The “Framework for Revitalising Distressed Assets in the Economy”, issued by the Reserve Bank of India (RBI) on 30 January 2014, requires banks and non-banking financial companies (NBFCs) to identify stress in their loan accounts and classify them into special mention accounts (SMA) in accordance with the framework. The framework mandates lenders to form a joint lenders’ forum (JLF) once the account is reported as SMA-2 to the Central Repository of Information on Large Credits and if the aggregate exposure of the lenders in the account is at least ₹1 billion (US$15 million). The JLF is to arrive at a joint corrective action plan (CAP) for early resolution and recovery.
On the basis of the framework, the RBI issued circulars dated 26 February and 21 March 2014 to banks and NBFCs respectively. On 8 June 2015, the RBI issued a circular introducing the concept of a “strategic debt restructuring” (SDR) scheme, which could be undertaken by banks to convert loan dues to equity shares so as to ensure that promoters have a greater stake in reviving stressed accounts.
The framework and the SDR scheme were analysed in this column in the September 2014 and June 2015 issues of India Business Law Journal respectively. The RBI has by way of a circular dated 24 September 2015 (JLF circular) reviewed the framework to iron out the issues being faced by lenders. By way of another circular of the same date (circular on change in ownership), the RBI has provided clarifications in relation to change in ownership by lenders outside the SDR scheme.
JLF scheme modifications
Under the JLF scheme, lenders are permitted to consider the options of rectification, restructuring or recovery in order to arrive at a joint CAP. If a minimum of 75% of creditors by value and 60% of creditors by number agree to restructure the account, the decision would be binding on all lenders under the terms of the inter-creditor agreement. This provision created issues for lenders (especially lenders with a minority stake in the account) which would be bound by a decision that was not approved by them.
In October 2014, the RBI issued a clarification based on the provisions of the master circular on “Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances” in relation to the corporate debt restructuring mechanism, and permitted banks to exercise an option not to commit additional finance for restructuring the stressed account by exiting and arranging for their share of additional finance to be provided by a new or existing creditor.
By way of the JLF circular, the RBI has now permitted dissenting lenders, which are not willing to participate in the CAP, to sell their exposure to a new or existing lender. Such exit will be available for both rectification and restructuring, and will not be only for provision of additional finance scenarios, unlike the earlier position. However, lenders are not permitted to reject the CAP and continue with their exposure. Effectively, lenders now have the option to agree to the proposed rectification or restructuring as the CAP or to exit by selling their exposure.
Being bound by a decision which they rejected was a major factor impacting banks that were part of a JLF. This move by the RBI recognizes the importance of all lenders willingly participating in the rectification or restructuring of the account.
The JLF circular also recognizes that since the senior-level officials of the banks do not participate in JLF meetings, the boards of such banks face a challenge in implementing the JLF’s decisions. In view of this, the RBI has now stipulated that the CAP finalized by the JLF will need to be placed before an “Empowered Group” of lenders. The composition of such a group has been laid down.
Change in ownership
The JLF circular clarifies that in case of failure of a CAP, the JLF would have an option of initiating the SDR scheme. Further, the circular on change in ownership provides that banks may change the ownership of a borrowing entity which was under stress primarily due to operational/managerial inefficiencies, outside the SDR scheme, and such banks will be permitted to upgrade the credit facilities extended to such entities to the “standard” category on such change in ownership.
These recent clarifications provided by the RBI will ensure the effectiveness of the JLF framework. Further, banks will be in a better position to effect a change of ownership of borrowers outside the SDR scheme. These steps could go a long way in reducing the number of non-performing assets.
The JLF circular and the circular on change in ownership have so far only been issued in respect of banks. One would hope that the benefits provided by these circulars are extended to NBFCs as well.
Babu Sivaprakasam is a partner, Deep Roy is an associate partner and Megha Agarwal is an associate at Economic Laws Practice. This article is intended for informational purposes and does not constitute a legal opinion or advice.
109 A Wing, Dalamal Towers
Free Press Journal Road
Nariman Point, Mumbai – 400 021, India
Tel: +91 22 6636 7000
Fax: +91 22 6636 7172
Mumbai | New Delhi | Ahmedabad | Pune | Bengaluru | Chennai