Why IBC must be sector-agnostic

Power companies’ plea for differential treatment doesn’t have merit

The ministry of finance held a stakeholder meeting on June 21 to discuss the issue of how best to handle the stress in the power sector and whether the Reserve Bank of India (RBI) should reverse its February notification that would have pushed a number of power generators into the insolvency route, post a Allahabad High Court order to that effect. In effect, the meeting had to take a call on whether a special dispensation for power companies could be created outside the RBI’s notification that set a deadline for lenders to resolve debt issues.

The RBI certainly was in no mood to give an exemption, even as the power producers backed by the ministry of power pleaded that the banking sector regulator should allow grandfathering or at least give 18 to 12 months in cases where change in ownership schemes have already been invoked instead of completely halting the statutory debt restructuring scheme and the scheme for sustainable restructuring of stressed assets (S4A). They said the framework should provide for implementation of a resolution plan if the same is approved by 75 per cent of the lenders by value in line with Insolvency and Bankruptcy Code (IBC). In the view of power producers that went to court against the February notification, the timelines for resolution plans need to factor in the receipt of regulatory and government approvals since in many cases projects were held up because of clearance-related hurdles.

The RBI in its February notification had said that in case of accounts with an aggregate debt exposure of ~20 billion and above, on or after March 1, 2018, including accounts where resolution may have been initiated under any of the existing schemes and accounts classified as restructured standard assets, lenders should implement a resolution plan within 180 days from the reference date of February 12. And if in default after the reference date, then 180 days from the date of the first default. Such cases must be referred to the NCLT for IBC proceedings.

According to one estimate, more than 75,000 MW of power assets, either under operation or under construction, are stressed due to reasons such as shortage of coal, lack of long-term/mediumterm power purchase agreements, divergence between policy and regulations on what cost can be passed through in consumer tariff. There are essentially two premises on which the power side argument is based — coal shortage and taking away of captive mines in some cases; and non-availability of long-term power purchase agreements for the industry. These issues are beyond the control of promoters, and hence the distress. If these are treated as legitimate grounds to keep power companies off the insolvency route, then every other industry would be coming out with its own set of issues that they would contend were beyond its control. The steel sector, for instance, had been pleading the same with promoters of insolvent companies like Essar Steel and Bhushan Steel, contesting their companies being put on the sell-off route.

For bankers choosing to give an extended lifeline to debt-ridden companies, it is safe to cite a possible RBI exemption. But neither bankers nor the regulator would risk taking an out-ofthe-line decision on debt restructuring. This might have been the reason behind RBI’s outright rejection of the power sector’s demand.

The government is now working on a scheme to bail out stressed power assets. Among the various options being worked out is one that aims to create an asset management company to manage plants. Such an entity has to be driven essentially by government-owned public sector undertakings and financial investors. That would, in effect, mean a publiclyowned bail-out rather than an outright buy-out by a company under the IBC. The proposed structure being tailored by the government, in itself, is tedious.

It is feared that if the insolvency route is taken, resolution professionals might find it tough to get buyers for power companies, especially since sector issues do not change overnight. It must, however, be kept in mind that the fear of no buyers turning up was equally expressed in the case of steel companies. What was witnessed instead is aggressive bidding and each prospective buyer trying to outdo the other.

The underlying point is that a financial default sets in a trigger under the insolvency law and that should remain untouched by sectoral concerns which should be handled by the government and the industry separately. There is, therefore, a case for IBC to be sector-agnostic.