New Delhi: The Allahabad high court on Monday declined to halt implementation of the Reserve Bank of India’s February order on non-performing assets, paving the way for lenders to drag as many as 34 power sector defaulters to bankruptcy courts for the recovery of loans.
These power companies – including GMR Chhattisgarh, Ind-Barath Energy (Utkal), Lanco Anpara and Jindal India Thermal Power – together owe more than Rs 1.75 lakh crore to banks and various financial institutions,
In May 2018, the high court had temporarily stayed the RBI’s circular after hearing a clutch of petitions from various power sector lobby groups.
The RBI circular, which was issued in February, had laid down strict timelines for banks to initiate insolvency proceedings. In specific, banks and financial institutions had 180 days from March 1, 2018 to work out a resolution plan for accounts that were overdue by a single day. If they failed to do so in 180 days, this would automatically trigger insolvency proceedings – this deadline ends on August 27, 2018.
The final Allahabad high court order, which has refused to grant any interim relief, is being seen as a vindication of the RBI’s stand that the power sector cannot be given any special dispensation when it comes to the treatment of loan defaults.
How many can be resolved before going to NCLT?
Meanwhile, all eyes are on the Supreme Court’s hearing of the RBI’s petition tomorrow that has sought transfer of all cases challenging its controversial February 12 circular to the apex court.
The Allahabad HC’s order came even as lenders were in hectic negotiations with these corporate defaulters to settle non-performing loan accounts just before the 180-day grace period technically ends at 12:01 AM tonight. Banking executives, however, have indicated that the RBI has given lenders another 15 days to appoint resolution professionals and legal consel.
Lenders have been working round the clock to reach settlement with promoters of KSK Mahanadi, Prayagraj Power, JP Power Venture, SKS Power, Jhabua Power and Coastal Energen.
Addressing an event in Mumbai, State Bank of India chairman Rajnish Kumar recently said seven cases in the power sector are likely to be resolved outside of bankruptcy court. He said that four are approved by SBI and remaining four would be approved in the next within two days.
However, banking sector watchers say it is not clear if bank boards will approve the resolution plans which would necessitate an average hair-cut of at least 50%.
For instance, the Independent Power Products Association of India (IPPAI), a power sector lobby group and one of the petitioners before the high court, believes that the NCLT process could end up with a haircut of anywhere between Rs 4-5 lakh crore.
“You won’t really achieve anything by going through the Insolvency and Bankruptcy Code’s NCLT process,” Harry Dhaul, director general of IPPAI told Bloomberg. “You can go through this [NCLT] process… where you will end up with a haircut of maybe Rs 4-5 lakh crore but haircuts won’t solve the problem till the systemic issues are resolved.”
What will the Modi government do?
While the court has refused to interfere with the insolvency process stipulated by the RBI circular, it has, nevertheless, asked the high-powered committee-headed by cabinet secretary P.K. Sinha to complete consultations within next two months to explore the possibility of reviving these projects.
The committee, which was set up recently at the direction of the Allahabad high court, includes representatives from the ministries of railways, finance, power, coal and banks with major exposure to the electricity sector.
The court has also asked the government to examine the possibility of advising the central bank under Section 7 of the RBI Act against initiation of bankruptcy proceedings. According to reports, during the hearing, a government representative said that it would begin consultations with the RBI on the matter under Section 7 of the RBI Act.
Section 7 gives the Centre a range of powers to give directions to the central bank in public interest. In this case, this rare provision could be used to force the central bank to dilute its stricter NPA norms for the power sector.
“This section has never been invoked to force the RBI to alter its rules or regulations. If this is done to help the power companies, it would be quite unprecedented,” a senior banking industry executive, who declined to be identified, told The Wire.
The Centre, which has struggled to adequately recapitalise India’s banking system, has argued that the power industry needs special treatment due to the large number of stressed projects and low investor interest. The RBI, however, has not budged on this matter and has maintained that its February NPA rules are “sector-agnostic”.
However, banking sector experts The Wire spoke to appeared skeptical about the possibility of these power projects escaping the insolvency process, citing that the court has not issued any directive to the government or the RBI.
While admitting Independent Power Producers Association of India’s (IPPAI) petition challenging the RBI’s February 12 circular earlier, the Allahabad high court had directed banks and financial institutions not to initiate insolvency proceedings against non-wilful loan defaulters until the finance ministry holds a meeting of all stakeholders in this regard.
The court had requested finance secretary Hasmukh Adhia to explore the possibility of preventing stressed power plants from becoming non-performing assets (NPAs) in the wake of the central bank’s new framework for identification and resolution of bad loans. At the time, it had based its initial order on the findings of a report by the parliament’s standing committee on energy that warned that as much as Rs 1.75 lakh crore of stressed private investment in power generation is at the risk of becoming dud assets.
Power companies and lenders, however, were hoping for a extension given the large number of factors that have placed stress on the power sector.
Bankers will now have to follow the central bank’s circular for all stressed assets, says UCO Bank MD and CEO Ravi Krishan Takkar. “If a stay was provided by Allahabad Court then it would have provided some interim relief to bankers,” Takkar said.