Though the Board for Industrial and Financial Reconstruction (BIFR) and the Corporate Debt Restructuring Cell (CDR) are working on the same problem — restructuring debt, ensuring the safety of bank resources and keeping the precious industrial assets in use — they seem to be poles apart in terms of powers, operations, efficiency and delivery.

The CDR mechanism is focused on timely restructuring of debt of ‘genuine’ cases, while BIFR tries to find remedies for sick companies, which have seen an erosion of their total capital base. In the case of CDR, the accounts would be frozen or guarded against any legal action for 90-180 days from both sides, allowing the CDR Cell to evolve a revival package. Besides, borrowers can look for special rebates on interest rate and deferred repayment options.

Debtors also approach BIFR for exemption on statutory dues, such as corporate and state-level taxes.

Losing steam

The BIFR has been losing steam since 2003 when the CDR mechanism became well known. But the trend became even starker in 2005, when only 180 cases were registered with BIFR, down from the peak of 559 in 2002. This tapered off to just 80 cases by 2012.

From its inception in 1987 until October 2010, BIFR registered 5,687 cases, consisting of 5,469 from the private sector, 94 from Central PSUs and from 124 State PSUs. They had an overall initial investment of Rs 76,729.7 crore, accumulated losses of Rs 1,52,165.34 crore, and were employing 25,99,985 people.

Of them, a total of 899 companies (including those where net worth became positive at the inquiry stage itself) were revived by October 2010 — 861 private, 17 CPSUs, 21 SPSUs, respectively. Revived units had a net worth of Rs 11,945.88 crore and were employing 7,74,909 people. It had recommended the winding up of 1,262 companies and termed 2,327 cases “non-maintainable”.

The figures reflect that BIFR had been successful in saving only 15.81 per cent of companies registered with it, and about 29.80 per cent of the jobs.

A poor performance by any standard for an institution that had completed 23 years by 2010. On the other hand, the number of cases referred to the CDR Cell over the last four years have more than doubled — to 522 — with an aggregate debt of Rs 2,98,141 crore by March 2013. In the first eight years since its inception in 2001, there were only 225 references with an aggregate debt of Rs 95,815 crore. The CDR Cell has approved 401 cases with an aggregate debt of Rs 2,29,013 crore, including those withdrawn or exited. It has rejected or closed 88 cases carrying a debt of Rs 37,045 crore, leaving only 33 cases with an aggregate debt of Rs 32,083 crore for restructuring. That is, a scorching pace of resolution at 76.82 per cent of the total cases.

Despite the Reserve Bank of India issuing norms for opening a CDR kind of window for SMEs in 2005, it remains a non-starter, with many banks yet to formulate such a scheme internally. The guidelines asked banks to evolve the scheme internally on the same lines as applicable to large companies, and suggested a 60-day lag for working out and implementing a package from the date of request from an SME.

If these two prongs — for large corporate and SMEs segments — of CDR are implemented, the importance of BIFR should nosedive. Sectorwise, textiles, iron and steel, and sugar have the highest number of companies drawn into the CDR mechanism, with 74, 59 and 27 companies respectively. Aggregated debtwise, iron and steel, followed by infrastructure and power topped the chart with a share of 23 per cent, 9.57 per cent and 8.06 per cent respectively in the total debt of Rs 2,29,014 crore of 401 companies that were restructured.

The Government and the RBI should think of some remedies for revival of these major industries struggling with high debt but contributing immensely to the exchequer. If necessary, a committee should be appointed to look into the reasons for sickness.

Some limitations

Compared to BIFR, the CDR mechanism is an efficient system and quick in resolving cases at a much earlier stage. However, the restriction of referring only syndicated (debt involving more than one bank) loans of ‘Rs 10 crore or above’, is proving to be a big limitation.

The Sick Industrial Companies Act (SICA), under which BIFR was set up, applies to industries specified in the First Schedule to the Industries (Development and Regulation) Act, 1951, (IDR Act), except the industries relating to ships and other vessels drawn by power. That is a major limitation, though there are other qualifications too that are necessary for entry into BIFR.

The Government could consider lifting or relaxing these limitations in light of visible benefits from these schemes for the economy as a whole.

Banks should promptly appoint nominee independent directors to the board of the debtor company at the time of making the reference to CDR instead of waiting till the CDR package is finalised.

Steps like ensuring CDR mechanism for SMEs and entrusting the job of liquidation of sick units to BIFR itself will help expedite matters.

(The author is Chief Advisor, ‘Banking Law’, PDS & Associates, and former CMD of Corporation Bank. The views are personal.)

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