Trident Microfin is under a Corporate Debt Restructuring plan: How can Kotak Bank slap a legal notice on the microfinance institution?

According to certain media reports, Kotak Bank has slapped a legal notice on Trident Microfin for a dishonoured cheque. But the microfinance institution is under a CDR plan. This is a peculiar case—and there are a number of legal issues and questions surrounding this move

In the last couple of days, we have had news releases that claimed that “Kotak Bank has slapped a legal notice on Trident” (Kotak Mahindra Bank slaps legal notice on Trident, 19 Oct, 2011, PTI ), which is part of a CDR (Corporate Debt Restructuring) plan. And we have had various stakeholders condemning the action already. Moneylife decided to look into the various (legal issues and questions) surrounding this peculiar happening where a company committed to a corporate debt restructuring (CDR) has been apparently sent a legal notice.

As always, we provide a background and then delve into the various issues. “Trident is one of the five MFIs in Andhra Pradesh that became part of a corporate debt restructuring (CDR) plan, under which it had recast its debt” ( Trident’s Managing Director, Mr Puli, said, “We received a legal notice on October 14. We had taken Rs4 crore loan from Kotak Bank and repaid Rs2.6 crore but could not service the remaining Rs1.6 crore, hence the court notice,” ( However, according to Mr Puli, Kotak “was not part of Trident's CDR program” ( Without doubt, this unusual happening raises a lot of questions indeed but before we get deeper into the issues, let us get to know Trident, the microfinance institution.

According to, “Trident Microfin Private Ltd. (formerly Annapurna Financial Services Pvt Ltd) is a new generation microfinance institution established in 2007 and headquartered at Hyderabad in Andhra Pradesh, India. The Company was promoted by highly qualified microfinance professionals with the motto 'to reach the unreached'. The overarching goal of the company is to provide comprehensive financial and business solutions to low income individuals and enterprises. The primary objectives are: a) To ensure that no bankable poor are left behind in the area of our operation; and b) To provide comprehensive financial and business solutions to low income individuals particularly women and micro-enterprises. Trident’s growth over the last few years is given below:

As noted above, several issues arise from this rather strange happening to an MFI that is a part of the CDR mechanism. “CDR is a non-statutory mechanism which is a voluntary system based on Debtor-Creditor Agreement (DCA) and Inter-Creditor Agreement (ICA). The Debtor-Creditor Agreement (DCA) and the Inter-Creditor Agreement (ICA) shall provide the legal basis to the CDR mechanism. The debtors shall have to accede to the DCA, either at the time of original loan documentation (for future cases) or at the time of reference to Corporate Debt Restructuring Cell. Similarly, all participants in the CDR mechanism through their membership of the Standing Forum shall have to enter into a legally binding agreement, with necessary enforcement and penal clauses, to operate the System through laid-down policies and guidelines. The ICA signed by the creditors will be initially valid for a period of 3 years and subject to renewal for further periods of 3 years thereafter.” (Quoted from ““Revised Guidelines on Corporate Debt Restructuring (CDR) Mechanism”,

The legal basis to the CDR System has two basic categories and these are described below:

CDR for Standard and Sub-Standard Accounts: “The Inter-Creditor Agreement would be a legally binding agreement amongst the creditors, with necessary enforcement and penal clauses, wherein the creditors would commit themselves to abide by the various elements of CDR system. Further, the creditors shall agree that if 75% of creditors by value and 60% of the creditors by number, agree to a restructuring package of an existing debt (i.e., debt outstanding), the same would be binding on the remaining creditors. Since Category 1 CDR Scheme covers only standard and sub-standard accounts, which in the opinion of 75% of the creditors by value and 60% of creditors by number, are likely to become performing after introduction of the CDR package, it is expected that all other creditors (i.e., those outside the minimum 75% by value and 60% by number) would be willing to participate in the entire CDR package, including the agreed additional financing.” (

CDR for Doubtful Accounts: “There have been instances where the projects have been found to be viable by the creditors but the accounts could not be taken up for restructuring under the CDR system as they fell under ‘doubtful’ category. Hence, a second category of CDR is introduced for cases where the accounts have been classified as ‘doubtful’ in the books of creditors, and if a minimum of 75% of creditors (by value) and 60% creditors (by number) satisfy themselves of the viability of the account and consent for such restructuring, subject to the following conditions:
a.    It will not be binding on the creditors to take up additional financing worked out under the debt restructuring package and the decision to lend or not to lend will depend on each creditor bank / FI separately. In other words, under the proposed second category of the CDR mechanism, the existing loans will only be restructured and it would be up to the promoter to firm up additional financing; and
b.    All other norms under the CDR mechanism such as the standstill clause, asset classification status during the pendency of restructuring under CDR, etc., will continue to be applicable to this category also.” (

Hence, from the above it is clear that if “75% of creditors by value and 60% of the creditors by number, agree to a restructuring package of an existing debt (i.e., debt outstanding), the same would be binding on the remaining creditors.”  (

That being the case, the first question that arises is how could Kotak bank initiate legal action? Does it mean that 75 % of creditors by value and 60 % of the creditors by number did not agree to the restructuring package for Trident? That needs to be clarified by Trident and Kotak bank. It should also serve as a first point of investigation by the CDR system as it looks into the peculiar happening.

And when less than 75% of creditors by value and 60% of the creditors by number agree to a restructuring package and some creditors (those who did not agree to the CDR package) take legal action, the CDR system must provide guidance to debtor’s on what exactly they can do? A solution is certainly needed here as otherwise, the whole exercise becomes meaningless and perhaps, even counter-productive.

