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Last Updated : Apr 02, 2019 07:11 PM IST | Source: Moneycontrol.com

Power companies need at least 6-12 months for sectoral reforms to take effect

Banks, as financial creditors, still have the discretion to invoke insolvency under IBC. However, now they will need to decide on case-to-case basis to initiate action, without the deadlines set by the RBI.

Parnika Sokhi @ParnikaSokhi

The power sector that has been grappling with huge debts scored a victory against the banking regulator in the country's highest court of law on April 2. While the judgement has bought them more time to deal with sticky sectoral issues, it will take at least six months to a year for the reforms to kick in and take effect.

In a shocking judgement, the Supreme Court has struck down the central bank's directions on the resolution of bad loans under the Insolvency and Bankruptcy Code (IBC), saying it is beyond the banking regulator's authority to issue such a mandate.

"The judgement buys time for all power companies because recently the government has started internationalising the recommendations of the high-level committee. It gives them time for sectoral reforms to take place without the axe of IBC hanging over them," said Vishrov Mukerjee, Partner at J Sagar Associates that represented the power companies in the case.

These reforms, Mukerjee said, would take at least six months to a year to take effect."There are upcoming elections and the code of conduct is in place. Also, the health of distribution companies is not going to miraculously revive in the short term. It would take at least six months to a year for these benefits to slowly start kicking in," he added.

A parliamentary panel, on August 7, had recommended a new framework for the resolution of stressed assets in the power sector. It stated that the circular issued by the Reserve Bank of India (RBI) on February 12, addressed only financial issues and ignored vital sectoral challenges.

The RBI circular had made it mandatory for banks to ensure that a resolution plan is in place within 180 days of a loan default for any account with exposure of Rs 2,000 crore or more. Failing this, such accounts were to be referred for insolvency proceedings under the IBC. The central bank had set the deadline of August 31, 2018, for banks to comply with this norm.

The apex court said the reference under IBC has to be on a case-specific basis and with the authorisation of the central government. The judgement, rendered by a bench led by Justice Rohinton Nariman, stated the RBI could not have issued a generic circular under IBC. It also added that all consequential proceedings including IBC proceedings initiated under section 7 of IBC also stand non-est and quashed.

SC order a set back for banks

The parliamentary committee analysed 34 stressed power projects with total debt exposure of over Rs 1.74 lakh crore to the Indian banking system. Of this, total non-performing loans amounted to Rs 34,200 crore.

"It is common knowledge that huge resources and costs have been put in by the banks as well as the borrowers in various matters pending before NCLT and NCLAT. The time already spent by the industry including the courts has been unprecedented. This is certainly a set back to IBC initiatives at least for a short term," said Rajesh Narain Gupta, Managing Partner, SNG & Partners.

Banks, as financial creditors, still have the discretion to invoke insolvency under IBC. However, now they will need to decide on a case-to-case basis to initiate action, without the deadlines set by the RBI.

A senior official from the banking industry body said with the timelines gone, it will bring back uncertainty and shake the confidence of new investors in the debt resolution processes.
First Published on Apr 2, 2019 07:11 pm
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