SC order quashing RBI circular to give relief to power cos but delay bankruptcy proceedings

The Supreme Court order quashing a Reserve Bank of India circular on resolving bad debt will provide relief to power companies and lenders as well as flexibility to restructure debts but will slowdown bankruptcy proceedings, experts said Tuesday.

The Supreme Court on Tuesday quashed RBI's February 12 circular, which prescribed rules for recognising one-day defaults by large corporates and initiating insolvency action as a remedy.

Vishrov Mukerjee, Partner, J Sagar Associates said after the Supreme Court judgment, the RBI may have to issue revised guidelines/circulars for the restructuring of stressed assets.

"There is also a question mark over existing processes which may have been completed/nearing completion," he said. "However, with the threat of IBC proceedings mitigated, it will give some breathing space to power companies and lenders as well as flexibility to restructure debts in a manner which ensures continuity and value maximization for lenders as well as power companies."

Cyril Shroff, Managing Partner, Cyril Amarchand Mangaldas, termed the ruling as a major development that shows how "proactive" the judiciary has been.

 

"Whilst it's too early to say but if banks voluntarily still invoke IBC - the practical impact will be minimal," he said.

ICRA senior vice president Sabyasachi Majumdar said the Supreme Court decision is likely to result in a further slowdown in the already tardy pace of resolution of stressed assets in the power sector.

"This apart, the resolution process is in any case subjected to regulatory risks as exemplified in the case of the Prayagraj Power asset, where the regulator has given a recent directive for a discount in PPA tariff while allowing the shareholding change approval for the same," he said.

The RBI had on February 12, 2018, issued a circular on the resolution of stressed assets revised framework -- commonly known as February 12 circular.

According to the circular, lenders had to classify a loan account as stressed if there was even a day of default. The bankers had to mandatorily refer all accounts with over Rs 2,000 crore loans to the National Company Law Tribunal (NCLT) or the bankruptcy court if they failed to resolve the problem within 180 days of default.

Lenders were supposed to file an insolvency application under the Insolvency and Bankruptcy Code 2016 within 15 days of the completion of the 180-day deadline. The circular also withdrew the loan resolution mechanisms the RBI had implemented, such as Corporate Debt Restructuring and Strategic Debt Restructuring.

Power sector was the worst hit by the circular and so were companies in steel, textile, sugar and shipping sector.

GMR Energy Ltd, RattanIndia Power Ltd, Association of Power Producers (APP), Independent Power Producers Association of India, Sugar Manufacturing Association from Tamil Nadu and a shipbuilding association from Gujarat moved different courts against the circular.

The power sector argued that outstanding loans of Rs 5.65 lakh crore (as on March 2018) were a result of factors beyond their control such as unavailability of fuel and cancellation of coal blocks.

The Supreme Court Tuesday held that the circular was 'ultra vires' -- meaning it went beyond the scope of what the RBI can do when coming up with rules and regulations.

Mukerjee said the Supreme Court verdict along with recent government decisions implementing the recommendations of the High-Level Empowered Committee will provide much needed respite and impetus to regulatory reform in the power sector.