Prudential Norms on Income Recognition, Asset Classification and Provisioning pertaining to Advances – Projects Under Implementation

RBI/2014–15/538 DBR.No.BP.BC.84/21.04.048/2014–15

April 6, 2015

We have been receiv­ing rep­re­sen­ta­tions from banks that, in the case of projects which have been stalled pri­mar­i­ly due to inad­e­qua­cies of the cur­rent pro­mot­ers, a change in ownership/management may be required to revive the project. How­ev­er, the new promoters/developers may require addi­tion­al time to revive/complete the stalled projects.

2. Accord­ing­ly, in para­graph 26 (extract enclosed) of the Sixth Bi-Month­ly Mon­e­tary Pol­i­cy State­ment, 2014–15 announced on Feb­ru­ary 03, 2015, it was pro­posed to allow exten­sion of the date of com­mence­ment of com­mer­cial oper­a­tions (DCCO) with­out change in asset clas­si­fi­ca­tion in cas­es of change in own­er­ship of the projects.

3. It has been decid­ed that in cas­es where, in the assess­ment of the banks, the imple­men­ta­tion of the project has been stalled pri­mar­i­ly due to inad­e­qua­cies of the exist­ing pro­mot­ers and a sub­se­quent change in the own­er­ship of the bor­row­ing enti­ty has been effect­ed, banks may per­mit exten­sion of DCCO up to a fur­ther peri­od of two years, in addi­tion to the exten­sion of DCCO per­mit­ted under exist­ing reg­u­la­tions. Detailed guide­lines in this regard are annexed.

Yours faith­ful­ly,

(Sudar­shan Sen)
Chief Gen­er­al Manager-in-Charge

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Extracts from Sixth Bi-Month­ly Mon­e­tary Pol­i­cy State­ment, 2014–15

26. At present, imple­men­ta­tion of large projects is com­plex and unfore­seen events may cause delays in project imple­men­ta­tion, lead­ing to fail­ure in achiev­ing the orig­i­nal­ly envis­aged date of com­mence­ment of com­mer­cial oper­a­tions (DCCO). The Reserve Bank has allowed vide cir­cu­lars dat­ed March 31, 2010 and May 30, 2013, cer­tain flex­i­bil­i­ty with regard to loans to projects under imple­men­ta­tion, where­in DCCO of the projects under imple­men­ta­tion along with repay­ment sched­ules for such loans are allowed to be shift­ed to a cer­tain extent with­out adverse­ly affect­ing the asset clas­si­fi­ca­tion of such loans. How­ev­er, in the case of projects which have been stalled pri­mar­i­ly due to inad­e­qua­cies of the cur­rent promoters/management, a change in own­er­ship and man­age­ment may be required to revive the project. In this con­text, the new promoters/developers may require addi­tion­al time to revive/complete the stalled projects. In order to facil­i­tate change in own­er­ship and revival, it has been decid­ed to pro­vide fur­ther flex­i­bil­i­ty by allow­ing a fur­ther exten­sion of the DCCO of such projects where a change of own­er­ship takes place, with­out adverse­ly affect­ing the asset clas­si­fi­ca­tion of loans to such projects, sub­ject to cer­tain con­di­tions. Oper­at­ing guide­lines in this regard will be issued shortly.

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Annex

1. In terms of extant instruc­tions con­tained in the cir­cu­lars DBOD.No.BP.BC.85/ 21.04.048/2009–10 dat­ed March 31, 2010 and DBOD.BP.BC. No.99/21.04.132/2012–13 dat­ed May 30, 2013, revi­sions of the date of DCCO and con­se­quen­tial shift in repay­ment sched­ule for equal or short­er dura­tion (includ­ing the start date and end date of revised repay­ment sched­ule) will not be treat­ed as restruc­tur­ing pro­vid­ed that:

1. The revised DCCO falls with­in the peri­od of two years and one year from the orig­i­nal DCCO stip­u­lat­ed at the time of finan­cial clo­sure for infra­struc­ture projects and non-infra­struc­ture projects respec­tive­ly; and
2. All oth­er terms and con­di­tions of the loan remain unchanged.

2. Fur­ther, in terms of extant instruc­tions quot­ed at para­graph 1 above, banks may restruc­ture such loans, sub­ject to the extant pru­den­tial norms on restruc­tur­ing of advances, by way of revi­sion of DCCO beyond the time lim­its quot­ed at para­graph 1(a) above and retain the ‘stan­dard’ asset clas­si­fi­ca­tion, if the fresh DCCO is fixed with­in the fol­low­ing lim­its, and the account con­tin­ues to be ser­viced as per the restruc­tured terms:

1. Infra­struc­ture Projects involv­ing court cases 

   Up to anoth­er two years (beyond the two year peri­od quot­ed at para­graph 1(a) above, i.e., total exten­sion of four years), in case the rea­son for exten­sion of DCCO is arbi­tra­tion pro­ceed­ings or a court case.

2. Infra­struc­ture Projects delayed for oth­er rea­sons beyond the con­trol of promoters 

   Up to anoth­er one year (beyond the two year peri­od quot­ed at para­graph 1(a) above, i.e., total exten­sion of three years), in case the rea­son for exten­sion of DCCO is beyond the con­trol of pro­mot­ers (oth­er than court cases).

3. Project Loans for Non-Infra­struc­ture Sector 
   (Oth­er than Com­mer­cial Real Estate Exposures)

   Up to anoth­er one year (beyond the one year peri­od quot­ed at para­graph 1(a) above, i.e., total exten­sion of two years).

