced under its existing operations it can
resort to any of the following courses of action:
Enhance its quantum of Debt with an expectation to
increase its Profitability & to pay off its original debt,
however the company may not be able sustain such
enhanced level of debt
Cease the current operations of the company & undergo
winding up, so this will ultimately lead to unnatural
death of company
“To consider a structured plan to re –negotiate the terms
of its current debt with existing lenders itself”
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This is where restructuring gains prominence.

5. CDR- Lender’s perspective
CDR gives the lenders a unique opportunity to
avoid being encumbered with NPA’s.
The primary interest of lenders always lies in
recovering the principle amount lent to corporate
along with returns on that investment & not in
liquidation of assets
Apart from this Liquidation proceedings are
notorious for yielding low returns for creditors
Therefore, CDR becomes an instrument for the
lenders, i.e. the banks, to aid the transformation of
otherwise Non-Performing Assets into productive
assets
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6. CDR – Is it legitimate in every case
Whether a case should be referred for restructuring or
not is based upon thorough examination of facts &
viability of the case.
However, wherever the demand for restructuring is
legitimate, and there is a good reason to believe that
the corporation may be revived, it must be considered
for restructuring.
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7. Objectives of CDR
By way of CDR there is a hope of preservation of
Viable corporate that are affected by certain
internal & external factors
CDR aims at minimising the losses to creditors &
other stakeholders through an orderly & co-
ordinates restructuring programme
To support continuing economic recovery
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8. CDR Structure
The CDR structure in India is based upon the three tier structure as follows:
•It is third tier of CDR mechanism
•This cell makes the initial scrutiny of the proposals & if restructuring gets
approved this cell makes a detailed plan for restructuring in conjunction with the
CDR CELL lenders
•This group is comprised of the ED level representatives of leading banks along
with ED level representatives of concerned lenders
•This group based upon preliminary report prepared by CDR cell decides whether
they should take up the restructuring or not, if yes then they provide initial
Empowered guidelines
Group
• When final restructuring plan is prepared by CDR cell the same is again
approved by EG
•This is the top tier in CDR mechanism comprised of representatives of all the
financial institutions & banks.
Standing •This body lays down the policies & guidelines to be followed by the EG & CDR
Forum cell for debt restructuring
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9. Legal Basis to CDR
The legal basis to the CDR System is provided by the Debtor-
Creditor Agreement (DCA) and the Inter-Creditor Agreement
(ICA).
ICA: All banks /financial institutions in the CDR System are required
to enter into the legally binding ICA with necessary enforcement and
penal provisions, if 75% of creditors (by value) agree to a debt
restructuring package, the same would be binding on the remaining
creditors.
DCA: Debtors are required to execute the DCA. The DCA has a legally
binding ‘stand still’ agreement binding for 90/180 days whereby both
the debtor and creditor(s) agree to ‘stand still’ and commit themselves
not to take recourse to any legal action during the period.
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10. Certain Instances of CDR
In the past, there have been several companies which have been
referred to CDR, few of them are as follows:
Subhiksha Retail
Vishal Retail
GTL Infra
Air India
Wockhardt
India cements
Jindal Steel
Essar Steel
HPL
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11. Accounts classification under
CDR system
Standard &
Substandard Category 1 Additional
Accounts CDR funding can
System be
provided
Doubtful NO
Accounts Category 2 Additional
CDR funding can
System be
provided
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12. RBI Guidelines for restructured
Account
The dues to the bank are ‘fully secured by tangible security’ (not
applicable in the infrastructure projects, provided the cash flows
generated from these projects are adequate & escrow mechanism
available).
The unit becomes viable in 10 years, if it is engaged in infrastructure
activities and in 7 years in the case of other units.
The repayment period of the restructured advance including
moratorium period doesn’t not exceed 15 years in the case of
infrastructure advances and 10 years in the case of other advances.
Promoter’s sacrifice and additional funds brought by them should be
minimum of 15% of the banks’ sacrifice.
Personal Guarantee is offered by the promoter except when the unit is
affected by the external factors pertaining to the economy and
industry,
The restructuring under consideration is not a repeated restructuring
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13. Exit & Recompense Clause
The payment of recompense amount gets triggered in the following
circumstances:
Mandatory Cases:
Exit: The exit of the borrower from the CDR mechanism either
voluntarily or at the end of the restructuring period.
Performance: If the performance of the borrower in any whole
financial year improves in comparison to CDR projections.
Declaration of dividend: If the borrower declares dividend in any
financial year in excess of ten percent on annualised basis. The
recompense amount shall be payable prior to distribution of
dividend.
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14. Exit & Recompense Clause
Methodology:
On the occurrence of any of the trigger events, the
referring/monitoring institution shall convene a meeting of the
Monitoring Committee to determine the quantum of the recompense
amount payable by the borrower till the trigger date.
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15. Points to be considered while
preparing restructuring package
S.No. Particulars S.No. Particulars
1. Entry into CDR System. 8. Monitoring Mechanism.
2. Financial Viability Parameters : 9.. Sharing of Securities.
Benchmark Levels i.e. BEP, RoCE,
IRR, Cost of capital & Loan life ratio
3. Category 1 & 2 under CDR System. 10. Conversion of Debt/Sacrifices in to
Equity.
4. BIFR Cases; Eligibility Criteria. 11. Additional Finance and sharing
thereof.
5. Cases of Willful Defaulters: 12. Payment Parity.
Benchmark Levels
6. Borrower Classification for 13. TRA: Treatment For Interest on WC
stipulation of Standard Terms & and Term Loan (TL/WCTL/FITL)-
Conditions Treatment in TRA.
7. Time Frame for Processing and 14. Prudential & Accounting Issues
Implementation of Restructuring
Schemes. 15

