RBI/2018-19/203
DBR.No.BP.BC.45/21.04.048/2018-19
June
7, 2019
Prudential
Framework for Resolution of Stressed Assets
Introduction
In exercise of the powers
conferred by the Banking Regulation Act, 1949 and the Reserve Bank of India
Act, 1934, the Reserve Bank, being satisfied that it is necessary and
expedient in the public interest so to do, hereby, issues the directions
hereinafter specified.
Short title and commencement
1. These directions shall be
called the Reserve Bank of India (Prudential Framework for Resolution of
Stressed Assets) Directions 2019.
2. These directions shall come
into force with immediate effect.
Applicability
3. The provisions of these
directions shall apply to the following entities:
a.
Scheduled
Commercial Banks (excluding Regional Rural Banks);
b.
All
India Term Financial Institutions (NABARD, NHB, EXIM Bank, and SIDBI);
c.
Small
Finance Banks; and,
d.
Systemically
Important Non-Deposit taking Non-Banking Financial Companies (NBFC-ND-SI)
and Deposit taking Non-Banking Financial Companies (NBFC-D).
Purpose
4. These directions are issued
with a view to providing a framework for early recognition, reporting and
time bound resolution of stressed assets.
5. These directions are issued
without prejudice to issuance of specific directions, from time to time, by
the Reserve Bank to banks, in terms of the provisions of Section 35AA of
the Banking Regulation Act, 1949, for initiation of insolvency proceedings
against specific borrowers under the Insolvency and Bankruptcy Code, 2016
(IBC).
I. Framework for Resolution of
Stressed Assets
A. Early identification and
reporting of stress
6. Lenders1 shall recognise incipient stress in loan accounts,
immediately on default2, by classifying such assets as
special mention accounts (SMA) as per the following categories:
SMA
Sub-categories
|
Basis
for classification – Principal or interest payment or any other amount
wholly or partly overdue between
|
SMA-0
|
1-30 days
|
SMA-1
|
31-60 days
|
SMA-2
|
61-90 days
|
7. In the case of revolving
credit facilities like cash credit, the SMA sub-categories will be as
follows:
SMA
Sub-categories
|
Basis
for classification – Outstanding balance remains continuously in excess
of the sanctioned limit or drawing power, whichever is lower, for a
period of:
|
|
|
SMA-1
|
31-60 days
|
SMA-2
|
61-90 days
|
8. As provided in terms of the
circular3 DBS.OSMOS.
No.14703/33.01.001/2013-14 dated May 22, 2014 and subsequent
amendments thereto, lenders shall report credit information, including
classification of an account as SMA to Central Repository of Information on
Large Credits (CRILC), on all borrowers having aggregate exposure4 of ? 50 million and above with them. The
CRILC-Main Report shall be submitted on a monthly basis. In addition, the
lenders shall submit a weekly report of instances of default by all borrowers
(with aggregate exposure of ? 50 million and above) by close of business on
every Friday, or the preceding working day if Friday happens to be a
holiday.
B. Implementation of Resolution
Plan
9. All lenders must put in place
Board-approved policies for resolution of stressed assets, including the
timelines for resolution. Since default with any lender is a lagging
indicator of financial stress faced by the borrower, it is expected that
the lenders initiate the process of implementing a resolution plan (RP)
even before a default. In any case, once a borrower is reported to be in
default by any of the lenders mentioned at 3(a), 3(b) and 3(c), lenders
shall undertake a prima facie review of the borrower account within thirty
days from such default (“Review
Period”). During this Review Period of
thirty days, lenders may decide on the resolution strategy, including the
nature of the RP, the approach for implementation of the RP, etc. The
lenders may also choose to initiate legal proceedings for insolvency or recovery.
10. In cases where RP is to be
implemented, all lenders shall enter into an inter-creditor agreement
(ICA), during the above-said Review Period, to provide for ground rules for
finalisation and implementation of the RP in respect of borrowers with credit
facilities from more than one lender.5 The ICA shall provide that any decision agreed by
lenders representing 75 per cent by value of total outstanding credit
facilities (fund based as well non-fund based) and 60 per cent of lenders
by number shall be binding upon all the lenders. Additionally, the ICA may,
inter alia, provide for rights and duties of majority lenders, duties and
protection of rights of dissenting lenders, treatment of lenders with
priority in cash flows/differential security interest, etc. In particular,
the RPs shall provide for payment not less than the liquidation value6 due to the dissenting lenders.
11. In respect of accounts with
aggregate exposure above a threshold with the lenders, as indicated below,
on or after the ‘reference date’, RP shall be implemented within 180 days
from the end of Review Period. The Review Period shall commence not later than:
a.
The
reference date, if in default as on the reference date; or
b.
The
date of first default after the reference date.
12. The reference dates for the
above purpose shall be as under:
Aggregate
exposure of the borrower to lenders mentioned at 3(a), 3(b) and 3(c)
|
Reference
date
|
? 20 billion and above
|
Date of these Directions
|
? 15 billion and above, but
less than ? 20 billion
|
January 1, 2020
|
Less than ? 15 billion
|
To be announced in due course
|
13. The RP may involve any
action / plan / reorganization including, but not limited to,
regularisation of the account by payment of all over dues by the borrower
entity, sale of the exposures to other entities / investors, change in
ownership and restructuring7.
