New resolution plan offers additional credit, tenure extension, debt conversion facilities to corporate debtors

The separate resolution plan for corporate borrowers announced by the Reserve Bank of India (RBI) today will have steps like sanctioning of additional credit facilities, extension of the residual tenure of the loan as well as conversion of a part of the debt into equity.

The RBI announced a comprehensive resolution framework for corporate debtors hit by the coronavirus pandemic. The steps announced will also include 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 restructuring.

Only those borrower accounts will be eligible for resolution under this framework which were classified as standard, but not in default for more than 30 days with any lending institution as on 1 March 2020. Further, the accounts should continue to remain standard till the date of invocation. .Resolution under this framework may be invoked not later than 31 December 2020 and must be implemented within 180 days from the date of invocation.

The resolution plan will also include sanctioning of additional credit facilities to address the financial stress of the borrower on account of Covid19 even if there is no renegotiation of existing debt. The lending institutions may allow extension of the residual tenure of the loan, with or without payment moratorium, by up to two years. The moratorium period, if granted, shall come into force immediately upon implementation of the resolution plan.

The resolution plan may also provide for conversion of a portion of the debt into equity or other marketable, non-convertible debt securities issued by the borrower, provided the amortisation schedule and the coupon carried by such debt securities are similar to the terms of the debt held on the books of the lending institutions, post implementation of the resolution plan.

Resolution plans for accounts with the aggregate exposure of the lending institutions at the time of invocation of the resolution process is Rs 100 crore and more will require an independent credit evaluation by any one credit rating agency (CRA) authorized by the Reserve Bank.

Under the new framework, any additional disbursement to the borrowers or repayment by borrowers, as part of the resolution plan, should be routed through an escrow account.

If there are multiple lenders with exposure to the borrower, the resolution process can be implemented only if lenders representing 75 per cent by value of the total outstanding credit facilities (fund based as well non-fund based) , and not less than 60 per cent of lending institutions by number agree to the same.

As per the plan, the RBI will constitute under KV Kamath a committee which will recommend a list of financial parameters required to be factored in before implementing each resolution plan. These parameters will cover aspects related to leverage, liquidity, debt serviceability etc. The Committee will submit the list of such financial parameters and the sector-specific desirable ranges for such parameters to the Reserve Bank, which will notify the same, along with modifications, if any, within 30 days.

The committee will also have the responsibility of vetting the resolution plans for accounts with aggregate exposure of the lending institutions at the time of invocation of the resolution process is Rs.1500 crore and above.