16. Points to be considered while
preparing restructuring package
S.No. Particulars S.No. Particulars
15 Prepayment of Restructured Debt 18. Revocation of Restructuring scheme/
and Exit From CDR System. Legal action for recovery.
16. Recompense Clause. 19. Re-workout of CDR Packages.
17. OTS/ Assignment of Debts. 20. Exit Cases From CDR System.
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17. Certain Case studies

18. Case Study -1
KSL & Industries Ltd.

19. Snapshot of the company
KSL Industries Ltd. (KSLIL) is the flagship company
of Saurabh Tayal Enterprise (ex-major stake holder of
Bank of Rajasthan)
KSLIL is a Mumbai based conglomerate engaged in
India’s fastest growing industries i.e. Textile & real
estate
Company is having spinning facility, knitting facility
& processing facility in the various parts of the
country i..e at Nagpur, Dombivali & Wada.
KSLIL embarked an expansion project at it’s units
located at Kalmeshwar & Nagpur after due appraisal
in the FY 2010 & 2011

20. Current Financial performance
Particulars FY 09 FY 10 FY 11 FY 12 (H1)
Sales 819 1031 1306 740
EBIDTA 158 157 187 121
% EBIDTA 19.3% 15.2% 14.3% 16.3%
Interest 57 73 86 64
PBT 30 (4.4) 2.1 8.0
PAT 24.37 4.00 -3.42 6.38
Cash Accruals 96.64 94.09 96.07 56.61
Long term Debts 860.27 897.28 867.02 839.38

21. Why CDR for KSLIL
Increasing in cost
causing reduction
in profits
Affecting the
Deficit in cash flow
business volumes
Inadequate working
capital

22. Reasons for deterioration of financial
position
As explained before company had undertaken an expansion project
in FY 2010 & 2011, however during the project implementation the
textile industry underwent major change causing a major deviation in
the assumptions envisaged during project appraisal & present
scenario such as :
Increase in cotton Cost – 54%
Increase in power cost – 38%
Increase in Labour cost - 35%
Increase in yarn price – 19%
Increase in Knitted fabric cost – 5%
As can be seen there was a major increase in the cost but
commensurate increase in the income was not reflected causing a
significant gap in the profit envisaged & actual profits earned

23. Other Reasons for deterioration
of financial position
Due to industry downturn delay in receipt of receivables
Delay in receipt of TUFS subsidy
Changes industry dynamics - Past profitability not
sustainable in prevailing circumstances

24. Cash flow Analysis
Particulars FY10 FY11 HFY-12 Total
EBIDTA Less Tax 158 186 120 464
Net Current Assets (20) 43 22 45
Suplus Post NCA built up 178 143 98 419
Capex 147 24 3 174
Surplus after Capex 32 118 95 245
Interest Obligation 73 86 63 222
Principal Obligation 89 34 35 159
Total Debt Obligation 162 120 99 381
Surplus/(deficit) post (130) (2) (4) (136)
debt servicing

25. Management Initiatives & Business plan
Exhaustive restructuring plan is to be prepared to revive the
operations & profitability .
Certain modifications and up gradation to the machineries
to improve production and productivity, these will entail
saving in labour cost & other overhead cost

26. Debt realignment proposal (Holding on
operations)
Till the time of designing & implementation of restructuring
following steps shall be taken
Lenders not to recover any Loan installments and interest
Lenders not to levy of any penal charges for delays /
irregularities
Continuation of working capital limits at existing levels
Till implementation of restructuring package, cash / cheque
deposits made in the KSL’s accounts, would be allowed to be
withdrawn, without any adjustment against any dues payable
to the bank.

