By Ruma Dubey

There have been various lifelines thrown by RBI and in different sizes – the One Time Settlement or OTS scheme for urban co-operative banks and SMEs, Corporate Debt Restructuring (CDR), legislations like SARFAESI Act and the latest - Strategic Debt Restructuring (SDR) in 2014. These various schemes have evolved since 2001. We are now in mid-2016. It’s been over 15 years and we yet are to find a solution which can plug this menace of NPAs. Sadly, despite all these schemes in place, the NPAs have only grown.

That was the bad news. The good news now – banks are almost at the fag end of cleaning up their balance sheets. Maybe from second half of FY17, we will see leaner and hopefully, meaner PSU banks which will work with vigilance to ensure history of NPAs does not repeat itself.

But the pain which banks are going through now is pretty excruciating. And in order to help banks bear their pain much better, deal with stressed assets with more grit and to help put real assets back on track by providing an avenue for reworking the financial structure of entities facing genuine difficulties, the Reserve Bank of India yesterday issued a new guidline – Scheme for Sustainable Structuring of Stressed Assets or S4A.

This S4A is mainly for dealing with large stressed accounts – where deep financial restructuring is required, huge write-down of debt or higher provisioning is needed. The S4A envisages determination of the sustainable debt level for a stressed borrower, and bifurcation of the outstanding debt into sustainable debt and equity/quasi-equity instruments which are expected to provide upside to the lenders when the borrower turns around.

In order to make sure that that the entire exercise is carried out in a transparent and prudent manner, S4A envisages that the resolution plan will be prepared by credible professional agencies, while an Overseeing Committee, set up by the Indian Banks Association, in consultation with the RBI, comprising of eminent experts will independently review the processes involved in preparation of the resolution plan, under the S4A, for reasonableness and adherence to the provisions of these guidelines, and opine on it.

Lets break down this mumbo-jumbo into smaller, digestible bites:

The S4A can be availed by companies which have commenced commercial operations; more importantly. The aggregate exposure (including accrued interest) of all institutional lenders in the account is more than Rs.500 crore (including Rupee loans, Foreign Currency loans/External Commercial Borrowings,).

They have to pass the ‘test of sustainability’. Sustainable debt means that where the Joint Lenders Forum (JLF)/Consortium of lenders/bank conclude through independent techno-economic viability (TEV) say that debt can be serviced over the same tenor as that of the existing facilities even if the future cash flows remain at their current level. For this scheme to apply, sustainable debt should not be less than 50 percent of current funded liabilities.

The resolution plan will involve one of the following options with regard to the post-resolution ownership of the borrowing entity:

(a) The current promoter continues to hold majority of the shares or shares required to have control;

(b) The current promoter has been replaced with a new promoter, in one of the following ways:

Through conversion of a part of the debt into equity under SDR mechanism which is thereafter sold to a new promoter;

In the manner contemplated as per Prudential Norms on Change in Ownership of Borrowing Entities (Outside SDR Scheme);

(c) The lenders have acquired majority shareholding in the entity through conversion of debt into equity either under SDR or otherwise and

allow the current management to continue or hand over management to another agency/professionals under an operate and manage contract.

Note: Where malfeasance on the part of the promoter has been established, through a forensic audit or otherwise, this scheme shall not be applicable if there is no change in promoter or the management is vested in the delinquent promoter.

And once the company gets the nod for S4A, what will happen? (Part A stands for level of debt while Part B represents difference between the aggregate current outstanding debt, from all sources.)

There shall be no fresh moratorium granted on interest or principal repayment for servicing of Part A.

There shall not be any extension of the repayment schedule or reduction in the interest rate for servicing of Part A, as compared to repayment schedule and interest rate prior to this resolution.

Part B shall be converted into equity/redeemable cumulative optionally convertible preference shares. However, in cases where the resolution plan does not involve change in promoter, banks may, at their discretion, also convert a portion of Part B into optionally convertible debentures. All such instruments will continue to be referred to as Part B instruments in this circular for ease of reference.

The equity will be marked to market and where current quotations are not available or where the shares are not listed on the stock exchanges, they will be valued at the lowest value arrived given RBI’s stipulated methodology.

This Plan can go through only if agreed upon by a minimum of 75 percent of lenders by value and 50 percent of lenders by number in the JLF/consortium/bank.

This is another good move in the right direction but we need to wait and see how promoters make use of this – will they use this route to ‘ever-green’ their loans or getting fresh loans to repay old ones? The big beneficiaries will most obviously be the JP group, Essar, Lanco, GMR; mainly all those huge infra companies sitting on huge piles of debt.