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Strategic Debt Restructuring (SDR) Scheme: Overview

Recently RBI has come out with a new circular on June,8, 2015 wherein it has elaborated in detail the modes operandi of loan conversion into shares leading to management takeover . The scheme is in continuation of its’ efforts in devising framework for Revitalising Distressed Assets. The concept is based on the general principle of restructuring i.e. Shareholders bear the first loss rather than the debt holders.
This will enable the lenders to convert the loan into equity and thereby management control from the promoters. The scheme has been named as Strategic Debt Restructuring (SDR) scheme as it involves change in management temporarily or permanent too. The scheme is based on the presumption that the existing management is either not capable to revive the unit or does not intend to do so. Also this will give more ammunition to the lenders to pressurize the borrowers. This scheme can also be applied to the cases where restructuring is done earlier and the MRA has necessary clause to this effect. The circular gives in detail guidelines towards conversion ratio and all related matters.
In my view, such draconian clauses needs be studied properly. An entrepreneur who has already lost all the properties, business and credibility is further pushed to corner. There may be some willful defaulters but not all are willful. In business uncertainty is always there and the entrepreneur services the obligation to the maximum possible. By threatening to takeover, there is least probability of recovery, rather the fear in borrower may further push the company to dust. Also the lender is not always at fault for NPA, even lenders are also equally responsible for such disaster. In most of the cases timely relief could have saved the borrowing unit from slipping to NPA. Always the delay in support plays major role in such situation. I also feel that the lenders should also be made equally responsible and thorough investigation should be carried out into their role and actions. Borrower should be given unbiased and patient hearing as he is the person who has taken maximum risk by pledging every thing . The takeover of shareholding and transferring to some New Promoter at later stage may be part of some conspiracy . This may also lead towards new kind of corruption. The scheme also mentions about the divestment to new promoter and also refinancing the debt to new promoter. Such refinancing may lead to some kind of conspiracy . Thus such scheme is not only impractical but full of flaws.
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