The Curious of Debt Restructuring
Corporate debt restructuring has been an issue lately by Indian financial institutions and banks due to this highly talked about cases of the Ispat industries and Kingfisher airlines.
Ispat industries was formerly owned by the Mittals and now bought by the Jindals. Before it was sold, it was a nonperformer for mostly 10 years. Its lenders gave two chances for corporate debt restructuring and waited for seven years before deciding to change management thus it was sold to Jindal steel.
In the case of the Ispat industries, in 2003, the management renewed on a number of commitments it had made to the institution for many years. In May 2009, they were given a chance to reconstruct their package so as to allow them time. On October 2010, despite the chance given, the lenders noted that the company did not fulfill what they have committed on. So when they applied for a 3rd CDR package, the lenders already gave up on them which placed the company in an auction block. But now, the new owners have nothing to comment about regarding the said issue.
As for the Kingfisher airlines, it initially showed debt recovery when it bought low-cost carrier Deccan aviation in 2007.Through this move, the company has been approved for a CDR package. Newer terms were added in October 2010 which include part conversion of debt into equity and a lower interest rate.
Regarding these two cases, it is important to note the role of the banking regulator, the Reserve bank of India should not stand afar from these CDR packages and try to implement strict regulations to the companies availing the CDR packages.
On February 2003, RBI, another category for CDR packages, added “doubtful loans” aside from the standard and substandard. To justify this, they noticed that there are accounts that are viable by lenders but could not be approved for CDR. Thus, these fell under doubtful category. Meanwhile, the CDR Core group gave chance to the willful defaulters who promised to clean up the mess once given the approval for a CDR.
In conclusion, it is thus the duty of the financial institutions and banks to assess properly the companies if whether they deserve such chance to undergo corporate debt restructuring.
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Source : http://www.business-standard.com/taketwo/news/the-curious-casedebt-restructuring/426203/
