Judicious decision

Allahabad High Court has sent the right signal

The Allahabad High Court has taken the right decision by denying interim relief to power companies from the Reserve Bank of India’s (RBI’s) February 12 circular, which set a 180-day deadline for the resolution of all non-performing assets. The RBI circular requires banks to finalise a resolution plan in case of a default on large accounts of ~20 billion or more within the deadline, failing which insolvency proceedings will have to be invoked against the defaulter and assets would be taken to the National Company Law Tribunal (NCLT). As many as 34 power plants, with a combined capacity of 39 GW, have been identified as stressed assets. The central bank also introduced the concept of a one-day default under which banks have to identify incipient stress even when repayments are overdue by a day.

Reports suggest that 70 large companies with a debt of around ~3.8 trillion would have to face Insolvency and Bankruptcy Code (IBC) proceedings. Threefourths of this debt — that’s roughly ~2.6 trillion — pertains to a handful of power producers for whom Monday was the last date. To be sure, power producers were not the only ones dithering on submitting to the IBC process. The government and even the lenders, mostly public sector banks, were also not keen on implementing the RBI circular and were putting pressure on the central bank to relent on the ground that the power sector’s problems had more to do with external factors than any real fault of the companies or their promoters.

It is true that power producers have been struggling both on supply and demand factors ranging from inconsistent or costly supply of coal to lack of power purchase agreements. Moreover, given the absence of power pricing reforms, these companies have been struggling to attain viability. The IBC process is most likely to end in liquidation as there are hardly any buyers for such assets. Liquidation would thus mean destruction of the existing power generation capacity. The government and the power producers used this logic to try and convince the court to create an exception for them and allow them more time to find a solution.

It’s not yet clear whether the power producers will move the Supreme Court. Till that happens, the RBI deadline stands and banks are bound to start IBC proceedings. The high court has, however, done its bit by cementing the RBI’s position as an independent regulator and avoiding a precedent that could easily be misused. It is for the RBI and nobody else to decide whether any particular sector deserves regulatory forbearance — in this case, it has decided against granting any exception, which is a sound, rule-based approach. Any judicial intervention would have sent a signal to other defaulters that they could seek judicial reprieve from the RBI’s circulars.

The central government, of course, has the option of directing the RBI to take corrective action in public interest under Section 7 of the RBI Act. However, the truth is that the crisis in the power sector has been brewing for a long time and the government has not shown any urgency in resolving the issues that the sector has been facing. There is no real reason to believe that power producers’ worries will be over anytime soon in the absence of real reforms. Why, then, spoil the credibility of the IBC process?