Restructuring & Turnaround – Indian Scenario

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Restructuring & Turnaround –Indian Scenario

IAIP Speaker EventThe Indian Habitat Centre, Habitat World,

New Delhi, December 28, 2013

Presented by: Sajeve Deora, FCADirector, Integrated Capital Services Ltd.

Member of


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• Borrower Side– Section 391 of Companies Act, 1956 / Section 230 of Companies Act,

2013– Sick Industrial Companies (Special Provisions) Act, 1985 / Section 253

of Companies Act, 2013– Corporate Debt Restructuring

• Lender Side– Recovery of Debts Due to Banks and Financial Institutions Act, 1993– Securitisation and Recovery of Financial Assets and Enforcement of

Security Interest Act, 2002– Winding up, Companies Act

• Title of assets carry the baggage of business, impairing value of security.• Both Sides

– Holding-on operations– Bilateral actions– Arbitration

Available Forums


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• Group company guarantee for borrowings / business transactions / statutory obligations, collateral tangible security, negative lien on intangibles.

• Default in business continuity obligations assumed pursuant to incentive plans / schemes causing forfeiture of operating businesses.

• Crippling of operations due to delay in payment / unsettled disputes with large customers, including State Enterprises (also competitor in market place).

• Title of assets carry the baggage of business, impairing value of security.• New money inferior to old money.• Call and Put Options not fully recognised. Options held by foreign

companies considered as borrowings, making them subject to exchange control regulations.

• Brownfield purchases / restructuring coupled with control subject to approvals, amongst others, of Lenders, Contractual Restrictions, Foreign Investment Promotion Board, Securities Exchange Board, Competition Commission.

Issues before Corporate Borrowers


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• Lenders have choice of recovery through Debt Recovery Tribunal or collective action to repossess security.

• Maintain security ingrained in assets during recovery process.• Priority of payments on realisation of security.• Foreign borrowings can be utilised for assets creation and not to repay

borrowings from Indian Banks.• Decisions of State owned banks are subject to scrutiny.• Restricted in tailoring lending / restructuring, and want to maximise recovery.• Personal loans for agriculture, consumer goods, education suffer from

adequate security.• Sensing trouble, unsecured lenders initiate Arbitration / Winding up actions,

and stall restructuring / implementation thereof leading to serious conflict in debt management and operations.

• Emergence of Micro lending platforms, Self-help groups, Co-operative banks, Non banking companies, Not For Profit organisations, Sharia lending, resort to legal action.

Issues before Lenders


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• Restructuring under SICA based on objective of protecting employment, and restricts applicability to industrial companies.

• Co-existence of SARFAESI, DRT, CDR and Companies Act.• Global order is shifting to Pre-packs.• Cancelled business and operational licences• RBI’s approach:

– Lenders may consolidate debt.– Lenders acquire real estate in debt settlement.– Penalise erring lender.– Discover incipient sickness.

• Companies Act, 2013:– Reporting in case of a debt defaulter.– Role of Administrator and Creditor Committee.– BIFR and Operating Agency process shifting to Consultative process.– Single forum for restructuring on stand alone situations, debt defaulters,

winding up, as latter follows failure of restructuring.

Recent Changes


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• Specialised enterprises licensed and regulated by RBI.• Transfer of distress debt from banks to ARC’s based on electronic bidding.• ARC’s can:

– Invite foreign ownership upto 74%.– Trade debt.– Swap debt to equity.– Taking over of Management for limited period.

• Security Receipts, pass through trust certificates, are means of payment by ARC’s.

• Foreign Institutional investment permitted in Security Receipts.

• Operational Turnaround Restructuring – The New Order– New money is the key, Not forthcoming from ARC’s– CRO and Management Teams for Restructuring

Asset Reconstruction Companies


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• Spread of foreign banking institutions expected to change corporate lending.• Guarantee for Loans for Long Term Project Finance.• Promotion of Corporate Bond market, Reducing role of State Enterprises.• Debt consolidation and follow-up SBLC’s.• Directions for time bound release of farmer dues and commencement of in-

season operations by sugar mills.• Restructuring of:

– Wockhardt Sale of Nutrition Division and Hospitals, New Preference Shares, Reduction in Interest rate Losses on

Derivatives converted into NCPS, OCPS.– Suzlon Debt to Equity Swap, Fresh Working Capital, Moratorium on

Interest and Extended Period for Repayment of term debt.

• Distress Asset Funds• Swift action by State to place independent control over:

– Satyam Software Ltd.– National Spot Exchange Ltd.

Interesting Situations


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Personal

• Persons having beneficial interest in the borrower offer personal guarantees and collateral security of their assets.

• Lenders insist collecting post-dated cheques from borrower, when returned uncollected attract criminal liability on signatory / person in-charge of borrower.

• Reporting defaulters and willful defaulters, Shaming defaulters through media.

• Recourse by banks is enforced through DRT, competent to pass decrees and execute the same against personal assets.

• Recovery of unpaid taxes is through attachment of assets and issuing garnishee orders.

• Courts enforcing recovery competent to impose travel restrictions.• Individuals sparingly use statutory provisions to obtain declaration of

bankruptcy.• Protection is available to property under, Insurance with Married Woman’s

Property clause, Hindu Undivided Family and Public Provident Fund.

Documents

Restructuring & Turnaround – Indian Scenario