Strategic Debt Restructuring Scheme or the SDR from the RBI, enables banks who have issued loans to corporates, to convert a part of the total outstanding loan amount and interest into major shareholding equity in the company. 

Why Strategic Debt Restructuring?

This scheme aims at tackling the mammoth NPA problem baffling the banking system. 

  • In the event that the borrower fails to meet the feasibility milestones and/or conform to the essential limits established in the restructuring package, the banks may use this option.
  • The aim of enforcing the SDR Scheme is to allow lenders to jointly purchase % or more of the debtor's equity shares and terminate the management team/promoter group in the event of recurrent defaults.

The SDR gives banks more clout in the management of companies that have defaulted on loans. Later, the RBI changed the scheme to give it a more accurate form.

Who initiates SDR?

The SDR scheme can be initiated by the Joint Lenders Forum/Corporate Restructuring Cell (JLF). The JLF should make the decision to use the SDR by transforming all or part of the loan into equity securities. The majority of JLF members should accept and log the decision (minimum of 75% of creditors by value and 60% of creditors by number).

Note: 

When a loan is restructured, the JLF/Corporate Debt Restructuring Cell (CDR) may evaluate the following options:

  • Possibility of promoters selling the company's equity to lenders; Promoters putting more money into their businesses; Transferring the promoters' holdings to a security trustee or an escrow account before the business is turned around.
  • SDR provisions would apply to the accounts only if necessary clauses are included in the agreement between the banks and the borrower. 
  • The SDR is a provision that ensures that promoters have a greater stake in reviving distressed accounts and that banks have enhanced capabilities to facilitate the transfer of management, and it cannot be used for any other reason.