‘Preferential allotment’ in restructuring schemes

The restructuring of stressed assets under the Strategic Debt Restructuring Scheme (SDR), the Scheme for Sustainable Structuring of Stressed Assets (S4A) or any other deep restructuring under the extant guidelines of the Reserve Bank of India (RBI) seeks to achieve timely resolution of stressed assets.

The purpose of the restructuring is to enable the borrowing company to address intermittent cash stress and meet the repayment obligations of its debts by converting the unsustainable portion of debt into equity or an equity-like instrument, thus substantially reducing the debt repayment and servicing obligation of the company for a considerable time.

A comparison between the allotment of securities by further issue in the normal course and allotments pursuant to the restructuring schemes reveals substantial differences in the processes.

In the case of further issue in the normal course, the Companies Act, 2013, and the rules made under it set out a significant and proactive role for the board of directors in driving the process of further issue of capital by private placement/preferential allotment.

KA Najmi and Y Sriniwas Arun are partners at Link Legal India Law Services.