Q. Which of the following statements best describes the term ‘Scheme for Sustainable Structuring of Stressed Assets (S4A)’, recently seen in the news?
- It is a procedure for considering ecological costs of developmental schemes formulated by the Government.
- It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.
- It is a disinvestment plan of the Government regarding Central Public Sector Undertakings.
- It is an important provision in The Insolvency and Bankruptcy Code’ recently implemented by the Government.
Answer: (b) It is a scheme of RBI for reworking the financial structure of big corporate entities facing genuine difficulties.
Notes:
- Scheme for Sustainable Structuring of Stressed Assets also known as S4A Scheme was launched on 13th June 2016 by the Reserve Bank of India as an initiative to address and resolve the debt issues of the corporate sector along with strengthening the ability of the lender to deal with stressed assets.
- As per the S4A scheme, the debt of a company is bifurcated into two parts namely sustainable and unsustainable debt based on the cash flows of the company’s project.
- The sustainable debt of a company should not be less than 50% of the existing debt and the unsustainable debt can be converted into optionally convertible debentures.
- Banks can sell this stake or equity to a new owner who will have the advantage of getting to run the business with a more manageable debt.
- The sustainable debt of a company should not be less than 50% of the existing debt and the unsustainable debt can be converted into optionally convertible debentures.
- RBI mandated advisory body called Overseeing Committee (OC) will be constituted, which will review the resolution plans submitted by the Banks.
- The main aims of the S4A scheme are:
- The scheme aims to provide financial restructuring of large debted projects by allowing the bank’s lender in acquiring equity of the stressed project.
- To restore the credit flow to the critical sectors along with restoring the infrastructure.
- To restore the issues faced by the real assets by providing an avenue for reworking financial structure.
- Some of the major benefits provided by the S4A scheme are:
- The scheme helps the banks to speed up the asset recovery process and also to manage their NPAs. For the fiscal year 2015-16, the Non-Performing Assets (NPAs) has touched Rs. 6 lakh crore.
- The S4A Scheme also provides another opportunity for the borrowers to rework its financial structure.
- The scheme saves the banks from undue scrutiny through the oversight of an external Overseeing Committee (OC) which also ensures transparency. The endorsement of the OC is very important for the approval of any loan under the S4A scheme.
- Main features of the S4A scheme:
- Under the S4A scheme, an account is considered eligible for restructuring if the total loans in the account by all the institutional lenders exceeds Rs. 500 crore which includes the rupee loans as well as the foreign currency loans.
- An independent agency is hired by the lending bank for evaluating sustainable debt.
- The projects that are under the S4A Scheme should have started their commercial operations and also allow the banks to take part in the stressed project.
- The scheme also protects bankers from undue scrutiny by allowing the banks to rework on stressed loans.
- One of the main features of this scheme is the test of sustainability as it allows the evaluation of the level of sustainable debt for a stressed borrower. Under the S4A scheme, the loans are divided into sustainable and unsustainable components.
Insolvency and Bankruptcy Code (IBC), 2016
- The IBC, 2016 is the bankruptcy law of India that consolidates and amends the existing laws relating to insolvency and bankruptcy of corporate persons, partnership firms, and individuals.
- Insolvency is a state where the liabilities of an individual or an organization exceeds its asset and that entity is unable to raise enough cash to meet its obligations or debts as they become due for payment.
- Bankruptcy is when a person or company is legally declared incapable of paying their due and payable bills.
- The IBC aims to provide a time-bound and creditor-driven process for insolvency resolution and to improve the credit culture and business environment in the country.
- IBC resolves claims involving insolvent companies. This was intended to tackle the bad loan problems that were affecting the banking system.
- Regulating Authority:
- The Insolvency and Bankruptcy Board of India (IBBI) was established under the Insolvency and Bankruptcy Code, 2016.
- It is a statutory body, responsible for making and implementing rules and regulations for insolvency and bankruptcy resolution of corporate persons, partnership firms, and individuals in India.
- The IBBI has 10 members, representing the Ministry of Finance, the Ministry of Corporate Affairs,and the Reserve Bank of India.
- Adjudicating Authority:
- National Company Law Tribunal (NCLT) has jurisdiction over companies, other limited liability entities.
- Debt Recovery Tribunal (DRT) has jurisdiction over individuals and partnership firms other than Limited Liability Partnerships.
Insolvency and Bankruptcy Board of India
- The Insolvency and Bankruptcy Board of India was established in 2016 under the Insolvency and Bankruptcy Code, 2016 (Code).
- It is a key pillar of the ecosystem responsible for implementation of the Code that consolidates and amends the laws relating to reorganization and insolvency resolution of corporate persons, partnership firms and individuals in a time bound manner for maximization of the value of assets of such persons, to promote entrepreneurship, availability of credit and balance the interests of all the stakeholders.
- It is a unique regulator as it regulates a profession as well as processes.
- It has regulatory oversight over the Insolvency Professionals, Insolvency Professional Agencies, Insolvency Professional Entities and Information Utilities.
- It has also been designated as the ‘Authority’ under the Companies (Registered Valuers and Valuation Rules), 2017 for regulation and development of the profession of valuers in the country.