The RP shall be clearly documented by the lenders concerned (even if there
is no change in any terms and conditions).
C. Implementation Conditions for
RP
14. RPs involving restructuring
/ change in ownership in respect of accounts where the aggregate exposure
of lenders is ? 1 billion and above, shall require independent credit
evaluation (ICE) of the residual debt8 by credit rating agencies (CRAs) specifically
authorised by the Reserve Bank for this purpose. While accounts with
aggregate exposure of ? 5 billion and above shall require two such ICEs,
others shall require one ICE. Only such RPs which receive a credit opinion
of RP49 or better for the residual
debt from one or two CRAs, as the case may be, shall be considered for
implementation. Further, ICEs shall be subject to the following:
a.
The
CRAs shall be directly engaged by the lenders and the payment of fee for
such assignments shall be made by the lenders.
b.
If
lenders obtain ICE from more than the required number of CRAs, all such ICE
opinions shall be RP4 or better for the RP to be considered for
implementation.
15. A RP in respect of borrowers
to whom the lenders continue to have credit exposure, shall be deemed to be
‘implemented’ only if the following conditions are met:
(a) A RP which does not involve
restructuring/change in ownership shall be deemed to be implemented only if
the borrower is not in default with any of the lenders as on 180th day from
the end of the Review Period. Any subsequent default after the 180 day
period shall be treated as a fresh default, triggering a fresh review.
(b) A RP which involves
restructuring/change in ownership shall be deemed to be implemented only if
all of the following conditions are met:
i.
all
related documentation, including execution of necessary agreements between
lenders and borrower / creation of security charge / perfection of
securities, are completed by the lenders concerned in consonance with the
RP being implemented;
ii.
the
new capital structure and/or changes in the terms of conditions of the
existing loans get duly reflected in the books of all the lenders and the
borrower; and,
iii.
borrower
is not in default with any of the lenders.
16. A RP which involves lenders
exiting the exposure by assigning the exposures to third party or a RP
involving recovery action shall be deemed to be implemented only if the
exposure to the borrower is fully extinguished.
D. Delayed Implementation of
Resolution Plan
17. Where a viable RP in respect
of a borrower is not implemented within the timelines given below, all
lenders shall make additional provisions as under:
Timeline
for implementation of viable RP
|
Additional
provisions to be made as a % of total outstanding, if RP not implemented
within the timeline
|
180 days from the end of
Review Period
|
20%
|
365 days from the commencement
of Review Period
|
15% (i.e. total additional
provisioning of 35%)
|
18. The additional provisions
shall be made over and above the higher of the following, subject to the
total provisions held being capped at 100% of total outstanding:
a.
The
provisions already held; or,
b.
The
provisions required to be made as per the asset classification status of
the borrower account.
19. The additional provisions
shall be made by all the lenders with exposure to such borrower.
20. The additional provisions
shall also be required to be made in cases where the lenders have initiated
recovery proceedings, unless the recovery proceedings are fully completed.
21. The above additional
provisions may be reversed as under:
(a) Where the RP involves only
payment of overdues by the borrower – the additional provisions may be
reversed only if the borrower is not in default for a period of 6 months
from the date of clearing of the overdues with all the lenders;
(b) Where RP involves
restructuring/change in ownership outside IBC – the additional provisions
may be reversed upon implementation of the RP;
(c) Where resolution is pursued
under IBC – half of the additional provisions made may be reversed on
filing of insolvency application and the remaining additional provisions
may be reversed upon admission of the borrower into the insolvency
resolution process under IBC; or,
(d) Where assignment of
debt/recovery proceedings are initiated – the additional provisions may be
reversed upon completion of the assignment of debt/recovery.
E. Prudential Norms
22. The prudential norms
applicable to any restructuring/change in ownership, whether under the IBC
framework or outside the IBC, are contained in Annex-110.
II. Supervisory Review
23. Any action by lenders with
an intent to conceal the actual status of accounts or evergreen the
stressed accounts, will be subjected to stringent supervisory / enforcement
actions as deemed appropriate by the Reserve Bank, including, but not
limited to, higher provisioning on such accounts and monetary penalties11.
III. Disclosures
24. Lenders shall make
appropriate disclosures in their financial statements, under ‘Notes on
Accounts’, relating to RPs implemented.
IV. Exceptions
25. Restructuring in respect of
projects under implementation involving deferment of date of commencement
of commercial operations (DCCO), shall continue to be covered under the
guidelines contained at paragraph 4.2.15 of the Master Circular No. DBR.No.BP.BC.2/21.04.048/2015-16
dated July 1, 2015 on ‘Prudential norms on Income Recognition,
Asset Classification and Provisioning pertaining to Advances’.
26. Section I(B), I(C) and I(D)
of the framework shall not be applicable to revival and rehabilitation of
MSMEs covered by the instructions contained in Circular No. FIDD.MSME & NFS.BC.No.21/ 06.02.31/ 2015-16 dated
March 17, 2016, as amended from time to time. Section I(E) of the
framework shall not be in derogation to the provisions of the circular DBR.No.BP.BC.18/21.04.048/ 2018-19 dated January
1, 2019.
