RBI’s February circular: Allahabad High Court refuses relief to power assets

Banks say recast plan ready for 7-8 projects, insolvency route for some two dozen, up to 70% haircut seen.

RBI’s February circular: Allahabad High Court refuses relief to power assets
With the court refusing to set it aside (it said the Centre may direct the RBI for a special dispensation for the sector), a large chunk of the 34 projects

With the Allahabad High Court on Monday not giving them a special waiver from the Reserve Bank of India’s (RBI) February 12 circular, promoters of most among the 34 identified stressed power projects could lose ownership of the assets, while bankers including State Bank of India (SBI) seemed to have built a consensus on restructuring at least seven to eight of these accounts.

Under the central bank’s circular, lack of a restructuring plan by Monday would set in motion insolvency proceedings against the debtors. With the court refusing to set it aside (it said the Centre may direct the RBI for a special dispensation for the sector), a large chunk of the 34 projects — with a combined capacity of about 39 gigawatts (GW) and banks’ exposure of Rs 1.75 lakh crore — would now take the insolvency route. Analysts estimate resolution under this process could result in hefty haircuts of up to 70% for banks.

Sources said the HC order won’t have any incremental effect on non-performing assets of banks. “There won’t be any impact on provisioning… Everything is already recognised,” SBI chairman Rajnish Kumar told a TV channel a few hours before the court pronounced its ruling.

The recast plans initiated by SBI is under what is called the Samadhan scheme, where sustainable debt levels of the assets are determined and up to 51% of the equity being put up for sale with a chance for existing promoters to redeem their stakes at a later stage.

Samadhan projects are those with at least partial power purchase agreements and certain fuel linkages. While large plants like GMR (Chhattisgarh) Energy (1,370 MW), Essar Mahan (1,200 MW), Prayagraj Power (1,980 MW), KSK Mahanadi (2,400 MW) and Jaypee Power Ventures (1,820 MW) were part of the scheme, it was not immediately clear on which of these projects consensus has been reached by lenders.

Banks’ exposure to the seven Samadhan scheme projects is around Rs 68,000 crore, of which SBI’s is Rs 17,000 crore.

In the case of at least a dozen projects, the insolvency proceedings have already started. Under-construction power assets such as Athena Energy’s 1,200 MW Chhattisgarh plant, East Coast Energy’s 1,320 MW Andhra Pradesh unit and Lanco’s 1,320 MW plant in Odisha are among these.

Of course, the HC said that the central government could direct the RBI to provide special dispensation to the power sector under the provisions of the Section 7 of the RBI Act. This, analysts said, could put the Centre in a tight spot as it won’t be wanting to be seen easing the stringency imparted by the RBI in recognition/resolution of stressed assets. As per the Act, the government would have to consult the RBI governor before issuing such a directive.

The court also directed the high-level committee that was formed to address the issue of stressed power assets to come up with its report by September-end. It asked an RBI nominee to be part of the panel. The government on July 29 had set up the high-level empowered committee headed by the Cabinet secretary, with representatives from the ministries of power, coal, finance and railways along with lenders having major exposure to the sector.

As per the RBI’s February 12 circular, lenders irrespective of the sectors the debtors belong to will have 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 (that is, by August 27, 2018), failing which insolvency proceedings will be initiated.

The independent power producers — through industry body IPPAI — and the RBI had stressed their views in the hearings.

While the power producers — with some support from the power ministry — have attributed the crisis in the sector to delayed payments by discoms, irregular coal supply and regulatory delays, the RBI said government policies like preferential treatment to state-owned power utilities like NTPC caused the problems. In a stern rebuttal of the power ministry’s contention that only “external factors” are to be blamed primarily for the high incidence of stress in the power sector, the RBI informed the court that the industry had seen many “chronic defaulters” much before its contentious February circular. The central bank also said that many private power producers were “suppressing facts” and presenting a distorted view of the potential impact of the circular on them.

Meanwhile, the Supreme Court is likely to hear on Tuesday the RBI’s plea seeking transfer and clubbing of all cases challenging its circular that mandates insolvency proceedings for a debt servicing default beyond 180 days.

The RBI had raised the issue of the Allahabad High Court’s jurisdiction in this regard and wanted all similar cases pending before high courts of Delhi, Allahabad and Madras transferred to the Supreme Court. It claimed that there is a likelihood of conflict of judicial decisions that would lead to “confusion and uncertainty for lenders, borrowers, defaulters and other involved parties”.

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