CDR/SDR/S4A/SARFAESI/ Constitutionality of IBC

The corporate debt restructuring is done by lowering the amount of payable towards the debt. Choose the incorrect option.

• The interest rate is lowered.

• The repayment tenure is reduced

• At times, a part of the company’s debt would be waived off by the creditors.

• waiver is in exchange for equities of the company.

Answer explanation

The repayment tenure is enhanced, which would help the company in paying the outstanding dues.

Corporate debt restructuring or business debt restructuring is preferred over bankruptcy.

• True

• False

Answer explanation

This is because going through the procedure of bankruptcy can be expensive and most small businesses will find it difficult to go through the process and therefore they would prefer to give up some of the stakes in the company to their lenders in the form of equities via corporate debt restructuring.

WHICH AMONG THE FOLLOWING IS NOT THE REASONS FOR FAILURE OF CDR:

• In some cases the banks may have been hasty in agreeing to restructure the debt and failed to adequately assess the ability of the borrowers to meet their restructuring commitments.

• Monitoring of CDR cases is not an issue. The banks have enough resources to oversee the large number of restructuring cases.

• In many cases where there is provision for conversion of loan into equity, the promoters hesitate from taking new investors on board

• Regulatory changes required that net present value of a loan after restructuring should be retained - this led to ballooning of debt which ultimately led to the collapse of the CDR framework

•In August this year, RBI set up a committee headed by K.V. Kamath on restructuring of loans impacted by the Covid-19 pandemic.

• The Committee was tasked to recommend parameters for one-time restructuring of corporate loans.

• Banks can classify the accounts into mild, moderate and severe as recommended by the committee.

• The Committee was tasked to recommend parameters for full-time restructuring of corporate loans.

• 26 sectors have been identified including auto, aviation, construction, hospitality, power, real estate and tourism.

Five financial parameters stated by the KVS Kamath committee to measure the condition of sectors facing difficulties: (Choose the incorrect option)

• total outside liabilities to adjusted tangible net worth

• total debt to earnings before interest, taxes, depreciation, and amortization (Ebitda)

• debt service coverage ratio (DSCR)

• quick ratio

• average debt service coverage ratio (ADSCR)

•The concept of Strategic Debt Restructuring ("SDR") has been introduced by the Reserve Bank of India (the "RBI") in the SDR Scheme (the "Scheme") to help banks recover their loans by taking control of the distressed listed companies.

• True

• False

The SDR Scheme has been enacted with a view to revive stressed companies. Which of the following is incorrect?

• It is a way to initiate change of management in companies which fail to achieve the milestones under Corporate Debt Restructuring ("CDR").

• Conversion of outstanding debts can be done by a consortium of lending institutions.

• The Scheme will also be applicable to a single lender.

• The Scheme is subsequent to CDR or any other restructuring exercise undertaken by the companies

The conversion price of the equity shall be determined as follows:

• Conversion of outstanding debt into equity will be treated at a 'Fair Value'

• 'Fair Value' will be lowest of

  Market value, average of the closing prices during the 30 day average price in the market.

• 'Fair Value' will be lowest of Book value per share to be calculated from the company's latest audited balance sheet after considering revaluation resources.

• the price can be lower than the face value of the share.

The Sustainable Structuring of Stressed Assets (S4A) scheme is aimed at reducing the bad loans in the economy. This scheme allows the bank to acquire the equity of the stressed project.

• False

• True

(S4A) The Reserve Bank of India ("RBI"), from time to time, had issued various Guidelines with the objective of stimulating the stressed assets in the economy. which are:

• The Scheme is one step forward to the SDR Mechanism as under this Scheme the existing promoter are NOT allowed to continue in the management

• The stressed assets excludes Non Performing Assets (NPAs), restructured loans and written off assets.

• The Guideline on SDR provides that banks should consider revival plan using SDR only in cases where change in ownership is likely to improve the economic value of the loan asset and the prospects of recovery of their dues

• the lenders have an option to hold optionally convertible debentures in addition to equity or preference shares, which is also available under SDR.