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Corporate Debt Restructuring

What is corporate debt restructuring?

Corporate debt restructuring was introduced in India by the Reserve Bank of India in 2001. It is an entirely voluntary process to revive a company or firm that is in debt trouble. The primary objective of CDR is to provide timely support to the companies in need, which is a non-statutory process. However, this is not the only motive of CDR, it also involves the interests of stakeholders, investors, and any other parties involved in lending funds to the company. CDR is available to any enterprise that has taken loans from multiple financial institutions, and these financial institutions come together to restructure its debt and help the firm for the benefit of all the parties involved.

 

Corporate Debt Restructuring Explained

In corporate finance, the concept of restructuring becomes relevant when a company finds itself in financial distress, wobbling on the verge of insolvency. Company restructuring becomes necessary when the core business operations remain viable, yet external factors beyond the company's control lead to continuous losses. External factors could be changes in government policies, fluctuations in interest rates, or shifts in currency values, among others.

In these instances, Corporate Debt Restructuring (CDR) is emphasized for granting the company a chance to survive in the market. The primary objective of CDR is to ensure the company's long-term viability, thereby safeguarding the interests of all concerned parties from incurring substantial losses. Interested parties may engage in various arrangements with the company as part of the restructuring process. These arrangements could include actions such as exchanging their debt for a portion of company shares (commonly known as a debt-equity swap), giving up a portion of the outstanding loan, or mutually agreeing to a predefined moratorium period during which legal actions between the parties are suspended