Effectiveness of Corporate Debt Restructuring Mechanism in India A Study of Select Industries

Abstract

Corporations require funds, usually raised through either equity or debt. These funds are utilized by a company to make more profit. Risk is the probability for uncontrolled loss of something of value, and is a part and parcel of every business. It is the difference between the expected and the actual, and is dependent on the internal and external factors of the business environment. If these factors are positive, companies make profit; else they suffer losses and are unable to meet their financial commitments, leading to financial distress . Financial distress could be resolved through liquidation or bankruptcy. To avoid liquidation or default, a company has two options. It could either file for bankruptcy or it can privately renegotiate/restructure its financial mix with creditors, a process which is called workout . At the same time, lenders might also seek a reschedulement in order to minimize loss and reduce the number of non-performing assets. In 2001, Indian banks have formed a consortium and started the Corporate Debt Restructuring mechanism under the detailed guidelines given by the Reserve Bank of India. The numbers of cases under this mechanism have gradually increased over the years, as have the non-performing assets. These two issues may have a adverse impact on the Indian Economy. The present study deals with the important factors which influence corporate financial distress, generally referred to as the Corporate Debt Restructuring mechanism in India. It also explores the effectiveness of this mechanism on corporate and banking performance. The study was carried out by administering questionnaires on factors related to corporate financial distress to understand the perception of CFOs/ financial managers of companies, AGM/GMs of banks and Chartered Accountants involved in the Corporate Debt Restructuring process.The corporate performance of 74 companies has been analyzed from the financial statements through the Current ratio, Debt Equity ratio, Operating Profit ratio, Interest Coverage ratio, Ne