27. Restructuring of loans in
the event of a natural calamity, including asset classification and
provisioning, shall continue to be guided as per the extant instructions.
28. The framework shall not be
available for borrower entities in respect of which specific instructions
have already been issued or are issued by the Reserve Bank to the banks for
initiation of insolvency proceedings under the IBC. Lenders shall pursue
such cases as per the specific instructions issued to them.
V. Withdrawal of extant
instructions
29. The extant instructions on
resolution of stressed assets such as Framework for Revitalising Distressed
Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of
Existing Long Term Project Loans, Strategic Debt Restructuring Scheme
(SDR), Change in Ownership outside SDR, and Scheme for Sustainable
Structuring of Stressed Assets (S4A) stand withdrawn with immediate effect.
Accordingly, the Joint Lenders’ Forum (JLF) as mandatory institutional
mechanism for resolution of stressed accounts also stands discontinued.
30. The list of
circulars/directions/guidelines that stand repealed is given in Annex - 3.
31. The lenders shall not
reverse the provisions maintained as on April 2, 2019 in respect of any
borrower unless the reversal is a consequence of an asset classification
upgrade or recovery or resolution following the instructions of this
circular. Any RP under consideration as on the date of this circular may be
pursued by lenders under this revised framework subject to meeting the
requirements/conditions specified in this framework.
Yours faithfully,
(Saurav Sinha)
Chief General Manager-in-Charge
Annex
– 1
Prudential
Norms Applicable to Restructuring
1. Restructuring is an act in
which a lender, for economic or legal reasons relating to the borrower's
financial difficulty, grants concessions to the borrower. Restructuring may
involve modification of terms of the advances / securities, which would generally
include, among others, alteration of payment period / payable amount / the
amount of instalments / rate of interest; roll over of credit facilities;
sanction of additional credit facility/ release of additional funds for an
account in default to aid curing of default / enhancement of existing
credit limits; compromise settlements where time for payment of settlement
amount exceeds three months.
2. For this purpose, the
board-approved policies of lenders on resolution of stressed assets,
required to be in place in terms of the this framework, shall also have
detailed policies on various signs of financial difficulty, providing
quantitative as well as qualitative parameters, for determining financial
difficulty as expected from a prudent bank. In order to enable lenders to
frame respective policies for determination of financial difficultly, a
non-exhaustive indicative list of signs of financial difficulty are
provided as under12:
a.
A
default, as per the definition provided in the framework, shall be treated
as an indicator for financial difficulty, irrespective of reasons for the
default.
b.
A
borrower not in default, but it is probable that the borrower will default
on any of its exposures in the foreseeable future without the concession,
for instance, when there has been a pattern of delinquency in payments on
its exposures.
c.
A
borrower’s outstanding securities have been delisted, are in the process of
being delisted, or are under threat of being delisted from an exchange due
to noncompliance with the listing requirements or for financial reasons.
d.
On the
basis of actual performance, estimates and projections that encompass the
borrower’s current level of operations, the borrower’s cash flows are
assessed to be insufficient to service all of its loans or debt securities
(both interest and principal) in accordance with the contractual terms of
the existing agreement for the foreseeable future.
e.
A
borrower’s credit facilities are in non-performing status or would be
categorised as nonperforming without the concessions.
f.
A
borrower’s existing exposures are categorised as exposures that have
already evidenced difficulty in the borrower’s ability to repay in
accordance with the bank’s internal credit rating system.
3. The above list provides
examples of possible indicators of financial difficulty, but is not
intended to constitute an exhaustive enumeration of financial difficulty
indicators with respect to restructuring. Lenders shall need to complement
the above with key financial ratios and operational parameters which may
include quantitative and qualitative aspects. In particular, financial
difficulty can be identified even in the absence of arrears on an exposure.
The robustness of the board approved policy and the outcomes would be
examined as part of the supervisory oversight of the Reserve Bank.
I. Prudential Norms13
A. Asset Classification
4. In case of restructuring, the
accounts classified as 'standard' shall be immediately downgraded as
non-performing assets (NPAs), i.e., ‘sub-standard’ to begin with. The NPAs,
upon restructuring, would continue to have the same asset classification as
prior to restructuring. In both cases, the asset classification shall
continue to be governed by the ageing criteria as per extant asset
classification norms.
B. Conditions for
Upgrade
5. Standard accounts classified
as NPA and NPA accounts retained in the same category on restructuring by
the lenders may be upgraded only when all the outstanding loan / facilities
in the account demonstrate ‘satisfactory performance’14 during the period from the date of implementation
of RP up to the date by which at least 10 per cent of the sum of
outstanding principal debt15 as
per the RP and interest capitalisation sanctioned as part of the
restructuring, if any, is repaid (‘monitoring
period’).
Provided that the account cannot
be upgraded 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.
6. Additionally, for accounts
where the aggregate exposure of lenders is ? 1 billion and above at the
time of implementation of RP, to qualify for an upgrade, in addition to
demonstration of satisfactory performance, the credit facilities of the
borrower shall also be rated as investment grade16 (BBB- or better), at the time of upgrade, by CRAs
accredited by the Reserve Bank for the purpose of bank loan ratings. While
accounts with aggregate exposure of ? 5 billion and above shall require two
ratings, those below ? 5 billion shall require one rating. If the ratings
are obtained from more than the required number of CRAs, all such ratings
shall be investment grade for the account to qualify for an upgrade.
