Aspirin for Stress Relief: RBI Notifies Revised Framework for Stressed Assets
The Reserve Bank of India (“RBI”) has in the past, issued various instructions aimed at resolution of stressed assets in the economy, while also introducing certain specific schemes for resolution at different points of time. In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (“IBC”), the RBI has substituted these existing instructions and schemes with a harmonised and simplified generic framework for resolution of stressed assets (“Revised Framework”).
The increased focus on resolution of stressed assets has been a consistent theme over the course of the past year. All arms of the state, including the executive and regulatory bodies like RBI and Securities and Exchange Board of India (“SEBI”), have been taking measures to ensure that stressed assets are identified and resolved in the most efficient manner. The introduction of the IBC has been a significant step in this direction. The existing regime envisaged several1 methods of resolution not requiring the initiation of liquidation proceedings (“Existing Schemes”). The effectiveness of the Existing Schemes suffered due to a fragmented system and multiplicity of options available to the debtor/lender. Further, lenders were not precluded from initiating proceedings for recovery of outstanding debts during the continuance of steps being taken under Existing Schemes. On the other hand, operational creditors could take action under the IBC, thus starting parallel remedial measures to the Existing Schemes. Suffice it to say, multiple proceedings/actions under various frameworks resulted in inevitable delay of resolution process.
In order to harmonize these conflicting methods of resolution, the RBI has come up with the Revised Framework, which will operate in conjunction with the IBC, rather than in isolation.
The key highlights of the Revised Framework are as follows:
1. Early Identification and Reporting of Stressed Assets
2. Resolution Plan
3. Implementation of RP
4. Timelines for Special Accounts to be Referred to IBC
Provisioning by lenders will continue to be done as per the asset classification norms provided in the Master Circular on Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances. However, provisioning in respect of Notified Accounts continues to be done in the manner as provided in the RBI notifications by which these accounts have been directed to be referred under the IBC.
6. Supervisory Review
Actions taken by lenders to conceal the actual status of accounts, including the consistent evergreening of stressed accounts, has been one of the primary reasons for the huge NPA burden on the Indian banking system. While the Revised Framework uses strong language in respect of lenders taking any actions with a view to conceal the actual status of the accounts or evergreen the stressed accounts, it has possibly lost out on an opportunity to prescribe specific stringent action against such delinquent management by lenders, in conjunction with the promoters of errant companies.
7. Withdrawal of Extant Instructions
With the introduction of the Revised Framework, the erstwhile resolution mechanisms notified by the RBI namely, the Framework for Revitalising Distressed Assets, the CDR Scheme, Flexible Structuring of Existing Long Term Project Loans, the SDR Scheme, Change in Ownership outside SDR, and S4A stand withdrawn with immediate effect. By consequence, the JLF as an institutional mechanism for resolution of stressed accounts also stands discontinued. All accounts, including such accounts where any of the aforementioned schemes have been invoked but not yet implemented, shall now be governed by the Revised Framework, thereby making the Revised Framework retrospectively applicable in respect of such accounts. Considering the criteria for determining which scheme has been ‘implemented’ has been introduced only now by the Revised Framework, it will be interesting to see the treatment of the scheme that have been invoked but does not satisfy the criteria of being implemented under the Revised Framework.
While the Revised Framework is another step in the right direction by the Reserve Bank of India, which is intended to substitute the Existing Schemes, its interplay with the IBC remains questionable. The Revised Framework has possibly missed out on the opportunity to provide clarity on whether (a) proceedings under IBC can be initiated during pendency of restructuring under the Revised Framework; and (b) how the consequent statutory moratorium under IBC will affect restructuring under the Revised Framework. Some clarity in this regard is likely to be issued in the near future to alleviate any potential litigation.
Further, the Revised Framework provides for a special resolution mechanism where the AE of the lenders on or after March 1, 2018 is INR 20 billion and above (“Special Accounts”). “Special Accounts” includes even those accounts where there has already been a default and consequently have been restructured under one of the Existing Schemes. Some of these Debtors have, after availing of the Existing Schemes, either (a) defaulted again on the revised repayment schedules; or (b) may possibly default in the future (“Repeat Defaulters”). These Special Accounts including Repeat Defaulters are being provided an opportunity to either Implement a RP within 180 days of the default or be compulsorily referred to the NCLT under the IBC.
This special resolution mechanism is expected to be extended in some manner to accounts with an AE of INR 1 billion to INR 20 billion over the course of the next two years. However, till the time RBI announces such a reference date for implementing a RP in respect of such accounts, there appears to be no stringent timeline for implementing the RP for such accounts or for a compulsory reference under IBC for non-compliance with a RP. This has probably been done to ensure that the NCLT does not get over burdened with cases being referred by lenders and also because the RBI is taking a calibrated approach towards resolution of stressed assets by dealing with high value assets first.
Further, the Revised Framework declares borrowers who have committed frauds/ malfeasance/ wilful default as ineligible for restructuring. This appears to have been made in light of the Insolvency and Bankruptcy (Amendment) Act, 2017 notified on January 18, 2018. Also, the Revised Framework takes into account the exemptions provided under SEBI (Issue of Capital and Disclosure Requirements) Regulations, 2009 and the SEBI (Substantial Acquisition of Shares and Takeovers), 2011 for restructurings carried out as per the regulations issued by RBI and provides that these exemptions will form a part of the revised prudential norms applicable to restructurings.
Also, the Revised Framework has specifically allowed Lenders to individually take steps to cure defaults in the borrower entity’s account. This will have a significant impact on borrowings given by a consortium of lenders. This may, effectively, result in different lenders pursuing different actions such as change in control, proceedings under IBC, action under the Securitization and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002 for the same account. Accordingly, the Revised Framework seems to have opened gates to various corrective steps which may defeat the purpose of streamlining the RP process.
On its own legs, the Revised Framework will work to ease the process and dissolve the confusion created under the Existing Schemes and will lend credibility and certainty to both lenders and borrowers in respect of resolution of stressed assets and consequences for non-compliance with the mechanisms prescribed under the Revised Framework.
– Anandapadmanabhan Unnikrishnan, Swati Sharma, Arjun Gupta, M.S. Ananth & Sahil Kanuga
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1 Such as the Joint Lenders Forum (“JLF”), Corporate Debt Restructuring (“CDR”), Strategic Debt Restructuring (“SDR”) and the Scheme for Sustainable Structuring of Stressed Assets (“S4A”).
2 Lenders under the Revised Framework would generally include all scheduled commercial banks (excluding regional rural banks) and all India financial institutions.
3 The Revised Framework defines “Specified Period” as follows:
‘Specified Period’ means the period from the date of implementation of RP up to the date by which at least 20 percent of the outstanding principal debt as per the RP and interest capitalisation sanctioned as part of the restructuring, if any, is repaid.
Provided that the specified period cannot end before one year from the commencement of the first payment of interest or principal (whichever is later) on the credit facility with longest period of moratorium under the terms of RP.