The Joint Lenders’ Forum (JLF) and Corrective Action Plan (CAP) work on the principle of identifying the stress in a borrower and cure it at its nascent stage. The intent is to preserve the economic value of the underlying assets against the loan extended by the creditor.
The RBI has on 5 May 2017 rolled out an Amendment Notification
on the “Framework for Revitalising Distressed Assets in the Economy – Guidelines on JLF and CAP”, originally put to effect from 1 April 2014.
The guidelines are more as a set of instructions that the lenders under consortium or Multiple Banking Arrangements (MBA) and/or banks as individual lenders have to follow. Differently, resolution under Insolvency and Bankrutpcy Code, 2016 (IBC) is not instructions but a treatment or medication for both creditors and corporate debtors. While the RBI guidelines for CAP are aimed at revitalising stressed assets, IBC is a one-stop forum for all types of resolution.
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 consent of 75% of creditors by value and 60% by number for 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 approvals may be given faster and plans 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 cast by them. However, the Amendment Notification allows a bank to exit the decision approved by the JLF, by selling 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 up its decision within the stipulated time, than the decision of the JLF shall be binding on the bank.
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 earlier, the Amendment Notification clearly says that once they participate, the stand of the participating banks, while voting, cannot be ambiguous or conditional. The same has to be voted and accepted “as approved” without any conditionality, which means that whatever concerns a lender has, has to be taken into cognisance during the preparation of the restructuring plan.
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 strategic debt restructuring (SDR), and even the latest RBI framework on Scheme for Sustainable Structuring of Stressed Assets (S4A).
The conventional mode of restructuring was via corporate debt restructuring (CDR) route or in the case of outside CDR, then by carrying out the detailed Techno-Economic Viability (TEV) study.
Penalty on delay in implementation
In spite 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 all the JLFs formed in the country is proof of how matters linger in the name of preparation and implementation of the restructuring plan in a stressed company.
In an attempt to avoid delay by the banks, the Amendment Notification, sternly directs 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 have to be paid by 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; notably recovery has been considered as the last resort here.
What distinguishes 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. For very obvious reasons the Code will have a wider scope and far reaching implications on resolution proceedings. It is also interesting to note that the Code extends its span to include Operational Creditors.
Further to this, the Code has set specific timelines to dispose of applications and the resolution process, given its intent to resolve matters in a time-bound manner to defeat red-tape. 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 settle outside the JLF
Decisions under IBC are taken by a 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 MBA, except for instructions in paragraphs 2.1, 7.1, 8 and 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.
(Nitu Poddar is a practicing Company Secretary while Vallari Dubey is an Executive at Vinod Kothari & Company)