SC quashes RBI insolvency circular, relief for power assets worth Rs 2-trn

The Supreme Court (SC) on Monday provided a huge relief to thermal power projects worth Rs 2 trillion that were facing the threat of insolvency. The apex court held a 12 February 2018 circular of the Reserve Bank of India (RBI), which ordered banks to classify companies as 'stressed' if they default on loans even for a day, to be 'ultra vires'. The SC said that the circular that applied to numerous defaulting assets in power, sugar, shipping and companies in other sectors to be beyond the RBI's legal powers. 

A detailed copy of the judgement is awaited.

The February 12 circular allowed 180 days for the debt resolution of companies with loan accounts over Rs 2,000 crore, failing which the asset would have to be taken to the National Company Law Tribunal (NCLT) for insolvency action. The 180-day deadline got over on 31 August 2018. However, most companies took the legal route to avoid being dragged to NCLT.

The last financial year closed with only one power asset successfully completing debt resolution.

Power companies such as Essar Power, GMR Energy, KSK Energy, and Rattan India Power as well as The Association of Power Producers (APP) and Independent Power Producers Association of India had moved the Supreme Court in August last year, challenging the constitutional validity of the RBI circular.

In their submission, the power companies pleaded for relief from the circular as several resolution plans are under implementation.
 

Power companies also said the ‘one size fits all’ approach of the RBI doesn’t suit them as they are governed by different regulations.

“Huge delay and non-payment by power distribution companies are the primary cause for stress in the sector. If these dues are liquidated, not only would it enable power companies to service their debt on time, but also enable smooth and efficient operation,” said the submission.

Of the 34 thermal power assets identified as stressed by the Finance ministry, only one has found a buyer. Jaiprakash Associates’ operational power project (1980 Mw) at Bara was bought by Resurgent Power -- a JV promoted by Tata Power and ICICI Bank. There were seven projects which were subsequently declared resolved after they received subsidised coal supply under the SHAKTI scheme of the Centre. 

More than 24 stressed power projects that could have faced insolvency proceedings will now find it hard to get buyers because they are “incomplete”. Most of the incomplete projects are due to the cancellation of coal block allocation, delay in getting land and/or environmental clearances, unresolved local issues.

Besides thermal power projects, there are 14,000 Mw of natural gas-based power projects which don’t have any gas supply. These would face difficulties as there is no likelihood of any assured supply as yet. The Centre discontinued the scheme to offer subsidised gas last year. The other 14,000-Mw projects that received some gas barely run at 30 per cent PLF (Plant Load Factor).

Leading banks and sector lenders – SBI, PFC and REC -- designed several plans last year such as SAMADHAAN, PARIVARTAN, SASHAKT but there is yet to be a successful resolution announced. Government officials claim that these are “resolution frameworks” and do not amount to a bailout scheme.

Meanwhile, a High-Level Empowered Committee (HLEC) was formed under the chairmanship of Cabinet Secretary to provide a long-term solution for stressed assets in the power sector. It came out with its report in November 2018. The report had a slew of recommendations to improve payment to power companies, boost coal supply and provide power sale contracts to private units.

The power industry, however, in its submission to the SC, condemned the HLEC report saying the committee has not provided a remedy to the root cause of stress in the power sector “which is the discriminatory treatment meted out to the private sector power companies.”

The industry stated there has been a delay in implementing the HLEC by several departments. “It is submitted that while the Cabinet Committee on Economic Affairs and Ministry of Power have issued notifications with regard to some of the issues identified in the HLEC Report, the concerned Ministries like Ministry of Coal and Ministry of Railways will also have to issue necessary notifications in order to give effect to the recommendations. Further, no timelines for operationalising the said recommendations have been fixed till date,” power companies told the SC.