CDR - AN ESCAPE ROUTE FOR PLANS GONE AWRY
By Ruma Dubey
Corporate Debt Restructuring or CDR is hugely popular with traders. The moment a company announces that it is getting into CDR, the stock price zooms up. This is like a patient diagnosed with cancer; the moment one gets to know that chemo and other medications have been started, there is hope and hence optimism. The same psyche is true for CDR; it is hope that things will now improve for the company. Like getting into rehab – the company will emerge lean and clean after getting into CDR.
Earlier CDR meant the company was close to being declared sick but today, everyone knows the company is in trouble but CDR is like a magic pill that will get the company back into health. This positive perception towards CDR is on account of various past success stories – India Cements, Essar Oil, Nagarjuna Fertilisers and the most recent and ‘big’ being Wockhardt. At that time, when Wockhardt got ‘hospitalised’ investors and traders dumped the stock, saying it was on death bed. But experience now shows that it was more like a hospital bed from which the company has recovered back to the pink of health.
As per data on the CDR cell website, since its inception till 31st Dec’13, it has received 605 cases (365 cases as at 31st Dec’11) of which 105 cases were rejected, approving 443 cases. There were 69 cases which exited the CDR successfully while currently 259 cases are ‘live’. Of this, the highest CDR cases are from the infra sector, which accounts for the largest share of total restructured debt at 19.63%, followed by iron and steel at 17.92%, power at 12.67%, textiles at 9.46%, telecom at 5.19% and NBFCs at 3.36%.
The cases coming into CDR has not slowed with referrals for January coming in at Rs.11,000 crore of which more than half comes from IVRCL which is seeking easier repayment terms for its Rs 6,500 crore loan. In 2013, value of loans recast was around Rs 74,000 crore while the value of loans referred crossed Rs 1 lakh crore and bankers feel that some Rs.15,000 to 20,000 crore more will be restructured before March.
This surge in CDR is coming in despite RBI stating that any CDR proposal above Rs.500 crore needs to be vetted by an independent panel.
When there is such a big surge in the number of cases being referred to CDR, is that a good thing? Well, its good because it at least means that those who are sick and ailing have recognised they need help but at the same time, it is worrying because CDR seems to have become the preferred route to get out all the mindless spending promoters did on ambitious plans. They jeopardized the future of the company and its shareholders big time but they now seem to be getting an easy way out for their follies.
In simple parlance, CDR is given to companies reeling under debt which has been borrowed from a consortium of bankers and institutions. Companies are not able to repay debt and banks, to protect their interest too, reduce rates or sometimes extend repayment schedules. So promoters borrow mindlessly and then banks bail them out. Sometimes, the bailout is right but sometimes, unscrupulous companies take advantage and get away. To help someone when in distress is humane and when companies cry out for help, naturally, they need a helping hand. So to question whether CDR is required or not is futile but more relevant is why so many companies are opting for CDR? Is it because of a general downturn in the economy or is it gross misuse of the CDR mechanism?
Undoubtedly, excessive leveraging by companies when the times were good is a prime reason and that in turn means, banks, through CDRs are being punished for the follies of the companies. But banks also, when lending, had probably gone overboard, allowing logic to take a back seat. We are seeing the ills of the same in rising NPAs of banks – both public as well as private sector banks.
There is no debate on whether CDR is required but banks need to get more vigilant and CDR should not become a norm but a special helping hand only under special circumstances which are beyond management control but not due to mistakes made by the management. Examining the viability of the project should become a prerequisite for sanctioning any CDR for which project appraisal methods and ways need to get more efficient. And yes, banks need to be more concerned with leveraging and not with the fact that they are getting business. Even a man on the street will tell you that a high leveraged project is high risk and banks, somewhere, in their need to enhance their own balance sheets have forgotten that.
CDR as a process, on moral grounds needs to get tightened. Money in the banking sector is precious and it cannot be squandered away just because a few bankers and promoters got carried away by their ambitions.
Cancer requires treatment first, much more than those under self-inflicted substance abuse. The former is a victim of circumstance while the latter has created circumstances to become a victim.