The Reserve Bank of India (‘RBI’) issued fresh directions to lenders on the resolution of stressed assets. Unlike RBI’s previous circular dated February 12, 2018 (‘Prior Framework’), this new framework (‘Resolution Directions’) is also applicable to specified categories of non-banking financial companies and small finance banks.
By prioritizing incentive structures over compulsory initiation of insolvency against large borrowers, the Resolution Directions reflects the RBI’s revised position following the Supreme Court order dated April 2, 2019 (‘Supreme Court Order’) in the case of Dharani Sugars and Chemical Ltd. v. Union of India & Ors. striking down the Prior Framework. Rather than compel lenders to initiate insolvency proceedings within a certain timeline, the RBI now mandates as set out below.
|Parameters: Lenders are to put in place board approved policies for the resolution of stressed assets, including resolution timelines and parameters for determining financial difficulty. The ‘robustness’ of these policies and the outcomes may be examined by RBI as part of its supervisory oversight.||•|
|Default: Default by the borrower of debt (as defined in IBC) extended by relevant lender.||T|
|SMA: Classification of asset as a special mention account.||Forthwith|
|Review Period: This refers to a 30 (thirty) day period for review of the account by lenders and determination of resolution strategy and the nature and implementation of a resolution plan (‘Plan’), which:
||T + 30|
|ICA formation: During the Review Period, the lenders and asset reconstruction companies with exposure to the borrower are to enter into an inter-creditor agreement (‘ICA’) to provide rules for Plan finalisation and implementation and also provide that decisions by lenders representing 75% of outstanding facilities and 60% by number will bind all lenders.||T + 30|
|Plan Implementation: Plan to be ‘implemented’ within 180 (one hundred and eighty) days from the end of the Review Period. The conditions that must be met for a Plan to be ‘implemented’ are specified in the Resolution Directions. Where a Plan is implemented outside the insolvency process and the aggregate exposure is at least INR 100 crore (approx. USD 14,000,000), independent credit evaluation of residual debt is required.
Depending on the aggregate exposure (of relevant lenders), the Review Period is required to commence by a specified date, as set out below:
|By T + 210|
|20% additional provisioning: This is required if a viable Plan is not implemented by the end of 180 days from the end of the Review Period.||From T + 210|
|35% additional provisioning (including above 20%): This is required if a viable Plan is not implemented by 365 days from the commencement of the Review Period.
Conditions for reversal of additional provisioning are specified in the Resolution Directions. These include
|From T + 365|
We have set out below additional key points under the Resolution Directions:
|Applicability of the Resolution Directions||• They are not applicable where the RBI has already issued instructions to banks for initiation of insolvency proceedings against specific borrowers. They are applicable in all other cases, including where lenders are already considering resolution plans.
• All other RBI schemes on resolution of stressed assets as well as the Joint Lenders’ Forum as an institutional mechanism are discontinued from the date of issue of the Resolution Directions. So the status of erstwhile RBI schemes and the rights of lenders and borrowers thereunder between February 12, 2018 (date of issue of the Prior Framework) and June 7, 2019 (date of issue of the Resolution Directions) is not clarified.
|Insolvency||• Lenders are not restricted from initiating insolvency at any point.|
|Regulatory exemptions||• While the pricing of securities issued due to debt conversion under a Plan is exempt from the norms specified by the securities market regulator (and are to follow the pricing mechanism under the Resolution Directions); unlike the Prior Framework, certain exemptions relating to open offer requirements stand modified.|
|Prudential norms for restructuring||• Specific instructions have been issued in respect of asset classification, provisioning, income recognition, valuation and change in ownership.
• Lenders are now permitted to freeze the provisions in place as on the date of submission of an IBC resolution plan to the National Company Law Tribunal (‘NCLT’), provided the provisioning is expected to reduce upon implementation of such resolution plan. This is for a period being the earlier of 6 months from the date of submission of the resolution plan or up to 90 days from the approval of the resolution plan by the NCLT. However, where the provisioning is expected to increase upon implementation of such resolution plan, additional provisioning is required to be made to the extent of the shortfall.
• Upon a change of ownership of the borrower, upgradation of the restructured account to standard is subject to various conditions including due diligence by lenders that the acquirer would not be disqualified from submitting a resolution plan in the insolvency process, and that the acquirer is not part of the existing promoter group.