Jurisdiction - India
India – Banking & Finance Snapshots.

29 April, 2014


Legal News & Analysis – Asia Pacific – India – Banking & Finance


  • On January 20, 2014, RBI released final guidelines relating to ‘Early Recognition of Financial Distress, Prompt Steps for Resolution and Fair Recovery for Lenders: Framework for Revitalising Distressed Assets in the Economy’ (‘NPA Guidelines’). The NPA Guidelines have definitive provisions for banks and NBFCs requiring a corrective action plan that will incentivise early identification of problem cases, timely restructuring of accounts that are considered viable, and prompt steps by banks for recovery or sale of unviable accounts. Some provisions are:


i. Early formation of a lenders’ committee with timelines to agree to a plan for resolution and incentives for lenders to agree collectively and quickly to a plan. The NPA Guidelines prescribe better regulatory treatment of distressed assets if a resolution plan is underway, and for accelerated provisioning if no agreement can be reached;
ii. Improved restructuring process, including mandatory independent evaluation of large value restructurings, with a focus on viable plans and a fair sharing of losses (and future possible upside) between promoters and creditors;
iii. Future borrowing to be more expensive for borrowers who do not co-operate with lenders in resolution under the NPA Guidelines; and
iv. More liberal regulatory treatment of asset sales through certain prescribed means.


By way of a notification dated February 26, 2014, RBI has issued detailed guidelines, inter alia, on (i) refinancing of project loans; (ii) sale of financial assets to securitisation companies (‘SCs’) and reconstruction companies (‘RCs’) below net book value; (iii) sale of non-performing financial assets (‘NPAs’) by a bank (without the requirement for the selling bank to have held for any minimum holding period, as against the earlier requirement for a 15 month holding period) to other banks (who may in turn on-sell within 12 months as against the earlier 15 months); (iv) use of counter-cyclical/floating provisions; (v) bank loans for financing specialised entities formed for acquiring troubled companies, floated by individuals and institutions with prior experience in turning around troubled companies ( such loans may be extended once lenders have: (a) assessed the risks associated with such financing and (b) ensured that these entities are adequately capitalised, and debt equity ratio for such entity is not more than 3:1.); (vi) credit risk management.


  • By notification dated January 23, 2014 (‘Jan 23 Notification’), RBI has amended ‘The Securitisation Companies and Reconstruction Companies (Reserve Bank) Guidelines and Directions, 2003’ applicable to SC/RCs.


Some of the key aspects of the Jan 23 Notification are as follows:


i. SC/RCs are now permitted to convert a portion of debt into shares of a borrower company that exhibits potential for a ‘turn around’ after restructuring, but which normally has very high defaults and an unsustainable level of debt. Upon conversion, the shareholding of the SC/RCs cannot exceed 26% of the post converted equity capital of the company under reconstruction;


ii. SC/RCs are permitted to acquire debt from other SC/RCs, subject to inter alia the following conditions:


    • Such acquisition is for the purpose of debt aggregation for enforcement of security interest and further, (a) the existing holdings of the acquiring SC/RCs at the time of acquisition are less than 60% and (b) subsequent to the proposed acquisition from other SC/RCs, the total debt in the books of the aggregating SC/RC will in aggregate, correspond to 60% or more of the total secured debt;
    • The selling SC/RC(s) will utilise the proceeds so received, for the purpose of redemption of underlying security receipts (‘SRs’).




For further information, please contact:


Zia Mody, AZB & Partners
[email protected]


Abhijit Joshi, AZB & Partners 
[email protected]

Shuva Mandal, AZB & Partners 
[email protected]


Samir Gandhi, AZB & Partners
[email protected]

Percy Billimoria, AZB & Partners 
[email protected]


Aditya Bhat, AZB & Partners 
[email protected]


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