27. Debt realignment proposal
1. Term loans:
Repayable in 10 years
No moratorium period available in order to comply with
subsidy guidelines
Interest to be charged at concessional rate of 10%
Waiver of the unpaid penal & compound interest
2. Working capital limits:
Working capital limit to be assessed based on FY13 numbers
Reduced rate of interest @10%
Reduction in working capital margins from earlier 25% to 10%
LC & BG margins also reduced

28. Debt realignment proposal
3. Funding of Interest:
Interest due upon the term loans & working capital loans
to be converted into Funded interest term loan
Repayable in 2 years starting from 30th June 2015
Interest on FITL to be charged @5%
4. Foreign Currency convertible Bonds(FCCB’s):
25% of the FCCB amount to be paid within 6 months of
restructuring
Reduced coupon rate @2%
Yield to maturity of 4%

29. Debt realignment proposal
5. Promoter’s Contribution:
Promoter’s to infuse fresh contribution to the extent
of 15% of lenders sacrifice
50% of the same to be infused immediately &
remaining within 6 months

30. Post debt restructuring scheme
Post approval of restructuring scheme and subject to timely
availability of adequate working capital can generate decent
Revenue and EBIDTA levels sufficient to meet the debt
servicing requirements post restructuring.
Financial Year FY12-H2 FY13 FY14 FY 15
onwards
Total Revenues 606 1320 1338 1360
EBIDTA 33 80 94 118
EBIDTA % 5.4% 6.1% 7.0% 8.7%

31. Post debt restructuring scheme
The above projections are fully sensitized for further
downside risks, so it is very much likely that after
implementation of the package the company will able to
restore its old shape.
The restructuring package is expected to act as a breather for
the company.

32. Case study -2
Kingfisher Airlines

33. Kingfisher’s Debt recast package
If we look at the books of Kingfisher, banks & FI’s have taken the
following CDR route:
Rs. 750.10 Crores of loans were converted into 7.5% compulsorily
convertible preference shares which thereafter converted into equity
Rs. 553.10 Crores of Loans were converted into 8% Cumulative
Redeemable preference Shares redeemable at par after 12 years.
Repayment of the balance loans was rescheduled with a moratorium
on repayment of principal of 2 years and step-up repayment over the
subsequent 7 years
Interest for the period July 1, 2010 to March 31, 2011 on loans from
the banks was converted into a funded interest term loan repayable
in 9 years including 2 years moratorium.
Interest rate on loans reduced by over 300 bps
Additional fund based loan facilities of Rs.768.32 Crores and non-
fund based facilities of Rs.444.40 Crores sanctioned by the banks
Part of the working capital limits of Rs.297.40 crores converted into
working capital term loans.
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34. Analysis of the debt recast package
Action Taken Impact upon company
1. Conversion of loan into equity Reduction of interest burden
2 Conversion of loan into cumulative • Reduces the interest burden,
redeemable preference shares dividend is payable to shareholders
only upon the generation of profits
• Company needs to pay dividend
distribution tax, loss of interest
deduction too
3. Moratorium period of two years • Reduces the stress upon cash flow
as there will be no repayment liability
for 2 years
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35. Analysis of the debt recast package
Action Taken Impact upon company
4. Conversion of unserviced portion • Reduces the penal interest liability
of interest into term loan
5. Reduction in Rate of interest • Reduces the cash outflow in
terms of interest
6. Additional limits sanctioned • Will help the company to manage
its operational expenses till the
time it gets stabilised
7. Working capital limit converted • The limit will not be affected by
into Working capital term loan the net working capital of the
company it will be intact inspite of
the reduction in net working
capital
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36. CDR Mechanism – Concluding remark
The CDR mechanism attempts to be a one-stop forum for
lenders and creditors to arrive at mutually agreeable terms to
secure their interests, however varied they may be. With the
involvement of multiple lenders, there is every chance that
any restructuring process would face obstacles and time-
delays. These are the very problems that the RBI’s informal
CDR system aims to address by setting up a framework for
swift and timely action.
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37. Thank You