Understanding Corporate Debt Restructuring in India

Many companies at some point in time tend to falter. There could be many reasons for the same. The reasons could vary from internal or external factors that make the company go weak. To curb any further damage or losses to the organization, many financial institutes and banks join hands to restructure the debt of the faltering company and provide it timely support in terms of finance to nurse the sick company back to health.

The other underlying factor is to protect the interests of the stakeholders, investors and similar people who act as potential lenders. Corporate Debt Restructuring (CDR) works out well especially for companies who have borrowed money from more than one institute. CDR comes to the rescue specifically because it works on a larger interest of protecting everybody’s interest.

Corporate Debt Restructuring in India comes into picture when it is on a point of insolvency. The process of restructuring is implemented when the company profits look viable, but due to some unsolved factors, it continues to incur losses. The factors can range from change of interest rates, change in trade policies by the government, change in the currency and various other factors. CDR gives a second lease of life to the failing company by getting different parties with vested interest in the company to get into different kind of arrangements with the organization in terms of exchanging their debt with the investors in return for a percentage of ownership in the shares of the company. The arrangement could also be waiving off a part of the loan or both parties decide not to take action on each other until a fixed period for finding a solution has not lapsed.

Corporate Debt Restructuring in India was introduced in the year 2001. During this year, RBI came up with a mandate that was required to be followed by the banks and other financial institutions. The mandate simply states that if 75% of the creditors agree to help the failing organization, the other 25% will have to agree to help the 75% creditors to save the company. CDR is made available only if the outstanding debt of creditors and debtors should be 100 million or above.

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