Court refuses interim relief to power firms
Banks will have to start resolution process for assets whose deadline is over
The Allahabad High Court (HC) refused on Monday to provide relief for privately-owned stressed power projects from the Reserve Bank of India’s (RBI’s) February 12 order. The RBI circular directed lenders to undertake insolvency resolution of defaulting companies within a strict timeline. The central bank had ordered banks to identify stress even when repayments were overdue by only a day. Resolution proceedings must be completed in 180 days, a deadline that ended on Monday.
The court has, however, allowed the affected companies to try the legal route for individual grievances.
Monday’s order sets the clock ticking on 34 stressed assets with a cumulative debt of ~1.74 trillion. A dozen of these are expected to immediately face proceedings. Across sectors, about 70 companies face insolvency because of the RBI notification. Fifteen have since been resolved, including eight power companies.
The Supreme Court on Tuesday will hear a transfer petition filed by the RBI to get all the cases filed against its February 12 circular by all affected sectors to a single Bench in Delhi.
The Independent Power Producers Association of India had filed a petition in the Allahabad HC for exemption from the RBI notification. The court then directed the finance ministry to hold a meeting with all stakeholders, including the power ministry, the RBI, and private power companies, and to prepare a report. This report was the Centre’s submission to the HC and supported the plea for relaxation to the sector.
However, the court said the RBI is essentially a monetary and fiscal regulator. It was not to be specifically charged with the “function of framing sectoral resurrection measures or to fix incipient or seething problems faced by a particular industry”. Also, it said, “If it be the stand of the Union that a particular industry merits independent consideration in light of its own peculiar facts, then it should advise the RBI accordingly, leaving it open to the central bank to evaluate and consider whether any modulation is justified.”
The Centre has already said it would seek regulatory relief for a dozen power projects with overall debt exposure of around ~1 trillion. It has constituted a committee under Cabinet Secretary P K Sinha. Representatives from the ministries of railways, finance, power, coal, and key sector lenders are on it.
The court has directed that this committee come out with a resolution plan in two months from its constitution (July 29), and also invite a representative from RBI to be on it. It has also directed the Centre to start consultation with the RBI under Section 7 of the RBI Act, and conclude it in 15 days. According to Section 7, the central government may issue directions to the RBI as it may “consider necessary in public interest”, after consultation with the RBI Governor.
However, a senior government official said, Section 7 of the RBI Act only relates to management of the central bank, not policy issues. The government has so far never invoked Section 7 to issue directions. The court also asked the bankers concerned to move the RBI under Section 7 of the Insolvency Bankruptcy Code. The court, however, said that this judgment will in no way curtail any rights of the financial creditors and they are free to approach the RBI for any resolution. It said the order also does not restrict the RBI from issuing any directions to initiate corporate insolvency resolution process.
“The verdict has achieved a delicate balance amongst the institutions involved. The HC has taken recourse to the provisions of the Reserve Bank of India Act, 1934, that allows the central government to consult with the RBI and issue directions to the RBI. In doing so, the court has also refrained from taking a decision on matters which fall within the domain of the RBI and the central government,” said L Viswanathan, partner and chair, finance and projects, Cyril Amarchand Mangaldas.
The HC asked all the lenders and the government to identify and resolve the stressed assets under Sections 35AA and 35AB of the Banking Regulations Act. Section 35A of the Banking Regulation Act, 1949, enables the Union government to authorise the RBI to direct banking companies to resolve specific stressed assets by initiating insolvency resolution process. Eleven projects of State Bank of India (SBI) and three of the Power Finance Corporation (PFC) have been identified for a resolution plan. These would have to start the resolution process soon.
Punjab National Bank (PNB) is working with SBI on a resolution plan for some of these stressed power assets, industry sources said. The PFC has the highest exposure of ~300 billion, followed by PNB (~279billion) and SBI (~240billion). “Eighteen stressed power assets are in the NCLT, eight have been resolved, and 11 were identified for Samadhaan. Four of these have not found to be viable and will be referred to the NCLT,” Rajnish Kumar, chairman, SBI, said earlier in the day.
SBI has looked at 13-14 accounts that would entail changes in management, investment, etc. Of these, seven to eight accounts are close to getting consensus among the banks, SBI Managing Director Arijit Basu had said last week.
Lenders have decided to take four cases to the bankruptcy court. There is also room for banks to withdraw case referred to the NCLT, with the consent of 90 per cent of lenders, another SBI executive said. The Supreme Court on Tuesday will hear a transfer petition by the RBI to get all the cases filed against its February 12 circular by all affected sectors to a single bench in Delhi.
The power ministry has suggested two schemes for resolution of stress in the sector — Samadhaan, by SBI and PFC, and Pariwartan from the Rural Electrification Corporation (REC) which has suggested setting up an asset restructuring company (ARC). Samadhaan is about identifying 10 assets and taking over “sustainable debt” and then selling the asset to some ARC. Banks will have the additional burden of provision, depending on the haircut they have to take for each of the case, public sector bank executives pointed out.