The Hindu Business Line

IBBI delves into SC order striking down RBI circular on stressed assets

- KR SRIVATS

The insolvency regulator Insolvency and Bankruptcy Board of India (IBBI) has summarised the Supreme Court’s landmark judgment that struck down the RBI’s February 12 circular last year on stressed assets, raising awareness on how the apex court has dealt with the issues concerned.

The analysis brings to the fore that, on various counts as held by the apex court, the circular is ultra vires and how the constituti­onality of Section 35AA and 35AB of the Banking Regulation Act 1949 has been upheld.

The IBBI has, in its website, published an analysis of the SCruling on the fate of this circular in Dharani Sugars and Chemicals Ltd vs Union of India and others.

The analysis shows that the apex court has upheld the Banking Regulation (Amendment) Act 2017, introducin­g Sections 35AA and Sections 35AB as being constituti­onal (constituti­onally valid).

While Section 35AA conferred the discretion­ary power on the RBI to instruct banks to commence insolvency proceeding­s against a defaulter, Section 35AB permits the RBI to frame policies for stressed asset resolution.

Commenting on the IBBI’s move to analyse the apex court ruling, Aseem Chawla, Managing Partner, ASC legal, told BusinessLi­ne that the update which reflects the views of the legal division of the IBBI summarises the SC’s verdict suggesting that on various counts as held by the apex court the circular is ultra vires.

Many legal experts feel that although the SC may have struck down the RBI’s February 12 circular on stressed assets, the apex court has not curtailed the rights of banks to initiate insolvency proceeding­s on their own. This is a statutory right available to them under the Insolvency and Bankruptcy Code (IBC) as a financial creditor, they said.

This can continue to incentivis­e pre-bankruptcy restructur­ings, however with reduced compulsion / time constraint­s, according to a note by Khaitan & Co, a leading law firm.

Banks’ rights

The apex court ruling is likely to provide flexibilit­y for preinsolve­ncy restructur­ings. The banks and promoters of defaulting companies may welcome the flexibilit­y to enter into consensual restructur­ing schemes and the availabili­ty of a lengthier window can also help achieve complex restructur­ing transactio­ns in more realistic timetables (without the pressure of time periods set out in the circular).

However, it remains to be seen if the exemptions which were applicable to such restructur­ing schemes from applicabil­ity of SEBI regulation­s regarding change of control situations would continue to apply to contractua­l restructur­ings without the circular being in force, the Khaitan & Co note added.

RBI’s position

Regardless of the technical merits of the judgment from a legislativ­e competency and regulatory power perspectiv­e, as a policy matter, the RBI’s actions have been undermined in this specific sphere, according to the note. The ruling precludes the RBI from issuing any general directions to banks to initiate insolvency under the code.

Therefore, under Sections 35AA and 35AB, in the present form, the RBI can now only analyse specific cases of defaults and issue directions in respect of those pursuant to requisite authorisat­ion of the Centre in this regard.

“Given that the RBI’s approach has encouraged parties to take meaningful action to resolve the distressed debt situation in India (and notwithsta­nding the highly litigated nature of the Corporate Insolvency Resolution Process ), it is debateable as to whether this judgment is a step in the right direction from a policy perspectiv­e”, the note from Khaitan & Co added.

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