Slowdown in demand, short-supply of raw materials, volatile commodity prices, overleveraged balance sheets, and rising interest rates, among others, are increasingly driving Indian companies to seek debt restructuring.

In the second quarter of the current financial year, the quantum of corporate debt that came up for restructuring with the banking industry-promoted corporate debt restructuring (CDR) Cell was about 12 times higher as compared with the corresponding year ago period.

Nineteen corporates with debt aggregating Rs 28,889 crore were referred to the CDR Cell for restructuring in quarter ended September 30, 2011, against 12 corporates with debt aggregating Rs 2,469 crore in the corresponding period last year.

Steel, textile, infrastructure, and paper are some of the sectors that are proving to be pain points in the economy, say bankers.

In the September quarter, some of the companies that came up for restructuring include: GTL Infrastructure (exposure of banks to this company is Rs 10,000 crore), Chennai Network Infrastructure (Rs 6,000 crore), GTL (Rs 5,000 crore); KS Oils, SBQ Steels (between Rs 1,000 crore and Rs 2,000 crore each), Empee Sugars & Chemicals, Gold Plus Glass Industry (about Rs 400 crore each), Soni Ispat, Maruti Cotex, and Metalman Industries (about Rs 200 crore each).

Interest rate rise

“Interest rate rise is just one among the plethora of problems that corporates are dealing with in the current adverse macroeconomic scenario.

“Mid-sized steel companies, which don't have leased mines, are finding the going tough because it is becoming difficult to source iron ore and coal due to environment issues and illegal mining; infrastructure companies too are facing environmental clearance problems; when it comes to textile companies, cotton prices have become volatile,” said a senior public sector banker.

Bankers also fault the multiple banking arrangements, whereby, each bank independently appraises a project and extends credit, for some corporates becoming overleveraged.

Overall, in the first six months of the current financial year, 35 corporates with debt aggregating Rs 34,562 crore were admitted for restructuring in the CDR cell in quarter ended September 30, 2011, against 20 corporates with debt aggregating Rs 5,033 crore in the corresponding period last year.

The CDR Cell was jointly floated by banks and financial institutions in 2001 to restructure debts of viable corporate entities affected by internal and external factors.

Under CDR, creditors, among others, make concessions by reducing the interest rate, reschedule repayments, convert debt into equity/ preference shares, waive principal/ interest (to a limited extent), and convert working capital irregularity into working capital term loan.

Multiple accounts

CDR, according to the RBI guidelines, applies only to multiple banking accounts/ syndicates/ consortium accounts with outstanding exposure of Rs 10 crore and above with banks and financial institutions.

For a corporate account to be referred to the CDR Cell, the support of 60 per cent of creditors by number in addition to the support of 75 per cent of creditors by value is required with a view to make the decision making process more equitable.

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