Corporate Debt Restructuring in India: RBI Framework, OTR and Scheme of Arrangement

The 7 June 2019 circular did away with the old scheme-by-scheme approach and replaced it with a framework that leaves lenders to design the resolution but binds them to timelines and provisioning consequences. On default, lenders must complete a review of the account within 30 days and decide whether to pursue a resolution plan, initiate legal action, or both.

Where a resolution plan is pursued and multiple lenders are involved, they enter an inter-creditor agreement. This is the pivotal document: it provides that a plan approved by lenders holding 75% by value and 60% by number binds all signatory lenders, including dissenters. Without it, a single small lender can hold out and destroy an otherwise viable resolution.

The framework attaches escalating provisioning to delay — additional provisioning applies if a resolution plan is not implemented within prescribed timelines from the review period end. This creates genuine institutional pressure on lenders to conclude, and it is a legitimate point of leverage for a borrower with a credible plan ready to go.

A restructuring proposal succeeds or fails on the viability study. Lenders are being asked to defer or reduce contractual entitlements on the promise of future cash flow, and they will test that promise against evidence rather than optimism. A projection showing recovery to historical peak margins within two years, unsupported by orders, contracts or a structural change in cost base, reads as a request for time rather than a plan.

The credible version does three things. It identifies precisely what caused the distress and demonstrates that the cause has been addressed or has passed — a lost anchor customer replaced, an input-cost spike normalised, a capex cycle completed. It projects conservatively, with sensitivities. And it shows promoter contribution: lenders asked to sacrifice yield expect the promoter to inject funds, pledge shares, or bring in a strategic partner.

The techno-economic viability study, prepared by an agency acceptable to the lenders, is generally mandatory above a threshold exposure. Commission it early. A restructuring proposal submitted before the TEV is ready simply waits in the queue.

Where a company has a dispersed creditor base — debenture holders, multiple operational creditors, non-signatory lenders — a bilateral restructuring cannot bind everyone. A scheme of arrangement under Section 230 of the Companies Act, 2013, sanctioned by the NCLT, can. Creditors are divided into classes, each class votes, and a scheme approved by a majority in number representing 75% in value of each class, once sanctioned, binds every creditor in that class.

The process is more formal and slower than a bilateral restructuring: NCLT application, meeting directions, notices to the Registrar of Companies, the Income Tax Department and sectoral regulators, class meetings, and a sanction hearing. Expect six to twelve months. But the outcome is durable and comprehensive in a way that a negotiated arrangement with cooperative lenders alone is not.

Schemes are also the vehicle for capital restructuring — reduction of capital, conversion of debt to equity, demerger of a non-core division to fund debt repayment. Where the resolution requires corporate surgery rather than only a revised repayment schedule, Section 230 is usually the right instrument.

The decision turns on one question: is the enterprise generating, or capable of generating, operating cash sufficient to service a realistic debt schedule? If yes, restructuring almost always preserves more value. The promoter retains the business, employment continues, and the lender recovers the full principal over a longer horizon rather than taking a haircut today.

If no — if the business model has structurally failed, the market has moved, or the asset is more valuable sold than operated — restructuring merely postpones the reckoning and adds interest. In that case a clean settlement funded by asset realisation, negotiated while the promoter still controls the timing, produces a far better outcome than a restructuring that defaults in eighteen months with the promoter's credibility spent.

Lenders read this distinction well and are sceptical of restructuring requests from businesses they consider structurally impaired. Proposing restructuring where the file plainly supports settlement damages your position in the subsequent settlement negotiation. Diagnose honestly first.