Stressed power assets: Panel to discuss ARC, no fiat to RBI under Section 7

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New Delhi | Published: August 30, 2018 5:38:21 AM

The empowered committee on power, in its crucial meeting on Friday, could discuss a proposal to set up an asset reconstruction company (ARC) to take over banks’ stressed power assets, among other options, official sources told FE.

Earlier this week, the Allahabad High Court refused to grant interim relief to power producers that had challenged the RBI circular. (Reuters)

The empowered committee on power, in its crucial meeting on Friday, could discuss a proposal to set up an asset reconstruction company (ARC) to take over banks’ stressed power assets, among other options, official sources told FE.

However, the government is unlikely to direct the Reserve Bank of India (RBI), using power under Section 7 of the RBI Act for the first time, to give special relief to the power sector from the central bank’s February 12 circular that has specified that if a resolution plan was not found by August 27, insolvency proceedings must be invoked against defaulting companies.

One of the sources said the finance ministry is not willing to invoke the RBI Act, as any such step is meant to be taken only in “extraordinary circumstances”. “Such a step will create a bad precedent and spur similar demand for relief from other sectors reeling under stressed assets (such as steel, textiles and other infrastructure sectors),” he added.

Nevertheless, the panel, headed by the Cabinet secretary, will take a final call on this issue. The finance ministry, however, feels the regulator will take a pragmatic approach in addressing the power sector crisis. According to its assessment, less than a dozen companies could get impacted, half of which can be revived, and the rest might be dragged to insolvency courts, said the source.

Earlier this week, the Allahabad High Court refused to grant interim relief to power producers that had challenged the RBI circular. However, it asked the Centre to talk to the central bank to get some relief for the petitioners using the provisions of the RBI Act within 15 days.

“All possible measures, including the setting up of an ARC, would be discussed,” said one of the sources. The RBI has already showed its willingness to consider such a proposal, originally mooted by REC, instead of modifying its order for the power sector. The proposal is expected to be premised on a ‘level playing field’ agnostic of public/private ownership, and based on a transparent price discovery.

Friday’s meeting will also discuss all the external factors — including irregular payments from electricity distribution companies, shortage in fuel supplies and regulators’ delay in raising power tariffs — that have been blamed by power producers for the stress in the sector, and work out certain solutions, said the official.

The RBI’s February circular stipulates a one-day default rule on term loans, which mandates treating a borrower who misses repayments as a defaulter the very next day. It requires banks to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore or more within 180 days (irrespective of sector), failing which insolvency proceedings will have to be invoked against the defaulter. Since the deadline for the resolution of the first set of such cases was August 27, power producers were seeking urgent relief from the Allahabad HC.

Last month, in a report, the finance ministry had said the RBI’s “one size fits all approach” under its February 12 circular may not be the most suitable response to deal with the toxic assets in the power sector. It had suggested that banks be given one year instead of six months from the date of default by an entity, as stipulated by the RBI for all sectors, to start bankruptcy proceedings against the defaulter, in a bid to save stressed power assets worth billions of dollars from being dragged to the National Company Law Tribunal by as early as August 27.

According to an industry estimate, promoters of most among the 34 identified stressed power projects could lose their ownership. A large chunk of the 34 projects — with a combined capacity of about 39 gigawatts and banks’ exposure of Rs 1.75 lakh crore — would now take the insolvency route.

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