Relaxing the quantitative criteria required by JLF for approving a restructuring plan by Nitu Poddar & Vallari Dubey

RBI’s fast move in view of its latest powers granted through the Banking Ordinance

The Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP) work on the principle of indentifying the stress in a borrower entity and cure it at its nascent stage itself. The intent is to preserve the “economic value” of the underlying assets against the loan extended by financial creditor.

The RBI has, on May 5, 2017, rolled out an Amendment Notification[1] on the “Framework for Revitalising Distressed Assets in the Economy – Guidelines on JLF and CAP – originally put to effect on and from April 1, 2014.

Decrease in the quantitative criteria for passing a resolution

Vide the Amendment Notification, the majority of consensus required for approval of any resolution plan in the JLF has been decreased to 60% of creditors by value and 50% of creditors by number respectively thereby relaxing the quantitative criteria required to approve a restructuring plan.

Prior to the Amendment Notification, decisions under JLF mechanism required a consent of 75% creditors by value and 60% by number for the purpose of restructuring of accounts of stressed assets under the guidelines. However, by virtue of the latest Amendment Notification, it seems that the resolution process will be facilitated and the approvals may be sought faster and plans be implemented sooner.

As was the situation all this while, the same continues inasmuch as such resolution / restructuring plan, once approved, will be binding on all lenders irrespective of the vote casted by them. However, the Amendment Notification allows a bank to exit the decision approved by the JLF, by selling of its loan to another JLF member (referred to as “exit by substitution”) within the time stipulated in the JLF framework. If the bank is unable to firm its decision within such stipulated time, than the decision of the JLF shall be binding on such bank as well and it shall have to abide by the same.

Board of Banks to provide adequate authority and mandate for implementation of JLF decisions

So as to curb the lethargic practice of the banks of not providing adequate authority to its representatives, which proves to be an impediment in the entire restructuring process, the Amendment Notification specifically provides that, henceforth, lenders shall ensure that their representatives in the JLF are equipped with appropriate mandates and the employees with adequate powers to implement the JLF decision without any further power from the lender’s board.

Unlike never before, the Amendment Notification clearly mentions that the once participated in the JLF, the stand of the participating banks while voting cannot be ambiguous and / or conditional. The same has to be voted and accepted “as approved” without ant conditionalities which means that – whatever concerns a lender have, has to be sorted / taken into cognizance while the preparation of the restructuring plan before it comes to the stage of voting.

Additional mode of a restructuring plan

The Amendment Notification provides that the restructuring plan under JLF can now include flexible structuring of loans, change of ownership under SDR, and even the latest RBI framework on Scheme for Sustainable Structuring of Stressed Assets (S4A), etc.

The conventional mode of restructuring was either via CDR route or in case outside CDR – than by carrying out the detailed Techno-Economic Viability (TEV) study.

Penalty on delay in implementation

Inspite of specific timelines clearly provided in the RBI Notifications, within which lenders have to decide and implement the CAP, delays have been observed in finalising and implementation of the CAP, leading to delays in resolution of stressed assets in the banking system. The track records of the all the JLFs formed in the country is the proof how the matters linger in the name of preparation and implementation of the restructuring plan in a stressed company.

In an attempt to put rest to all the delay attitude by the banks, the Amendment Notification, in a sufficiently strict language directs the lenders to “scrupulously” adhere to the timelines of the framework, failing which, in addition to the disincentives, in the form of asset classification and accelerated provisioning, monetary penalties shall also get attracted on the lender as per the Banking Regulation Act.

Difference between JLF and IBC

CAP seeks to offer three options for the purpose of resolution, namely, rectification, restructuring and recovery; noticeably recovery has been considered as the last resort here.

What differs this action plan from the resolution process under IBC is that, the IBC is in form of a Code, specifically framed and passed as an Act of Parliament, while CAP is enunciated as part of RBI guidelines and for the very obvious reasons the Code shall have a wider scope and far reaching implication on resolution proceedings. It is also interesting to note that the Code extends its span to include Operational Creditors in the picture.

Further to this, the Code has set specific timelines to dispose off applications and resolution process, given its intent to resolve the matters in a time bound manner to defeat the very conventional red-tapism concern. On the other hand, even though CAP has specific timelines to be followed, delays have been noticed by the RBI in finalising and implementing CAP.

Reasons for delay in case of CAP

1. Absence of authorisation from the board of the nationalised banks
2. Banks with smaller exposure chose to setle outside the JLF

Decisions under IBC are taken by committee of creditors by a vote of 75% of the voting power. In case of JLF, now the decisions shall be taken by 60% of creditors by value and 50% of creditors by number.

Patently, the JLF guidelines are applicable for lending under Consortium and Multiple Banking Arrangements (MBA), except for instructions in paragraphs 2.1, 7.1, 8 & 9 which shall apply to all cases of lending. On the other hand, IBC is applicable to all types of Creditors – both financial and operational.

The guidelines are more of as a set of instructions that the lenders under consortium or MBA and/or banks as individual lenders have to follow. Differently, resolution under IBC is not instructions but a treatment or medication for both the creditors and corporate debtors. While the RBI guidelines for CAP are pivoted towards revitalising stressed assets, IBC is a one stop forum for all types of resolution.

[1]https://rbi.org.in/Scripts/NotificationUser.aspx?Id=10957&Mode=0

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By:-Nitu Poddar & Vallari Dubey-nitu@vinodkothari.com & vallari@vinodkothari.com