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In a move that will bring significant relief to power and infrastructure companies such as GMR Energy, Jaypee Group, Essar Group and Reliance Power, the Supreme Court on Tuesday set aside the RBI’s circular on a revised framework for the resolution of stressed assets.
Debt worth ₹3.8-lakh crore across 70 large borrowers came under the Insolvency and Bankruptcy Code (IBC) for resolution after the RBI issued the circular on February 12, 2018.
“The impugned circular will have to be declared as ultra vires as a whole, and be declared to be of no effect in law,” said the Supreme Court in its ruling.
“Consequently, all actions taken under the said circular, including actions by which the Insolvency Code has been triggered, must fall along with the said circular. As a result, all cases in which debtors have been proceeded against by financial creditors under Section 7 of the Code, only because of the operation of the impugned circular, will be proceedings which, being faulted at the very inception, are declared to be non-est.”
The RBI’s February 12 circular required banks to compulsorily implement a plan in a time-bound manner or refer the borrowers under IBC. Today’s ruling will give the promoters of stressed assets an opportunity to renegotiate their debt with lenders without going through the insolvency process.
Ashok Khurana, Director-General, Association of Power Producers, told BusinessLine the court intervention “mitigates the threat of power companies going into insolvency process”.
The Association was the first to challenge the RBI circular in the Supreme Court. Shares of power companies gained up to 12 per cent on Tuesday after the Supreme Court order.
Sajan Poovayya, a senior advocate who represented power generation companies and power producers’ associations, said that had the decision not been taken, it could have resulted in the disruption of industrial production, leading to more unemployment and GDP loss.
However, financial industry experts said the court ruling spells bad news for the banking sector, as recovery of debt could get delayed. Srikanth Vadlamani, Vice-President, Financial Institutions Group, Moody’s Investors Service, said: “The RBI circular had significantly tightened stressed loan recognition and resolution for large borrowers. With the voiding, this may now have to be watered down.”
Withdrawal of proceedings
IBC experts said the court may have opened a Pandora’s box, paving the way for many distressed promoters to pull their company out of insolvency proceedings. Banks had filed about 150 insolvency cases after the RBI issued the February 12 circular and, technically, in all these cases, promoters can move the National Company Law Tribunal (NCLT) to withdraw the proceedings.
“The RBI may have to issue revised guidelines/circulars for restructuring of stressed assets keeping in view the observations of the Supreme Court. There is also a question mark over existing processes which may have been completed or are nearing completion,”said lawyers at J Sagar Associates, the firm that represented the Association of Power Producers, Rattan India, GVK, GMR and Coastal Energen in the Supreme Court.
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