The post pandemic credit cycle and ongoing global economic volatility have left many Indian companies grappling with liquidity stress, higher costs, and increasing debt service obligations. Although insolvency is not always the appropriate path, most distressed borrowers end up considering two primary lifelines viz. restructuring or refinancing.

These terms are often used interchangeably but they represent legally and strategically distinct mechanisms, each with its own set of regulatory, contractual, and practical implications. Understanding the distinction between the two is essential for promoters, lenders, and legal advisors aiming to preserve value outside the insolvency process.

Understanding the Basics

Refinancing is the process of replacing an existing loan with a new one, usually under revised terms such as reduced interest rates, longer repayment periods, or a change in lenders. Borrowers who are financially sound but need improved liquidity or want to lower their overall cost of capital often choose this route. Legally, refinancing entails substituting the original lender or loan agreement, which can involve prepaying the old facility and releasing and recreating the relevant security.

Restructuring, by contrast, adjusts the terms of an existing debt without replacing or eliminating the underlying obligation. This may include revising the repayment schedules, capitalizing overdue interest into a funded interest term loan (FITL), granting temporary moratoriums, providing partial waivers, or converting debt into equity. From a legal perspective, restructuring occurs within the same lending relationship but with a modified risk reward arrangement, often supported by inter-creditor agreements and regulatory regimes such as the RBI’s Prudential Framework for Resolution of Stressed Assets[1] dated June 7, 2019 and related circulars.

The Regulatory Framework

RBI’s Prudential Framework for Resolution of Stressed Assets (2019)

This circular forms the backbone for restructuring outside the Insolvency and Bankruptcy Code (IBC). It allows banks to enter into inter creditor agreements (ICAs) and implement resolution plans (including restructuring) for borrowers facing stress but not yet classified as non-performing assets (NPAs). In terms of the circular, all lenders must sign the ICA and the restructuring must be completed within the prescribed timelines (usually within 180 days from the end of the review period i.e.the period of prima facie review of the borrower account within 30 days from such default).

RBI’s One Time Restructuring Schemes

During COVID 19, RBI announced specific one-time restructuring (OTR) windows for personal and corporate borrowers. These set a precedent for time-bound regulatory forbearance during extraordinary circumstances. While the special OTR windows have lapsed, their principles i.e. early recognition, viability assessment, and multi-lender coordination continue to guide restructuring practices.

Refinancing under External Commercial Borrowing (ECB) Framework

Where foreign lenders are involved, refinancing must comply with RBI’s ECB Master Direction[2]. Replacement of an existing external commercial borrowing with a new one whether by the same or new lender requires adherence to the average maturity and end-use norms.

Legal Issues in Restructuring

Inter-creditor coordination:In situations with multiple lenders, restructuring typically depends on obtaining unanimous or majority approval. The ICA serves as the primary legal framework that defines voting requirements, standstill provisions, and enforcement mechanisms.

Regulatory disclosures: In order to ensure transparency for investors and the market, and accurately setting out the nature of the restructuring, its financial impact, and any implications for the company’s future obligations, listed borrowers are required to disclose any material debt restructuring in accordance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

Promoters’ liability: Promoters often provide personal guarantees or pledges for the loan and these may need to be reaffirmed or substituted as part of the restructuring. Failure to do so can weaken the lender’s enforcement position.

IBC interface: A restructuring plan implemented outside IBC does not automatically bar creditors from initiating insolvency proceedings if the resolution plan fails. Borrowers must therefore ensure realistic compliance to avoid future section 7 or section 9 filings under the IBC.

Legal Issues in Refinancing

Prepayment and consent requirements: Many existing facility agreements restrict prepayment or require lender consent before replacing the debt and breach of such restrictions can amount to a contractual breach and may activate default or acceleration provisions, exposing the borrower to significant legal and financial consequences.

Security substitution :Refinancing a loan typically necessitates the release of the existing lender’s charge and the creation of a new charge in favor of the incoming lender. This process involves various regulatory formalities, including filings with the Registrar of Companies, sub-registrars for immovable property, and notifications to relevant project authorities.

Novation vs. Assignment :Refinancing can take place through either novation, where a new contract replaces the original one, or assignment, which involves the transfer of rights under the existing contract. This legal distinction influences factors such as stamp duty obligations, the need for consents, and the enforceability of the transaction.

Tax and FEMA considerations:In case of cross-border loans, refinancing transactions may trigger withholding tax liabilities and require compliance with FEMA regulations. Legal advisors need to work closely with tax and treasury teams to ensure all regulatory and tax obligations are properly addressed.

Choosing Between Restructuring and Refinancing

Restructuring is suitable if the borrower has strong ties with existing lenders, it makes it easier to negotiate revised terms, especially when the borrower prefers not to overhaul the entire loan documentation or create fresh security. It is also useful where multiple lenders are involved and alignment can be achieved through an inter-creditor agreement.

Refinancing is preferable when the borrower’s credit rating enables access to cheaper or longer-term funds and existing lenders are unwilling to extend further relief, if the project has completed construction and now qualifies for operational phase funding and the borrower seeks to consolidate multiple short-term debts into a single structured facility.

Strategic Considerations for Borrowers and Lenders

Addressing financial distress at an early stage greatly improves the likelihood of a successful resolution, whereas waiting until a loan turns NPA significantly reduces the options available to the borrower. Meticulous execution of waivers, board approvals, and required regulatory filings is critical and the borrowers must provide realistic financial forecasts and fully disclose any contingent liabilities to maintain credibility.

In India’s financial ecosystem, both restructuring and refinancing play a vital role in helping distressed borrowers maintain solvency and ensure the continuity of their business operations. Given the current climate of economic uncertainty, the success of such interventions depends less on the choice between restructuring or refinancing and more on the meticulous planning, legal compliance, and strategic execution with which the chosen solution is implemented.

[1]https://www.rbi.org.in/Scripts/NotificationUser.aspx?Id=11580&Mode=0

[2]https://www.rbi.org.in/Scripts/BS_ViewMasDirections.aspx?id=11510

Restructuring vs. Refinancing: Legal Options for Distressed Borrowers