7. If the borrower fails to
demonstrate satisfactory performance during the monitoring period, asset
classification upgrade shall be subject to implementation of a fresh
restructuring/ change in ownership under this Framework or under IBC.
Lenders shall make an additional provision of 15% for such accounts at the
end of the Review Period. This additional provision, along with other
additional provisions, may be reversed as per the norms laid down at
paragraph 21 of the covering circular.
8. Provisions held on
restructured assets may be reversed when the accounts are upgraded to
standard category.
9. Any default by the borrower
in any of the credit facilities with any of the lenders (including any
lender where the borrower is not in “specified
period”) subsequent to upgrade in asset
classification as above but before the end of the specified period, will
require a fresh RP to be implemented within the above timelines as any
default would entail. However, lenders shall make an additional provision
of 15% for such accounts at the end of the Review Period. This additional
provision, along with other additional provisions, may be reversed as per
the norms laid down at paragraph 21 of the covering circular.
“Specified period” means the
period from the date of implementation of RP17 up to the date by which at least 20 per cent of
the sum of outstanding principal debt as per the RP and interest
capitalisation sanctioned as part of the restructuring, if any, is repaid.
C. Provisioning Norms18
10. Accounts restructured under
the revised framework shall attract provisioning as per the asset
classification category as laid out in the Master Circular on Prudential
Norms on Income Recognition, Asset Classification and Provisioning
pertaining to Advances dated July 1, 2015, as amended from time to time.
11. In respect of accounts of
debtors where a final RP, as approved by the Committee of Creditors, has
been submitted by the Resolution Professional for approval of the
Adjudicating Authority (in terms of section 30(6) of the IBC), lenders may
keep the provisions held as on the date of such submission of RP frozen for
a period of six months from the date of submission of the plan or up to 90
days from the date of approval of the resolution plan by the Adjudicating
Authority in terms of section 31 (1) of the IBC, whichever is earlier.
12. The above facility of
freezing the quantum of the provision shall be available only in cases
where the provisioning held by the lenders as on the date of submission of
the plan for approval of the Adjudicating Authority is more than the
expected provisioning required to be held in the normal course upon
implementation of the approved resolution plan, taking into account the
contours of the resolution plan approved by Committee of Creditors/
Adjudicating Authority, as the case may be, and extant prudential norms.
However, lenders shall not reverse the excess provisions held as on the
date of submission of the resolution plan for approval of the Adjudicating
Authority at this stage. In cases where the provisioning held is lower than
the expected required provisioning, lenders shall make additional
provisioning to the extent of the shortfall. Subsequent to the lapse of
above mentioned period, provisioning shall be as per the norms compiled in
the Master Circular – Prudential Norms on Income Recognition, Asset
Classification and Provisioning pertaining to Advances dated July 1, 2015
(amended from time to time). The facility of freezing of provisions shall
also lapse immediately if the Adjudicating Authority rejects the resolution
plan thus submitted. Asset classification in respect of such borrower shall
continue be governed by the extant asset classification norms.
D. Additional Finance
13. Any additional finance
approved under the RP (including any resolution plan approved by the Adjudicating
Authority under IBC) may be treated as 'standard asset' during the
monitoring period under the approved RP, provided the account demonstrates
satisfactory performance (as defined at footnote 14) during the monitoring
period. If the restructured asset fails to perform satisfactorily during
the monitoring period or does not qualify for upgradation at the end of the
monitoring period, the additional finance shall be placed in the same asset
classification category as the restructured debt.
14. Similarly, any interim
finance [as defined in section 5 (15) of the IBC] extended by the lenders
to debtors undergoing insolvency proceedings under IBC may be treated as
‘standard asset’ during the insolvency resolution process period as defined
in the IBC. During this period, asset classification and provisioning for
the interim finance shall be governed by the Master Circular – Prudential
Norms on Income Recognition, Asset Classification and Provisioning
pertaining to Advances dated July 1, 2015 (amended from time to time).
Subsequently, upon approval of the resolution plan by the Adjudicating
Authority, treatment of such interim finance shall be as per the norms
applicable to additional finance, as per paragraph 13 above.
E. Income recognition
norms
15. Interest income in respect
of restructured accounts classified as 'standard assets' may be recognized
on accrual basis and that in respect of the restructured accounts
classified as 'non-performing assets' shall be recognised on cash basis.
16. In the case of additional
finance in accounts where the pre-restructuring facilities were classified
as NPA, the interest income shall be recognised only on cash basis except
when the restructuring is accompanied by a change in ownership.
F. Conversion of
Principal into Debt / Equity and Unpaid Interest into 'Funded Interest Term
Loan' (FITL), Debt or Equity Instruments
17. An act of restructuring
might create new securities issued by the borrower which would be held by
the lenders in lieu of a portion of the pre-restructured exposure. The FITL
/ debt / equity instruments created by conversion of principal / unpaid
interest, as the case may be, shall be placed in the same asset
classification category in which the restructured advance has been
classified.
