As per the Companies Act 2013, companies are separate legal entities, henceforth perpetual if kept afloat monetarily. To maintain companies perpetual, RBI has been following various re-structuring plan. Some of the plans are given below:
What is Corporate Debt Restructuring?
When the borrower is entirely bankrupt, it is beneficial for the lender to come to terms with lower interest rates or a lengthier debt cycles. This gives the borrower time to create some capital and pay the debt off. Also increases the chance of entities to survive long and stay afloat.
How debt restructuring works?
The loan repayment modification, goes through a process.
Step1: First, is due diligence regarding the Goodwill of the company and the impact falling of such entity will create socially and economically is analyzed. Then Creditors are proposed to come through any suitable mean of debt restructuring, via third parties as banks or the companies themselves.
Note: The sooner the creditor is contracted the better the chances of the deal to go through on good terms
Step2: Now, you all you have to do is negotiate. The better you will negotiate the lower your interest rate will go and higher your debt cycle go.
Step 3: Finalize the terms. Do not ruin your goodwill. Make sure you have saved enough capital to survive another day.
Four types of Debt Restructuring
To avoid defaulting on the debt, organizations, individuals, and countries often go through the process of debt restructuring; opting for different interest rates or debt cycle or other means financial tools available at hand..
A. Debt for equity swap: In this debt restructuring process, borrowers give away the equity in the company equal or partial to the loans via this method creditor often let go entirely or some share of debt on the borrower. Whenever companies are in situation of stress and can not operate further, buying in equity is another way to get a position in management.
B. Haircut: When entities are not in a situation to pay the entire loan, then they often ask the lenders to write off some portion of the loan or interest payments due will be written off. The forgotten amount of loan is waived off and never paid by the borrower to the lender.
Examples of Debt Restructuring;
a. Videocon: Company was found guilty for Rs. 64,838.63 crore fraud. but NCLT gave them a big haircut and only fined for the Rs.2,962.02.
C. Callable Bonds: Borrowers redeem their Callable bonds or assign them in the name of the creditors, as a payment to the debt outstanding.
D. Sovereign Debts: :Countries opt for this debt type. Private sectors buy these debts to build public infrastructure programmers. When the countries are about to default they often lower down the interest rates or increase the time period of the bond, or redeem partially or completely to pay off the debt.
E. Debt Consolidation: Entities get loans from other financial institutions and via that debt pay off the outstanding loan to the current creditors. Entities try to get loan on much favorable terms.
F. Payment Deferment: If the entities miss out on any of the loan repayment as scheduled, they are not reported, the defaulter is allowed for a threshold time period to arrange for the money, This is generally done in the case of individuals, and the debt amount is very small.
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