Rescuing power sector: Does IBC relief dilute RBI’s strict NPA solution? Here’s what experts say

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Published: June 18, 2018 2:32:33 PM

Rescuing power sector: India's power sector is potentially staring at Rs 2.6 lakh crore NPA (non-performing asset) and even big names such as Adani, Essar Power, Jaypee Power have been identified stressed coal-based thermal power plants by a Standing Parliamentary Committee.

Rescuing power sector: Does IBC relief dilute RBI's strict NPA solution? Here's what experts sayRescuing power sector: Does IBC relief dilute RBI?s strict NPA solution? Here?s what experts say

Rescuing power sector: India’s power sector is potentially staring at Rs 2.6 lakh crore of NPA (non-performing asset). A Parliamentary Standing Committee has identified stressed coal-based thermal power plants operated by even big names such as Adani, Essar Power and Jaypee Power.

Under the new framework laid down by the Reserve Bank of India (RBI) on February 12 for NPA recognition and resolution, banks are left exposed to Rs 2.6 lakh crore of NPAs from power sector alone, a Bank of America-Merrill Lynch (BofA-ML) report said.

The new RBI framework set a strict 180-day deadline for debt resolution, failing which accounts having exposure more than Rs 20 billion (Rs 2,000 crore) will undergo insolvency process under the Insolvency and Bankruptcy Code (IBC). However, earlier this month, Allahabad Court granted an injunction against RBI NPA framework in favour of Independent Power Producers Association of India and asked Finance Ministry to hold a meeting, but it did not grant any interim relief or stay.

Relief or precedent?

Experts say that even as there was no interim relief, an injunction like this could propel more sectors moving court demanding relief against the order. “If the interim injunction granted in this case remains for a prolonged period of time, then entrepreneurs engaged in other industries will be increasingly likely to seek similar relief from the High Court. If the order is confirmed then I am afraid it would definitely have an adverse impact on the NPA resolutions,” Punit Dutt Tyagi, Executive Partner, Lakshmikumaran & Sridharan Attorneys told FE Online.

The Allahabad High Court referred to the 37th Report of Standing Committee on Energy presented in Lok Sabha which observed that “the projects under electricity sectors have suffered due to many factors like fuel shortage, sub-optimal loading, the absence of fuel supply agreements (FSA) or lack of power purchase agreement (PPA).

Welcome move but…

Since high NPAs in the power sector were due to genuine business failures, the injunction by the court is a welcome move which ruled out the mechanical implementation of the RBI framework, Daizy Chawla, Senior Partner, Singh & Associates said.

However, it also leaves the room open for other “stressed sectors to try and get such a relief from courts, which will lead to dilution in the efforts of RBI to resolve the NPA situation”, Daizy Chawla told FE Online.

No special status? 

Last week, the Finance Ministry and Power Ministry held a meeting to discuss the stress in the power sector and the shortage of coal supply. The power ministry has reportedly asked the RBI to some leniency to the power sector but so far the central bank has refused to do so. The Narendra Modi government, however, is not in favour of giving any special status to the power sector against RBI’s order.

The government said that the Rural Electrification Corp under the Power Ministry is working on a scheme, SAMADHAN to resolve the crisis. Under SAMADHAN (Scheme of Asset Management and Debt Change Structure, or Samadhan), the bankers’ consortium shortlisted 11 power plants with an overall capacity of over 12 GW, which are either complete or nearing completion, to take over their unsustainable debt of stressed power plants to avoid their liquidation.

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