18. The provisioning applicable
to such instruments shall be the higher of:
a.
The
provisioning applicable to the asset classification category in which such
instruments are held; or
b.
The
provisioning applicable based on the fair valuation of such instruments as
provided in the following paragraphs.
19. Debt/quasi-debt/equity
instruments19 acquired by the lenders as
part of a RP shall be valued as under:
(a) Debentures/bonds shall be valued
as per the instructions compiled at paragraph 3.7.1 of the Master Circular
- Prudential Norms for Classification, Valuation and Operation of
Investment Portfolio by Banks dated July 1, 2015 (as amended from time to
time).
(b) Conversion of debt into Zero
Coupon Bonds (ZCBs)/low coupon bonds (LCBs) as part of RP shall be subject
to the conditions compiled at paragraph 5.4 of the Master Circular -
Prudential Norms for Classification, Valuation and Operation of Investment
Portfolio by Banks dated July 1, 2015 (as amended from time to time). Such
ZCBs/LCBs shall be valued as per the instructions contained at paragraph
3.7.3 of the above said Master Circular, subject to the following:
i.
Where
the borrower fails to build up the sinking fund as required under the above
said Master Circular, ZCBs/LCBs of such borrower shall be collectively
valued at Re.1
ii.
Instruments
without a pre-specified terminal value would be collectively valued at Re.
1.
(c) Equity instruments, where
classified as standard, shall be valued at market value, if quoted, or
else, should be valued at the lowest value arrived using the following
valuation methodologies:
i.
Book
value (without considering 'revaluation reserves', if any) which is to be
ascertained from the company's latest audited balance sheet. The date as on
which the latest balance sheet is drawn up should not precede the date of
valuation by more than 18 months. In case the latest audited balance sheet
is not available the shares are to be collectively valued at Re.1 per
company.
ii.
Discounted
cash flow method where the discount factor is the actual interest rate
charged to the borrower on the residual debt post restructuring plus a risk
premium to be determined as per the board approved policy considering the
factors affecting the value of the equity. The risk premium will be subject
to a floor of 3 per cent and the overall discount factor will be subject to
a floor of 14 per cent. Further, cash flows (cash flow available from the
current as well as immediately prospective (not more than six months) level
of operations) occurring within 85 per cent of the useful economic life of
the project only shall be reckoned.
(d) Equity instruments, where
classified as NPA shall be valued at market value, if quoted, or else,
shall be collectively valued at Re.1.
(e) Preference Shares shall be
valued on discounted cash flow (DCF) basis as per the instructions compiled
at paragraph 3.7.4 of the Master Circular - Prudential Norms for
Classification, Valuation and Operation of Investment Portfolio by Banks
dated July 1, 2015 (as amended from time to time), subject to the following
modifications:
i.
The
discount rate shall be subject to a floor of weighted average actual
interest rate charged to the borrower on the residual debt after
restructuring plus a mark-up of 1.5 percent.
ii.
Where
preference dividends/coupons are in arrears, no credit should be taken for
accrued dividends/coupons and the value determined as above on DCF basis
should be discounted further by at least 15 per cent if arrears are for one
year, 25 per cent if arrears are for two years, so on and so forth (i.e.,
with 10 percent increments).
20. The overarching principle
should be that valuation of instruments arising out of resolution of
stressed assets shall be based on conservative assessment of cash flows and
appropriate discount rates to reflect the stressed cash flows of the
borrowers. Statutory Auditors should also specifically examine as to
whether the valuations of such instruments reflect the risk of loss
associated with such instruments.
21. In case lenders have
acquired unquoted instruments on conversion of debt as a part of a RP, and
if the RP is not deemed as implemented, such unquoted instruments shall
collectively be valued at Re. 1 at that point, and till the RP is treated
as implemented.
22. The unrealised income
represented by FITL / Debt or equity instrument should have a corresponding
credit in an account styled as "Sundry Liabilities Account (Interest
Capitalization)".
23. The unrealised income
represented by FITL / Debt or equity instrument can only be recognised in
the profit and loss account as under:
a.
FITL/debt
instruments: only on sale or redemption, as the case may be;
b.
Unquoted
equity/ quoted equity (where classified as NPA): only on sale;
c.
Quoted
equity (where classified as standard): market value of the equity as on the
date of upgradation, not exceeding the amount of unrealised income
converted to such equity. Subsequent changes to value of the equity will be
dealt as per the extant prudential norms on investment portfolio of banks.
G. Change in Ownership
24. In case of change in
ownership of the borrowing entities, credit facilities of the concerned
borrowing entities may be continued/upgraded as ‘standard’ after the change
in ownership is implemented, either under the IBC or under this framework.
If the change in ownership is implemented under this framework, then the
classification as ‘standard’ shall be subject to the following conditions:
a.
Lenders
shall conduct necessary due diligence in this regard and clearly establish
that the acquirer is not a person disqualified in terms of Section 29A of
the IBC. Additionally, the ‘new promoter’ should not be a
person/entity/subsidiary/associate etc. (domestic as well as overseas),
from the existing promoter/promoter group. Lenders should clearly establish
that the acquirer does not belong to the existing promoter group (as
defined in Securities and Exchange Board of India (Issue of Capital and
Disclosure Requirements) Regulations, 2018).
b.
