Corporate debt restructuring and firm performance: A study of Indian firms

Deepika Kaur,Shashi Srivastava

doi:10.5937/sjm12-11916

Deepika Kaur, Shashi Srivastava

Open Access

https://doi.org/10.5937/sjm12-11916

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Abstract

Corporate Debt Restructuring (CDR) mechanism was initiated by the Reserve Bank of India (RBI) in the year 2001 as a remedial measure for preventing delinquency in the accounts of corporate facing financial difficulties due to internal and external factors. In this study an attempt has been made to analyze the effectiveness of the CDR system in improving the profitability of the firms. The sample consists of 91 firms that received debt restructuring package under the system form the year 2003-2015. The post-restructuring performance of the firms has been compared with their pre-restructuring performance and with their industry peers with the help of Wilcoxon sign rank test. The performance has been measured with the help of operating margin (EBDITA as a percentage of total income) and interest coverage ratio. The findings of this study reveal that sample firms were not able to improve their performance even up to five years after debt restructuring and they were performing significantly below their industry peers.

Highlights

Corporate Debt Restructuring (CDR) mechanism was initiated by the Reserve Bank of India (RBI) in the year 2001 as a remedial measure for preventing delinquency in the accounts of corporate facing financial difficulties due to internal and external factors
For revival of such financially distressed firms Corporate Debt Restructuring (CDR) mechanism was introduced by Reserve Bank of India (RBI) in the year 2001 as a voluntary, non statutory system that allows a company with multiple lenders and loans of more than Rs.20 crores to restructure those loans according to the plan approved by 75% or more of its lenders
The mechanism was meant to restructure corporate debt “for the benefit of all concerned” (CDR cell, 2016) by reviving the corporate facing financial difficulties because of factors beyond their control on one hand and providing safety for the money lent by the banks and financial institutions on the other