Supreme Court blow to IBC: RBI’s 12 Feb circular declared invalid; power cos, banks cheer

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Updated: April 2, 2019 12:38:46 PM

In a potential big setback to the much celebrated IBC, the Supreme Court has declared the RBI’s 12 February circular as unconstitutional.

The stringent criteria for identifying bad loans and resolving them quickly has so far seen Rs 3 lakh crore coming back to the banks under the newly-formed IBC.

In a potential big setback to the much-celebrated Insolvency and Bankruptcy Code, which is bringing defaulter corporate promoters to task and cleaning up banks’ massive NPAs, the Supreme Court has declared the RBI’s 12 February circular as unconstitutional. RBI’s 12 February circular had ruled that banks and lenders refer any loan account over Rs 2,000 crore to IBC if it is not resolved within 180 days of default.

A prominent lawyer, while declining to give a detailed comment, expressed ‘shock’. “It is truly unbelievable,” Bahram Vakil, founding partner, AZB & Partners told CNBC TV18. He also said that it would be a big setback to the Insolvency and Bankruptcy Code (IBC). The stringent criteria for identifying bad loans and resolving them quickly has so far seen Rs 3 lakh crore coming back to the banks under the newly-formed IBC.

While several advocates, bankers and power companies cheered the Supreme Court judgement, some other experts said that the judgement is a one step back for banks as the loan discipline would now take a back seat.

“SC judgement is of the view that one rule for everything will not be accepted and you will have to have a nuanced approach for different categories. This is one step backwards for banks at least. The loan discipline that was coming in will now take a step back with the decision,” Lalitabh Srivastava, Assistant Vice President of research at Sharekhan, said to ET Now.

On the other hand, Ashok Khurana of Association of Power producers welcomed the Supreme Court move and said it is now the banks’ discretion to evaluate each project and then hand it over to IBC. It is banks’ money and each project had already a haircut of 60-80%.

“The SC judgment is a wake-up call for the RBI to be more hands-on rather than be indifferent to the stresses in the banking sector. RBI needs to interact with other govt agencies dealing with coal, railways and DISCOM,” said Pratip Chaudhari, former chairman of State Bank of India to ET Now.

According to the circular, lenders were required to take the defaulting cases to the National Company Law Tribunal for insolvency and bankruptcy code proceedings.

The Feb 12 circular which has identified 30 companies having loan more than Rs 2,000 crore, didn’t go very well with the corporations and the lenders because of the rigidness of timeline and the fear of losing control of their businesses in bankruptcy courts. Many companies including Essar Power, RKM Power, IL&FS, GMR Energy, Association of Power Companies, Independent Power Producers Association of India came forward and challenged the circular in various high courts to get a stay on the insolvency proceedings.

However, the Allahabad High Court rejected their plea on 27 August last year after which the companies moved Supreme Court to get relief from the circular. The apex court then stayed the orders of insolvency against these companies until the final verdict.

Earlier in March, RBI had defended the February 12 circular, saying that the intention behind the circular was to give banks more powers in resolving stress. It also said that the 1-day default rule is to ensure banks and borrowers put a risk management framework in place.

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