The
new promoter shall have acquired at least 26 per cent of the paid up equity
capital as well as voting rights of the borrower entity and shall be the
single largest shareholder of the borrower entity.
c.
The
new promoter shall be in ‘control’ of the borrower entity as per the
definition of ‘control’ in the Companies Act, 2013 / regulations issued by
the Securities and Exchange Board of India/any other applicable regulations
/ accounting standards as the case may be.
d.
The
conditions for implementation of RP as per Section I-C of the covering
circular are complied with.
25. Upon change in ownership,
all the outstanding loans/credit facilities of the borrowing entity need to
demonstrate satisfactory performance (as defined at footnote 14) during the
monitoring period. If the account fails to perform satisfactorily at any
point of time during the monitoring period, it shall trigger a fresh Review
Period, in terms of paragraph 9 of the covering circular.
26. The quantum of provisions
held (excluding additional provisions) by the bank against the said account
as on the date of change in ownership of the borrowing entities can be
reversed only after the end of monitoring period subject to satisfactory
performance during the same.
II. Principles on classification
of sale and lease back transactions as restructuring
27. A sale and leaseback
transaction of the assets of a borrower or other transactions of similar
nature will be treated as an event of restructuring for the purpose of
asset classification and provisioning in the books of lenders with regard
to the residual debt of the seller as well as the debt of the buyer if all
the following conditions are met:
a.
The
seller of the assets is in financial difficulty;
b.
Significant
portion, i.e. more than 50 per cent, of the revenues of the buyer from the
specific asset is dependent upon the cash flows from the seller; and
c.
25 per
cent or more of the loans availed by the buyer for the purchase of the
specific asset is funded by the lenders who already have a credit exposure
to the seller.
III. Prudential Norms relating
to Refinancing of Exposures to Borrowers
28. If borrowings/export
advances (denominated in any currency, wherever permitted) for the purpose
of repayment/refinancing of loans denominated in same/another currency are
obtained:
a.
From
lenders who are part of Indian banking system (where permitted); or
b.
with
the support (where permitted) from the Indian banking system in the form of
Guarantees/Standby Letters of Credit/Letters of Comfort, etc.,
such events shall be treated as
‘restructuring’ if the borrower concerned is under financial difficulty.
IV. Regulatory Exemptions
Exemptions from RBI Regulations
29. Acquisition of non-SLR
securities by way of conversion of debt is exempted from the restrictions
and the prudential limit on investment in unlisted non-SLR securities
prescribed by the RBI.
30. Acquisition of shares due to
conversion of debt to equity during a restructuring process will be
exempted from regulatory ceilings/restrictions on Capital Market Exposures,
investment in Para-Banking activities and intra-group exposure. However,
these will require reporting to RBI (reporting to DBS, CO every month along
with the regular DSB Return on Asset Quality) and disclosure by banks in
the Notes to Accounts in Annual Financial Statements. Nonetheless, banks
will have to comply with the provisions of Section 19(2) of the Banking
Regulation Act, 1949.
Exemptions from Regulations of
Securities and Exchange Board of India (SEBI)
31. SEBI has provided
exemptions, under certain conditions, from the requirements of Securities
and Exchange Board of India (SEBI) (Issue of Capital and Disclosure
Requirements) (ICDR) Regulations, 2018 for restructurings carried out as
per the regulations issued by the Reserve Bank.
32. With reference to the
requirements contained in sub-regulations 158 (6) (a) of ICDR Regulations,
2018, the issue price of the equity shall be the lower of (a) or (b) below:
a.
The
average of the weekly high and low of the volume weighted average price of
the related equity shares quoted on the recognised stock exchange during
the twenty six weeks preceding the ‘reference date’ or the average of the
weekly high and low of the volume weighted average prices of the related
equity shares quoted on a recognised stock exchange during the two weeks
preceding the ‘reference date’, whichever is lower; and
b.
Book
value: Book value per share to be calculated from the latest audited
balance sheet (without considering 'revaluation reserves', if any) adjusted
for cash flows and financials post the earlier restructuring, if any. The
date as on which the latest balance sheet is drawn up should not precede
the date of restructuring by more than 18 months. In case the latest
audited balance sheet is not available the shares are to be collectively
valued at Re.1 per company.
33. In the case of conversion of
debt into equity, the ‘reference date’ shall be the date on which the bank
approves the restructuring scheme. In the case of conversion of convertible
securities into equity, the ‘reference date’ shall be the date on which the
bank approves the conversion of the convertible securities into equities.
V. Cases of frauds/wilful
defaulters
34. Borrowers who have committed
frauds/ malfeasance/ wilful default will remain ineligible for
restructuring. However, in cases where the existing promoters are replaced
by new promoters20, and the borrower company is
totally delinked from such erstwhile promoters/management, lenders may take
a view on restructuring such accounts based on their viability, without
prejudice to the continuance of criminal action against the erstwhile
promoters/management.
