All about ‘S4A’: The Scheme for restructuring Stressed Assets

(This article elucidates comprehensively about S4A (‘Scheme for Sustainable Structuring of Stressed Assets’) to tackle the problem loans of large projects. The article also covers  S4A- post resolution, with regard to management issues, Asset Classification, and Provisioning)

The newly announced ‘Scheme for Sustainable Structuring of Stressed Assets’ (S4A) by RBI  is outlined to tackle the ‘problem loans’ of large projects at a sufficiently early stage and protect the interest of lenders. The scheme is an optional framework under which the liabilities of struggling company’s debt will be bifurcated into sustainable and unsustainable portions.  The banks shall then convert the unsustainable debt into equity and sell this stake to a new owner who will have the advantage of getting to run the business with more manageable sustainable debts. Instead of the earlier system of leaving it to banks themselves, the entire exercise of credible resolution plan under S4A is independently carried out by overseeing committee set up by Indian Banks Association (IBA), in consultation with the RBI, in a transparent and prudent manner. By this exercise, banks are put into a position to upgrade their loans with cleaning up of the large portion of bad loans.   Nevertheless, in this exercise, banks may have to take a haircut as the market value of the stressed company might be less than the value of debt that is converted into equity.

The task of identifying the loans eligible for restructuring under S4A will be carried out by the professional agencies, involving eminent experts. According to the guidelines, only the projects which have commenced commercial operations are eligible for S4A scheme. The aggregate exposure of an enterprise like Rupee loans, Foreign Currency loans, External Commercial Borrowings etc. (including accrued interest) of all institutional lenders should be more than Rs.500 crore, to be eligible for the scheme. The debt shall also meet the test of sustainability. The debt level will be deemed as sustainable if an enterprise is in a position to service, its present principal value of the funded and non- funded liabilities, over the same tenor as that of the existing facilities, even if the future cash flows remain at their current level.

The ‘sustainable debt’ cannot be less than 50 percent of  ‘current funded liabilities’ if an enterprise is to be eligible for S4A. The assessment of debt will be done, through the independent techno-economic viability (TEV) carried out by the experts of professional agencies. The sustainable debt is referred as ‘Part A’ and the remaining portion of the aggregate debt is treated as unsustainable debt which is referred as ‘part B’. At individual bank level, the bifurcation into Part A and part B will be made in the proportion of Part A to Part B at the aggregate level. The resolution plan shall be agreed upon by a minimum of 75 percent of lenders by value and 50 percent of lenders by number in the JLF/consortium/bank for implementation.

The S4A resolution envisages the ‘Part B’ portion of the debt to be converted into equity/redeemable cumulative optionally convertible preference shares. In the cases where the resolution plan does not involve the change in the promoter, banks may, at their discretion, convert a portion of Part B into optionally convertible debentures which will continue to be referred as Part B instruments. Nevertheless, in the process, no part of security cover of the loan will be allowed to be diluted owing to the reason that the part B portion of debt is converted into equity instruments. At least the same amount of security cover will remain as was available prior to the restructuring resolution under the Scheme. Further, the borrower is not eligible for fresh moratorium on interest or principal repayment for servicing of Part A. There shall not be any extension of the repayment schedule or reduction in the interest rate for servicing of Part A, as compared to repayment schedule and interest rate prior to the restructure resolution.

Management of the borrowing entity:

The S4A post-resolution have two options to run the management of the enterprise.

1. The existing promoters continue to hold the management if they hold the majority of the shares required to have control. (However, the implementation of S4A resolution cannot take place when malfeasance on the part of the promoter has been established, through a forensic audit or otherwise and no change in the promoter or the management is vested in the delinquent promoter).
2. If the existing promoter/s does not have the majority stake to have the control of the enterprise; the existing promoter will be replaced with the new promoter/s. However, in certain cases where the resolution does not contain a change in  the promoter, the lenders may allow the existing promoter to operate and manage the company as the minority owner. In such cases, the principle of proportionate loss sharing by the promoters should be met. Therefore, in order to manage the enterprise by the minority owner (the existing promoter/s), he has to dilute his share- holdings in the enterprise by way of conversion of debt into equity /sale of some portion of promoter’s equity to lenders, at least in the same proportion as that of part B to total dues to lenders. Also, the promoters shall offer the personal guarantee to the lenders in all such cases, for at least the amount of Part A.

Asset Classification and Provisioning:

In case promoters are changed due to S4A resolution, the asset classification, and provisioning requirement will be as per the ‘SDR’ scheme or ‘outside SDR’ scheme as the case may be. If an account is ‘Standard’ as on the reference date (the date of lender’s decision to resolve the account)   the entire outstanding (both Part A and part B) will remain as ‘Standard’ subject to provisions made upfront by the lenders being at least the 40 percent of the amount held in part B or 20 percent of the aggregate outstanding (sum of Part A and part B) whichever is higher. For this purpose, the provisions already held in the account can be reckoned.

Where there is no change of promoters, the asset classification as of the date of reference will continue for a period of 90 days. If the implementation of resolution does not take place within 90 days, the asset classification will be as per extant norms, assuming there was no such ‘stand-still’.

Lenders may upgrade Part A and Part B to the standard category after one year of satisfactory performance of Part A loans.

RBI made following amendments in their circular no.RBI/2016-7/121/DBR.No.BP.BC.33/21.04.132/2016-17 Nov 10, 2016.

Under S4A, it was proposed therein to allow the portion of debt determined to be sustainable (under the Scheme for Sustainable Structuring of Stressed Assets) to be treated as a ‘Standard’ asset in all cases, subject to following conditions.In respect of an account that is classified as a non-performing asset as on the reference date, the Part B instruments shall continue to be classified as non-performing investment and provided for as a non-performing asset as per extant prudential norms, as long as such instruments remain in Part B.

The sustainable portion (Part A) may optionally be treated as ‘Standard’ upon implementation of the resolution plan by all banks, subject to provisions made upfront by the lenders being at least the higher of 50 percent of the amount held in part B or 25 percent of the aggregate outstanding (sum of Part A and part B). For this purpose, the provisions already held in the account can be reckoned.

In all cases, lenders may upgrade Part B to standard category and reverse the associated enhanced provisions after one year of satisfactory performance of Part A loans. In case of any pre-existing moratorium in the account, this upgrade will be permitted one year after completion of the longest such moratorium, subject to satisfactory performance of Part A debt during this period. However, in all cases, the required MTM provisions  on part B instruments must be maintained at all times.