Supreme Court verdict gives relief to power companies

Supreme Court verdict gives relief to power companies

After the expiry of 180 days, the defaulting borrowers, under the now struck down circular, had to mandatorily face proceedings under the Insolvency and Bankruptcy Code (IBC).

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 in August moved the Supreme Court, challenging the constitutional validity of the February 12 circular of the RBI.

What did the RBI circular say?

"Its our endeavor and we will ensure there is faster resolution of stressed assets because it is very critical for the stability of the banking sector and has an impact on the overall financial sector". The circular introduced a new one-day default norm - "As soon as there is a default in the borrower entity's account with any lender, all lenders - singly or jointly - shall initiate steps to cure the default", it said.

Last year, over two dozen lenders, led mostly by state-run banks, signed the inter-creditor agreement (ICA) under "Project Sashakt" to speed up the resolution of stressed assets that are under the ₹500 crore bracket.

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The rationale behind the circular was to tighten the noose on cash-strapped companies and force banks to account for bad loans immediately.

It also provides a breather for companies in the sugar, shipping, infrastructure and textile sectors which were under pressure, said several bankers and lawyers.

Reserve Bank of India Governor Shaktikanta Das on Thursday said the central bank will issue a revised circular about the resolution of stressed assets, PTI reported. The National Company Law Tribunal (NCLT) would also be involved in insolvency proceedings against the defaulting companies within 15 days of the six-month deadline.

Global rating agency Moody's said the judgement was credit negative for Indian banks and warned it could further delay the resolution process of bad debt in India. According to the circular, lenders had to classify a loan account as stressed if there was even a day of default.

"The court has said that power of RBI under Section 35AA has to be exercised in certain manner. All these options are within the commercial domain of banks.they will still remain answerable to the RBI", Lakshmikumaran & Sridharan Executive Partner Punit Dutt Tyagi said. As of March 31, 2018, 92% of this debt had been classified as non-performing, and banks have made provisions of over 25-40% on these accounts, ICRA said. However, the resolution process, which was expected to be expedited, may get delayed, Gupta said. The circular was applicable for loans of Rs 2,000 crore or more, and was a general circular.

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