Second, “The Debtor-Creditor Agreement (DCA) has a legally binding ‘stand still’ agreement binding for 90/180 days whereby both the debtor and creditor(s) agree to ‘stand still’ and commit themselves not to take recourse to any legal action during the period. ‘Stand Still’ is necessary for enabling the CDR System to undertake the necessary debt restructuring exercise without any outside intervention, judicial or otherwise. However, the ‘stand still’ is applicable only to any civil action, either by the borrower or any lender against the other party, and does not cover any criminal action. Besides, the borrower needs to undertake that during the ‘stand still’ period the documents will stand extended for the purpose of limitation and that he would not approach any other authority for any relief and the directors of the company will not resign from the Board of Directors during the ‘stand still’ period.” (

In fact, the Delhi High Court Notes {CS (OS) No.2278/2011}, “Once the CDR process is commenced, as per the Regulation of Reserve Bank of India and the Debtor Creditor Agreement, there would be a standstill period of 90 days during which time both the plaintiff No.1 and defendant Nos.3 and 4 and the lending banks are barred from taking/continuing any legal action.” (

Given this, the second question is how can Kotak bank initiate legal action therefore if indeed 75 per cent of creditors by value and 60 per cent of the creditors by number, had (in fact) agreed to a restructuring package of an existing debt (i.e., debt outstanding)? And given the above scenario, a further question that arises is whether the CDR system will initiate any penal action against the concerned bank? Again, clarity on this aspect is required in the CDR system.

Having said the above, it must also be noted that there is one possible route for legal action by the bank, even when 75% of creditors by value and 60% of the creditors by number, have agreed to a restructuring package of an existing debt. Please recall that according to Mint, “The bank initiated legal action against Kumar and five other directors after some cheques issued to it by Trident bounced. Trident was making repayments on Rs4 crore of loans to Kotak until January, after which it began defaulting.” (

So it is possible that the bank initiated action under the negotiable instruments act (NI Act). Here, “on the dishonour of a cheque, one can file a suit for recovery of the cheque amount along with the cost & interest under order XXXVII of Code of Civil Procedure 1908  and can also file a Criminal Complaint u/s 138 of Negotiable Instrument Act for punishment to the signatory of the cheque for haring committed an offence. However, before filing the said complaint, a statutory notice is liable to be given to the other party.”

Please recall from the earlier discussion that, as per the standstill clause under the CDR system, it would not be possible to file a civil suit if 75% of creditors by value and 60% of the creditors by number, had (in fact) agreed to a restructuring package of an existing debt. However, as also noted earlier, criminal action and associated proceedings are not prohibited. One wonders whether the said legal notice, given by Kotak Bank to Trident, is the statutory one under Section (138) of the NI Act.

If that is the case, then, the standstill clause becomes meaningless and would certainly have to be reviewed and suitably modified to protect debtors—who have committed to the CDR mechanism—against criminal action. I hope that the regulators and administrators of the CDR mechanism look into this aspect as well.

A final issue relates to information. According to the CDR Master Circular, “The company shall keep the lenders informed of any legal proceedings, the outcome of which would have a material impact on the debt servicing capability of the company. In consultation with the lenders, it shall take such remedial actions, as may be required in the best interest of the company and the lenders” (

 Here, it would be important to know whether Trident informed the other lenders of the happening as per the circular cited above.

All said and done, it seems very unusual that action has been taken against Trident, an MFI that has committed to the CDR mechanism and is in the process of having its debt restructured. With Kotak Bank saying that it is unable to share information because the matter is sub-judice, a lot of the questions remain unanswered. Hopefully, the RBI and the concerned administrators of the CDR system will get into the relevant issues identified above as soon as possible and bring an end to this very peculiar situation.

(The writer has over two decades of grassroots and institutional experience in rural finance, MSME development, agriculture and rural livelihood systems, rural/urban development and urban poverty alleviation/governance. He has worked extensively in Asia, Africa, North America and Europe with a wide range of stakeholders, from the private sector and academia to governments).


Ramesh S Arunachalam
1 decade ago
Thanks Mr Balakrishnan for your perspective. I too agree that more often than not, CDR is abused and I have been the a very strong critic of lifestyles of MFI promoters and the governance of their compensation. a LO0T OF THE CRISIS IS related to that as well.

That said, then, the law has to plug the loopholes and that is why I want the RBI and/or CDR system to look at in this case and see what has enabled misuse (if any) in the present case!

And further more, let us also recognise that most commercial banks were a major part in causing the MF crisis. That is why many perhaps agreed to a CDR in the first place. I would not be surprised if there were huge conflicts of interest in banks funding MFIs the way they did - between Rs 300 - Rs 1000 crores were sometimes sanctioned and disbursed in no time and with no serious due diligence. Bankers knew that MFIs were involved in multiple, ghost and over lending and ghost lending exists in financial statements of many MFIs. So, banks are equally responsible and that is why many have agreed to a CDR plan.

So, I think that, this whole set of things must be probed and systemic loop holes must be plugged.

My larger point in the article was to raise various questions related to the above so that seeming inconsistencies and loop holes in the law are rooted out

Thanks again and I dont disagree with you but legal loopholes must be plugged!
R Balakrishnan
1 decade ago
CDR is the most abused alphabets in India, by which wealth is transferred from the banks to promoters with dubious integrity. In the past, many corporates have built empires by using three alphabets called OTS. It involves grease, sleeze and wheeze. I support Kotak bank for having found a way to raise its voice.
I am sure that the promoter of the microfinance co has seen no diminution in his lifestyle or wealth. If anything it could have gone better.
CDR is a convenient escape route for promoters who try to escape personal liability for the problems they have caused wilfully, in their attempt to make personal money.
Free Helpline
Legal Credit