Annex
– 2
ICE
Symbols
|
Definition
|
RP1
|
Debt facilities/instruments
with this symbol are considered to have the highest degree of safety
regarding timely servicing of financial obligations. Such debt
facilities/instruments carry lowest credit risk.
|
RP2
|
Debt facilities/instruments
with this symbol are considered to have high degree of safety regarding
timely servicing of financial obligations. Such debt
facilities/instruments carry very low credit risk.
|
RP3
|
Debt facilities/instruments
with this symbol are considered to have adequate degree of safety
regarding timely servicing of financial obligations. Such debt
facilities/instruments carry low credit risk.
|
RP4
|
Debt facilities/instruments
with this symbol are considered to have moderate degree of safety
regarding timely servicing of financial obligations. Such debt
facilities/instruments carry moderate credit risk.
|
RP5
|
Debt facilities/instruments
with this symbol are considered to have moderate risk of default
regarding timely servicing of financial obligations.
|
RP6
|
Debt facilities/instruments
with this symbol are considered to have high risk of default regarding
timely servicing of financial obligations.
|
RP7
|
Debt facilities/instruments
with this symbol are considered to have very high risk of default
regarding timely servicing of financial obligations.
|
Annex
– 3
List
of circulars repealed
S.
No.
|
Circular
number
|
Date
of issue
|
Subject
|
1)
|
DBR.BP.BC.No.67/21.04.048/2016-17
|
05-05-2017
|
Timelines for Stressed Assets
Resolution
|
2)
|
DBR.No.BP.BC.33/21.04.132/2016-17
|
10-11-2016
|
Scheme for Sustainable
Structuring of Stressed Assets – Revisions
|
3)
|
DBR.No.BP.BC.34/21.04.132/2016-17 (Excluding instructions on deferment of DCCO)
|
10-11-2016
|
Schemes for Stressed Assets –
Revisions
|
4)
|
DBR.No.BP.BC.103/21.04.132/2015-16
|
13-06-2016
|
Scheme for Sustainable
Structuring of Stressed Assets
|
5)
|
DBR.BP.BC.No.82/21.04.132/2015-16 (Excluding Part E on Sale of Financial Assets to
SCs/RCs)
|
25-02-2016
|
Review of Prudential
Guidelines - Revitalising Stressed Assets in the Economy
|
6)
|
DBR.BP.BC.No.41/21.04.048/2015-16
|
24-09-2015
|
Prudential Norms on Change in
Ownership of Borrowing Entities (Outside Strategic Debt Restructuring
Scheme)
|
7)
|
DBR.BP.BC.No.39/21.04.132/2015-16
|
24-09-2015
|
Framework for Revitalising
Distressed Assets in the Economy - Review of the Guidelines on Joint
Lenders' Forum (JLF) and Corrective Action Plan (CAP)
|
8)
|
DBR.No.BP.BC.101/21.04.132/2014-15
|
08-06-2015
|
Strategic Debt Restructuring
Scheme
|
9)
|
DBR.No.BP.BC.53/21.04.048/2014-15
|
15-12-2014
|
Flexible Structuring of
Existing Long Term Project Loans to Infrastructure and Core Industries
|
10)
|
DBOD.No.BP.BC.45/21.04.132/2014-15
|
21-10-2014
|
Framework for Revitalising
Distressed Assets in the Economy – Review of the Guidelines on Joint
Lenders Forum (JLF) and Corrective Action Plan CAP)
|
11)
|
DBOD.No.BP.BC.31/21.04.132/2014-15
|
07-08-2014
|
Refinancing of Project Loans
|
12)
|
DBOD.No.BP.BC.24/21.04.132/2014-15
|
15-07-2014
|
Flexible Structuring of Long
Term Project Loans to Infrastructure and Core Industries
|
13)
|
DBOD.No.BP.BC.97/21.04.132/2013-14 (Excluding paragraph 8 on ‘Wilful Defaulters and
Non-cooperative Borrowers’ and paragraph 9 on ‘Dissemination of
Information’)
|
26.02.2014
|
Framework for Revitalising
Distressed Assets in the Economy – Guidelines on Joint Lenders Forum
(JLF) and Corrective Action Plan
|
14)
|
Para 2 of circular DBOD.BP.BC.No. 98/21.04.132/2013-14
|
26.02.2014
|
Framework for Revitalising
Distressed Assets in the Economy - Refinancing of Project Loans, Sale of
NPA and Other Regulatory Measures
|
15)
|
DBOD.No.BP.BC-99/21.04.048/2012-13 (Excluding paragraph 2 on change in DCCO)
|
30.05.2013
|
Review of Prudential
Guidelines on Restructuring of Advances by Banks and Financial
Institutions
|
16)
|
DBOD.BP.BC.No.80/21.04.132/2012-13
|
31.01.2013
|
Disclosure Requirements on
Advances Restructured by Banks and Financial Institutions
|
17)
|
DBOD.No.BP.BC-63/21.04.048/2012-13
|
26.11.2012
|
Review of Prudential
Guidelines on Restructuring of Advances by Banks and Financial
Institutions
|
18)
|
DBOD.BP.BC.No.99/21.04.132/2010-11
|
10.06.2011
|
Prudential Guidelines on
Restructuring of Advances by Banks
|
19)
|
DBOD.BP.BC.No.74/21.04.132/2010-11
|
19.01.2011
|
Credit Support to Micro
Finance Institutions
|
20)
|
DBOD.BP.No.49/21.04.132/2010-11
|
07.10.2010
|
Prudential Guidelines on
Restructuring of Advances by Banks
|
21)
|
DBOD.No.BP.BC.No.124/21.04.132/2008-09
|
17.04.2009
|
Prudential Guidelines on
Restructuring of Advances
|
22)
|
DBOD.BP.BC.121/21.04.132/2008-09
|
09.04.2009
|
Prudential guidelines on
Restructuring of Advances
|
23)
|
DBOD.BP.BC.76/21.04.132/2008-09
|
03.11.2008
|
Prudential guidelines on
Restructuring of Advances
|
24)
|
DBOD.BP.BC.58/21.04.048/2008-09
|
