The Supreme Court on Wednesday will hear a case filled by the power producers’ association, sugar companies and Shipping companies against RBI's February 12 circular which mandates insolvency proceedings for a debt servicing default beyond 180 days.
The decision by the apex court will impact the stressed power companies as well as the ones that are associated with them as SC has bunched all the petitions together for a single hearing.
In September this year, the SC had ordered status quo on the implementation of the circular and also agreed to transfer to itself 12 cases pending before different high courts related to this issue.
The apex court order came after power producers moved the court requesting it to cancel the RBI's dictate which has put a question mark over the future of these companies.
What is RBI's February 12 Circular
The RBI came up with an overarching framework for bad loan resolution on February 12, 2018, to replace all existing schemes for resolution at the time, including Strategic Debt Restructuring (SDR), Corporate Debt Restructuring (CDR), Sustainable Structuring of Stressed Assets (S4A), Joint Lenders’ Forums (JLF), 5/25 (flexible structuring scheme). If a borrower defaults on repayment of interest with any one of the banks, all lenders are required to put together a resolution plan. The new framework prescribed a strict 180-day timeline over which banks are required to unanimously agree on the resolution plan, failing which the stressed account would have to be referred for resolution under the Insolvency and Bankruptcy Code (IBC). The new rules apply to all accounts with aggregate exposure of over Rs 2,000 crore. For all other smaller accounts, RBI will announce rules over the next two years.RBI VS Power Companies
Several power companies, Association of Power Producers (APP), Independent Power Producers Association of India (IIPAI) had challenged the validity of the Reserve Bank of India’s February 12 circular in various high courts seeking a stay on insolvency proceedings. Power companies argued that the circular would push even power assets that were close to achieving loan restructuring in to insolvency.
Power ministry, government officials also spoke out against the February 12 circular seeking some relaxation in norms, especially with respect to the one-day default rule, attributing the stress in the sector to delayed payments by electricity distribution companies of India (discoms), lack of power purchase agreements and irregular coal supply.
The Allahabad High Court, while hearing the matter of several power producers, declined to grant their plea for a stay on the circular. The Court also suggested the government to begin consultations with RBI under Section 7 of RBI Act on the matter of power companies.
The Allahabad High Court order read the following: “We are of the opinion that interim relief, at this stage, need not be granted. IPPA or APP are at liberty to apply for urgent interim relief if need so arises, placing the requisite factual details on record. The Central Government shall consider initiation of the consultative process contemplated under Section 7 of RBI Act, and conclude the same within 15 days. The High-Level Empowered Committee shall submit its report within two months from the date of its constitution. The Ministry of Power shall invite a senior representative of the RBI, after consultation with the Governor of RBI, as a member of the High-Level Empowered Committee forthwith. This order shall not curtail the rights/powers of a financial creditor under Section 7 of the IBC or even of the RBI in issuing directions in specific case(s) under Section 35AA of BR Act to initiate corporate insolvency resolution process under Chapter II of Part II of IBC, in any given case, including the petitioners or members of the petitioners' Association.”
A similar challenge was mounted by the Shipyards Association of India and the South Indian Sugar Mills Association before the Gujarat and Madras High Courts, respectively. Since several high courts were hearing cases on the same issue, the RBI filed a transfer petition before the Supreme Court, including one from All India Bank Officers ConfederationStress In Power Sector
As per the finance ministry report titled “Impact of RBI's Revised Framework for Resolution of Stressed Assets on NPAs in the Electricity Sector” presented to the parliamentary committee on August 7, 34 coal-based thermal power plants were categorised as stressed for reasons ranging from non-availability of fuel, lack of enough power purchase agreements by states, delays in project implementations and project overruns to issues related to banks and other financial institutions. The Committee stated that of the total coal-based power capacity in the private sector of nearly 90,000 MW out of which 75,000 MW was already operational, approximately 60,000 MW to 65,000 MW capacity was under financial stress. It added that lenders had an exposure of approximately Rs 3 lakh crores, and were facing balance sheet pressures as a result. Of these 34 projects spanning Rs 1.77 lakh crores of debt, the report said about 14 cases were either resolved, admitted in NCLT, or in the process of being referred to NCLT. The remaining 20 were categorized as remaining stressed.Last Supreme Court Order on The Matter
On September 11, the Supreme Court ordered that all the pending cases challenging RBI’s February 12 circular stand transferred to it, and a status quo was to be maintained until the next hearing on the November 14.What Can Be Expected
Scenario One: Supreme Court may give a blanket exemption from February 12 circular. This would come as a big setback for RBI, that has time and again defended the circular, and stressed the importance of discipline to clean up bad loans. RBI deputy governor NS Vishwanathan in a speech on April 18 said, "Data show that a large number of borrowers, even some highly-rated ones, have failed on the one-day default norm. This has to change. If borrowers fail to pay on the due date because of a cash flow problem, banks should see that as an early warning indicator warranting immediate action… If a borrower delays coupon/principal payment on a corporate bond even for a day, the market would penalise the borrower heavily - the rating would be downgraded, the yields on the bonds would shoot up, cost of further financing would increase, suits would be filed by investors etc… So far, defaults in bank borrowings have not attracted similar reactions.”
Scenario Two: SC may grant a specified time period for resolution of power assets instead of a blanket exemption. This would allow banks to resolve these assets in a time-bound manner. In the past, however, banks were unable to find resolution for a single power sector assets under SBI-led Samadhan Scheme despite having buyers in place because of lack of unanimity among lenders on a resolution plan.
Scenario Three: SC may uphold RBI’s February 12 circular, dismissing all pleas by power, sugar and shipping companies. While this will be a big victory for RBI, power companies with an estimated Rs 1.8 lakh crore of debt will be pushed into bankruptcy courts. So far, resolution under IBC has been marred with litigation related delays and large haircuts except in large steel cases.First Published: Nov 13, 2018 6:00 AM IST
