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Supreme Court hearing on RBI circular next week, experts say scrapping of central bank diktat may kill IBC

sc, rbi, supreme court, ibcThe Supreme Court had on September 11 asked the RBI, banks and others to desist from invoking insolvency proceedings against corporate defaulters as per the banking regulator’s mandate till its orders.

The Supreme Court is set to hear a batch of petitions including from the Association of Power Producers next week against the Reserve Bank of India’s February circular which seeks to make it a must for lenders to take firms to the insolvency area (read National Company Law Tribunals) where each debtor holds veto, in case they failed to come out with a resolution plan within six months after a default. The industry has upped the ante against the circular, saying unless it is diluted, it would undermine Corporate India’s freedom to try legitimate debt sale/recast plans outside the NCLT ambit.

But a key question to be asked, according to many, is whether the SC would have entertained such petitions in the first place.

“This is a kind of unwarranted intervention. If this is allowed, it may encourages borrowers to keep on approaching courts to avoid rightful insolvency resolutions. Such a situation would impinge on the spirit of the Insolvency and Bankruptcy 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.

According to experts, the RBI diktat is not stricter in comparison to the similar guidelines issued by other major central banks.

Presenting the case before the parliamentary standing committee on energy, an RBI nominee had put it thus: “Globally, banks recognize an account as impaired today if it is about 90 days or some are less. But globally, it is a standard that if an account is not servicing, either the principal or the interest beyond the 90 day period, it is to be classified as a non-performing asset. Going forward from next year, it is going to become even most difficult. Our banks are not islands within the country… (they) have to deal with international counter-parties.”

Kumar said: “One of the petitions claim that NPA declaration made 16 months ago was wrong and should be set aside… Borrowers are always looking for innovative judicial tactics to delay the process, even exploiting the lack of coordination among lenders in large consortium,” he added.

The RBI representative quoted above added :“We could have been very comfortable not having the concept of NPA if we were an island. But we are not. We have evaluated and it costs us money. If the rating of a bank goes down, then the cost of raising of capital goes up. For these reasons, it is extremely important that we follow certain standards where counterparties who deal with us across the globe will understand in respect that we are running our house in a manner that is considered consistent with the standards.”

However, according to Supreme Court senior lawyer CS Vaidyanathan, “Each regulator looks at his remit with blinkers. He doesn’t make impact assessment holistically. The RBI looks at NPAs and health of banks and financial institutions; the power regulator is interested in ensuring uninterrupted power supply at economical prices and so on. The courts may be able to take a holistic look balancing the competing interests of all stakeholders.” However, Vaidyanathan added that “the court should in such matters not be entirely legalistic but weigh the impact the judgement will have on overall public interest and mould the relief.”

In a July 2018 report on stressed power assets prepared by department of financial services, the RBI said that previous experience with stressed assets has shown that despite most of them being restructured in the past, with adequate time, and with various schemes and forbearances available, the restructured assets have either become NPA or came under great stress. “Clearly, something was amiss in the manner in, or motives for which, the earlier restructurings were done. The lesson from this is that restructurings need to be meaningful, and the test for this is by applying more stringent criteria, and over a longer period, for upgrading the loan classification post restructuring, ” the central bank said.

Asked about the government’s view, solicitor-general Tushar Mehta said that “the Central Government will take a considered stand strictly in accordance with law bearing the economic scenario of each sector in mind and keeping the short term and long term fiscal planning of the country in focus in larger interest of the nation.”

Senior lawyer Kevin Gulati said: “the Court is the final arbiter of all disputes. If the resolution is to be attempted it has to be by legislation The court would normally not interfere with a matter of policy, but it certainly can look into whether a circular is in conflict with the circular making power given to the rbi or whether or not it violates fundamental rights.”

“RBI circular has no nexus with the objective sought to be achieved — resolution of stressed assets and adopts a ‘one pill for all ills’ approach. Insolvency proceedings or forced change of management will not address the issue of stressed assets unless other issues plaguing such stressed assets across various sectors are addressed. Initiation of insolvency proceedings should be at the discretion of the financial creditor as contemplated under the IBC and RBI should not interfere in this statutory schem,” says Milanka Chaudhury, partner, Link Legal.

The Supreme Court had on September 11 asked the RBI, banks and others to desist from invoking insolvency proceedings against corporate defaulters as per the banking regulator’s mandate till its orders. As per the RBI’s February 12 circular, lenders had to identify projects with even a day’s default and come out with a resolution plan within 180 days from the reference date of March 1, 2018 (by August 27, 2018). “The SC order has provided a great relief to power-sector stressed assets. This would provide time for bankers to finalise resolution plans for projects with combined capacity of about 13 gigawatts. The resolution plans (outside the IBC purview) were in their final stages and a high-level empowered committee under the chairmanship of Cabinet secretary was to submit its report on corrective actions,” Ashok Kumar Khurana, director general, Association of Power Producers had then said.

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Source: Financial Express