13.10.2008
|
(i) Disbursal of Loans against
Sanctioned Limits (ii) Restructuring of Dues of the Small and Medium
Enterprises (SMEs)
|
25)
|
DBOD.BP.BC.37/21.04.132/2008-09
|
27.08.2008
|
Prudential guidelines on
Restructuring of Advances-comprehensive guidelines
|
26)
|
DBOD.NO.BP.BC.45/21.0421.04.048/2005-06
|
10.11.2005
|
Revised Guidelines on
Corporate Debt Restructuring(CDR) Mechanism
|
27)
|
DBOD No.BP.BC.101/
21.01.002/2001-02
|
09.05.2002
|
Corporate Debt Restructuring
|
28)
|
DBOD No.BP.BC.15/
21.04.114/2000-2001
|
23.08.2001
|
Corporate Debt Restructuring
|
1 For the
purpose of these directions, ‘lenders’ shall mean all entities mentioned at
paragraph 3, unless specified otherwise.
2 ‘Default’
means non-payment of debt (as defined under the IBC) when whole or any part
or instalment of the debt has become due and payable and is not paid by the
debtor or the corporate debtor, as the case may be.
For revolving facilities like cash credit, default would also
mean, without prejudice to the above, the outstanding balance remaining
continuously in excess of the sanctioned limit or drawing power, whichever
is lower, for more than 30 days.
3 In these
directions, wherever a reference is made to the circulars addressed to
banks, other lenders indicated at paragraph 3 should refer to corresponding
circulars applicable to them, if any.
4 Aggregate
exposure under the guidelines would include all fund based and non-fund
based exposure, including investment exposure with the lenders.
5 In cases where
asset reconstruction companies (ARCs) have exposure to the borrower
concerned, they shall also sign the ICA and adhere to all its provisions.
6 Liquidation
value would mean the estimated realisable value of the assets of the
relevant borrower, if such borrower were to be liquidated as on the date of
commencement of the Review Period.
7 Restructuring
is an act in which a lender, for economic or legal reasons relating to the
borrower's financial difficulty, grants concessions to the borrower.
Restructuring would normally involve modification of terms of the advances
/ securities, which would generally include, among others, alteration of
payment period / payable amount / the amount of instalments / rate of
interest; roll over of credit facilities; sanction of additional credit
facility/ release of additional funds for an account in default to aid
curing of default / enhancement of existing credit limits; compromise
settlements where time for payment of settlement amount exceeds three
months.
8 The residual
debt of the borrower entity, in this context, means the aggregate debt
(fund based as well as non-fund based) envisaged to be held by all the
lenders as per the proposed RP.
9 Annex – 2 provides list of RP symbols that can
be provided by CRAs as ICE and their meanings.
10 During the
period when the RP is being finalised and implemented, the usual asset
classification norms would continue to apply subject to additional
provisioning requirements of this circular. The process of
re-classification of an asset should not stop merely because RP is under
consideration.
11 This may be in
addition to direction to bank/s to file insolvency application under the
IBC.
12 Based on the
Basel Committee Guidelines on “Prudential treatment of problem assets –
definitions of non-performing exposures and forbearance”.
13 Applicable to
all resolution plans, including those undertaken under IBC.
14 Satisfactory
performance means that the borrower entity is not in default at any point
of time during the period concerned.
15 Outstanding
principal debt shall include all credit facilities, including debt/debt
like instruments (viz., non-convertible debentures, optionally convertible
debentures, optionally convertible preference shares, non-convertible
preference shares etc.) that exist post implementation of the RP. Only
equity and instruments compulsorily convertible into equity (without any
embedded optionality) shall be exempt from determining outstanding
principal debt.
16 These ratings
shall be the normal ratings provided by the CRAs and not ICEs referred to
in paragraph 14 of the covering circular.
17 For accounts
restructured under IBC, the specified period shall be deemed to commence
from the date of implementation of the resolution plan as approved by the
Adjudicating Authority
18 Additional
provisions for delayed implementation of RP within timelines shall be as
per paragraph 17-20 of the framework
19 These
instruments shall be subject to all the instructions contained in Master
Circular - Prudential Norms for Classification, Valuation and Operation of
Investment Portfolio by Banks dated July 1, 2015 (as amended from time to
time) to the extent they are not inconsistent with the instructions
contained in this circular.
20 New promoters
must satisfy the conditions specified at paragraph 24(a), 24(b) and 24(c)
above.
|