3. In order to facil­i­tate revival of the projects stalled pri­mar­i­ly due to inad­e­qua­cies of the cur­rent pro­mot­ers, it is advised that if a change in own­er­ship takes place any time dur­ing the peri­ods quot­ed in para­graphs 1 and 2 above or before the orig­i­nal DCCO, banks may per­mit exten­sion of the DCCO of the project up to two years in addi­tion to the peri­ods quot­ed at para­graph 1 and 2 above, as the case may be, with­out any change in asset clas­si­fi­ca­tion of the account sub­ject to the con­di­tions stip­u­lat­ed in the fol­low­ing para­graphs. Banks may also con­se­quen­tial­ly shift/extend repay­ment sched­ule, if required, by an equal or short­er duration.

4. It is clar­i­fied that in cas­es where change in own­er­ship and exten­sion of DCCO (as indi­cat­ed in para­graph 3 above) takes place before the orig­i­nal DCCO, and if the project fails to com­mence com­mer­cial oper­a­tions by the extend­ed DCCO, the project will be eli­gi­ble for fur­ther exten­sion of DCCO in terms of guide­lines quot­ed at para­graph 1 and 2 above. Sim­i­lar­ly, where change in own­er­ship and exten­sion of DCCO takes place dur­ing the peri­od quot­ed in para­graph 1 (a) above, the account may still be restruc­tured by exten­sion of DCCO in terms of guide­lines quot­ed at para­graph 2 above, with­out clas­si­fy­ing the account as non-per­form­ing asset.

5. The pro­vi­sions of para­graphs 3 and 4 above are sub­ject to the fol­low­ing conditions:

i) Banks should estab­lish that imple­men­ta­tion of the project is stalled/affected pri­mar­i­ly due to inad­e­qua­cies of the cur­rent promoters/management and with a change in own­er­ship there is a very high prob­a­bil­i­ty of com­mence­ment of com­mer­cial oper­a­tions by the project with­in the extend­ed period;

ii) The project in con­sid­er­a­tion should be tak­en-over/ac­quired by a new promoter/promoter group with suf­fi­cient exper­tise in the field of oper­a­tion. If the acqui­si­tion is being car­ried out by a spe­cial pur­pose vehi­cle (domes­tic or over­seas), the bank should be able to clear­ly demon­strate that the acquir­ing enti­ty is part of a new pro­mot­er group with suf­fi­cient exper­tise in the field of operation;

iii) The new pro­mot­ers should own at least 51 per cent of the paid up equi­ty cap­i­tal of stake in the acquired project. If the new pro­mot­er is a non-res­i­dent, and in sec­tors where the ceil­ing on for­eign invest­ment is less than 51 per cent, the new pro­mot­er should own atleast 26 per cent of the paid up equi­ty cap­i­tal or up to applic­a­ble for­eign invest­ment lim­it, whichev­er is high­er, pro­vid­ed banks are sat­is­fied that with this equi­ty stake the new non-res­i­dent pro­mot­er con­trols the man­age­ment of the project;

iv) Via­bil­i­ty of the project should be estab­lished to the sat­is­fac­tion of the banks.

v) Intra-group busi­ness restructuring/mergers/acquisitions and/or takeover/acquisition of the project by oth­er entities/subsidiaries/associates etc. (domes­tic as well as over­seas), belong­ing to the exist­ing promoter/promoter group will not qual­i­fy for this facil­i­ty. The banks should clear­ly estab­lish that the acquir­er does not belong to the exist­ing pro­mot­er group;

vi) Asset clas­si­fi­ca­tion of the account as on the ‘ref­er­ence date’ would con­tin­ue dur­ing the extend­ed peri­od. For this pur­pose, the ‘ref­er­ence date’ would be the date of exe­cu­tion of pre­lim­i­nary bind­ing agree­ment between the par­ties to the trans­ac­tion, pro­vid­ed that the acquisition/takeover of own­er­ship as per the pro­vi­sions of law/regulations gov­ern­ing such acquisition/takeover is com­plet­ed with­in a peri­od of 90 days from the date of exe­cu­tion of pre­lim­i­nary bind­ing agree­ment. Dur­ing the inter­ven­ing peri­od, the usu­al asset clas­si­fi­ca­tion norms would con­tin­ue to apply. If the change in own­er­ship is not com­plet­ed with­in 90 days from the pre­lim­i­nary bind­ing agree­ment, the ‘ref­er­ence date’ would be the effec­tive date of acquisition/takeover as per the pro­vi­sions of law/regulations gov­ern­ing such acquisition/takeover;

vii) The new owners/promoters are expect­ed to demon­strate their com­mit­ment by bring­ing in sub­stan­tial por­tion of addi­tion­al monies required to com­plete the project with­in the extend­ed time peri­od. As such, treat­ment of financ­ing of cost over­runs for the project shall con­tin­ue to be sub­ject to the guide­lines pre­scribed incir­cu­lar DBOD.No.BP.BC.33/21.04.048/ 2014–15 dat­ed August 14, 2014. Financ­ing of cost over­run beyond the ceil­ing pre­scribed in the cir­cu­lar dat­ed August 14, 2014 would be treat­ed as an event of restruc­tur­ing even if the exten­sion of DCCO is with­in the lim­its pre­scribed above;

viii) While con­sid­er­ing the exten­sion of DCCO (up to an addi­tion­al peri­od of 2 years) for the ben­e­fits envis­aged here­in­above, banks shall make sure that the repay­ment sched­ule does not extend beyond 85 per cent of the eco­nom­ic life/concession peri­od of the project; and

ix) This facil­i­ty would be avail­able to a project only once and will not be avail­able dur­ing sub­se­quent change in own­er­ship, if any.

6. Loans cov­ered under this guide­line would attract pro­vi­sion­ing as per the extant pro­vi­sion­ing norms depend­ing upon their asset clas­si­fi­ca­tion status.