Corporate Debt Restructuring ("CDR") is a voluntary framework under which financial organisations and banks restructure the debt of business enterprises experiencing financial difficulties due to a variety of factors, in order to provide assistance to such businesses at the appropriate time. Corporate Debt Restructuring is a process used by companies in financial distress or facing a cash crunch to avoid default risk.
Meaning of Corporate Debt Restructuring
Corporate debt restructuring is the reorientation of a business entity that is in financial distress due to outstanding promises and obligations in order to inject liquidity into business operations and keep it afloat. This process is typically carried out by creditors and the distressed company's management.
Corporate creditors are typically banks and non-banking financial companies (NBFCs). Corporate debt restructuring is accomplished by lowering the amount payable on the debt. In addition, the interest rate has been reduced. However, the repayment period has been extended, which will assist the company in paying the outstanding debts.
The creditors would occasionally waive a portion of the company's debt. However, this would be in exchange for company stock. Nonetheless, this type of arrangement is preferable to declaring bankruptcy and undergoing time-consuming procedures for the distressed company.
How to avoid the risk?
In order to avoid CDR one can follow the following tips to stay safe.
- Mortgage loan interest rates are being reduced or payment terms are being extended.
- It could further involve an equity swap arrangement in which the company's creditors agree to cancel some or all of the debt in exchange for the company's equity. It may also necessitate a "haircut" in which the corporation agrees with the Financial Creditor to write off a portion of interest or capital part.
Mechanism stated by the Reserve Bank of India
According to the Reserve Bank of India, the country's central bank, the Corporate Debt Restructuring mechanism's objectives are as follows:
- "To ensure a timely and transparent mechanism for restructuring corporate debts of viable entities facing problems, to the benefit of all concerned."
- "The goal is to preserve viable corporates that are impacted by various internal and external factors."
- "Through an orderly and coordinated restructuring programme, to minimise losses to creditors and other stakeholders."
The mechanism's goal is to resurrect such businesses while also protecting the interests of financial institutions and other stakeholders. The Corporate Debt Restructuring mechanism is available to companies that have credit facilities from a maximum of one lending institution. The mechanism enables these institutions to restructure debt in a timely and transparent manner for the benefit of all. Debt restructuring can benefit both parties because the corporation avoids bankruptcy and the borrowers usually receive more than they would have received in an IBC bankruptcy proceeding.
Initiation of CDR
The Corporate Debt Restructuring system was designed nearly 18 years ago to restructure corporate debt outside of the purview of debt recovery tribunals (DRTs) and the then-Board for Industrial and Financial Reconstruction (BIFR).
- It is a three-tiered structure comprised of the CDR Standing Forum, the CDR Empowered Group, and the CDR Cell. The CDR Standing Committee was in charge of establishing all debt restructuring rules and regulations, while the CDR cell was in charge of reviewing both borrowers' and lenders' restructuring plans.
- The final decision to approve the restructuring package was made by the CDR Empowered Group. According to the CDR group's rules, the resolution plan must be approved by at least 75% of creditors based on the amount of outstanding financial debt.
Bankruptcy vs. Corporate Debt Restructuring
Corporate debt restructurings, also known as "business debt restructurings," are frequently preferable to bankruptcy, which can cost small businesses thousands of dollars and large corporations many times that amount. Only a small percentage of companies that seek protection from their creditors through a Chapter 11 filing emerge intact, thanks in part to a 2005 shift to a regime that prioritised meeting financial obligations over keeping companies intact through legal protection.
- Corporate debt restructuring, also known as business debt restructuring, is preferable to bankruptcy.
- This is due to the fact that going through the bankruptcy procedure can be costly, and most small businesses will find it difficult to go through the process, so they would prefer to give up some of their stakes in the organisation to their lenders in the form of equities via corporate debt restructuring.
What is the future of the CDR scheme?
There has been a lot of discussion about "Pre-Packs" on Corporate Debt Restructuring. A pre-packaged restructuring plan is a scheduled in advance insolvency process in which a corporation puts together to sell its assets to a bidder before filing for insolvency, promotes the sale, and approaches the NCLT with a pre-negotiated, pre-approved corporate reorganisation plan known as the "pre-packaged." This type of corporate rescue and reorganisation plan significantly reduces the time spent in lengthy court proceedings, in addition to the significant costs for companies that have been already in financial distress. One of the most significant advantages of Pre-pack is that it is debtor-focused rather than creditor-focused, as is typically the case under the IBC.