It may be in the interest of promoters of scores of defaulting companies belonging to diverse sectors such as power, sugar and textiles to try and implement debt resolution plans outside the Insolvency and Bankruptcy Code’s (IBC) ambit with their lenders.
Such non-IBC debt restructuring would help them keep their interests in the stressed assets intact or protect at least a part of the assets.
However, when the Supreme Court on Wednesday starts hearing a batch of petitions challenging the Reserve Bank of India’s February 2018 circular, which seeks to make it a must for lenders to take the firms to the insolvency arena in case they failed to come out with a resolution plan within six months after a default, it has to be mindful of the interests of a larger body of stakeholders. The court cannot turn a blind eye to the fact that the RBI diktat is in keeping with its obligations to regulate the banking sector, ensure financial stability and serve the larger interests of the economy.
The SC on September 11 asked the RBI, banks and others to desist from invoking insolvency proceedings under the IBC against corporate defaulters as per the banking regulator’s mandate till its final orders. Many power companies had then said the court’s order was akin to giving them a window to attempt non-IBC resolutions in right earnest. They claimed that bankers were to finalise resolution plans for stressed power projects with combined capacity of about 13 gigawatts. However, that was not to be.
According to industry sources, the condition put by the central bank in the February circular that any resolution outside NCLT will require approval of 100% of lenders — as against 50% by number and 60% by value earlier — has proven to be a stumbling block.
Debt resolution plans for stressed power units with combined capacity of 12 gigawatts are stuck because many small creditors are not consenting to the resolution plans, an industry source said, requesting anonymity. Some serious attempts by large banks like the State Bank of India (SBI), which would have helped existing promoters to retain parts of their stakes in their stressed-but-apparently-revivable units, were hamstrung by the RBI diktat, the source said.
The SBI-led plans for Prayagraj Power’s 1,980 mega watt Bara power plant, for instance, were at the final stages but could not be finalised as a few small lenders refused to give consent. The power industry is seeking to lower the threshold for lender approval to 66% in value, down from 100% stipulated by the RBI circular. Another source said SKS Power’s 1,200 mw Binjkote unit is the only power asset which reached resolution outside NCLT, thanks to the SC relief. Lenders to the project, led by SBI, are believed to have finalised Singapore-based Agritrade Resources’ offer of Rs 2,170 crore for the plant.
But many feel that the SC should not have entertained the pleas against the RBI circular. They believe any dilution of the circular would seriously undermine the IBC process that is integral to reduction of non-performing assets in the banking sector and putting the economy back on the rails. “This (the court’s) is a kind of unwarranted intervention. A favourable ruling by the court may encourage borrowers to keep on approaching courts to avoid insolvency resolutions via the IBC route. Such a situation would impinge on the spirit of the code,” said Ramanuj Kumar, partner, Cyril Amarchand Mangaldas. Borrowers have been taking advantage of the lack of expertise in this domain of judges to buy more time, Kumar said, adding that there are instances of a single promoter filing as many as five different petitions in various high courts, civil courts and NCLTs.
However, speaking to FE, senior lawyer Abhishekh Singhvi, who is appearing in the case, said: “The RBI circular to me appears ex facie arbitrary and perverse because it leaves no discretion to any bank. It is a one-size-fit-all approach irrespective of nature of default, how wilful the default is, the nature of industry, global headwinds etc. It drags all into the insolvency code, whether the units are intrinsically revivable or not and nullifies discretion of the lending bank. It treats unequals equally and equals unequally. It has been therefore rightly opposed even by the central government.”
The Supreme Court’s September order had come on an RBI plea, seeking the transfer of all the similar cases (challenging its February circular) pending before the high courts of Delhi, Allahabad and Madras on the grounds that there was a likelihood of conflict of decisions if the petitions were decided independently and that would lead to “confusion and uncertainty for lenders, borrowers, defaulters and other involved parties.”
The Association of Power Producers, the Independent Power Producers Association of India, shipowners’ and textile associations, private power companies, bank employees, etc, had filed various petitions against the controversial central bank circular in various high courts.
The Allahabad HC on August 27 refused the power industry’s plea to set aside the RBI circular. The high court said the Centre may direct the RBI for a special dispensation for the sector. Power sector players had alleged that the impugned provision was unfair to them as their debt servicing capability was directly linked to payments from power discoms and coal availability and both are heavily regulated by state and central governments.
The government had earlier told the Allahabad High Court that it had set up a high-level empowered committee in June to resolve various issues, including fuel allocation, and prevent stressed power assets worth Rs 2.5 lakh crore from becoming non-performing assets.