By Elton Gomes
In a huge relief to power companies, the Supreme Court has halted insolvency proceedings against defaulters in the power, sugar, shipping, and textile industries. Borrowers will breathe a sigh of relief hours before the deadline for referring them to insolvency court could expire on account of a circular passed by the Reserve Bank of India (RBI). However, there has been some confusion in terms of the order’s implications as a written order does not appear on the website of the Supreme Court.
The Supreme Court bench comprising Justices Rohinton F. Nariman and Indu Malhotra transferred the cases against the RBI circular that were pending in various high courts and have agreed to hear them together in November.
Hailing the Supreme Court’s decision, senior advocate Mahesh Agarwal, representing the power companies, said, “Where cases have been referred to NCLT (National Company Law Tribunal) after the RBI circular, there will be a status quo and where they have not been filed, they will not be referred to NCLT now,” the Economic Times reported. The next hearing in the matter has been scheduled for November 14.
How have power producers responded
A. K. Khurana, director general at the Association of Power Producers, said the decision will give bankers more time for a resolution. “The order has provided a great relief to stressed assets in the power sector. This would provide time for bankers to finalise resolution plans for projects of about 13 GW in their final stages and the High-Level Empowered Committee to submit its report on corrective actions,” Business Standard reported.
Khurana added that having roughly two additional months in hand will help lenders in completing all documentation work in terms of finalising resolution plans through the change of management route or via one-time settlements. “So before the next hearing of the Supreme Court in November, we will know how all the stress points of the sector are being remedied as per the report of the Committee which will give more clarity (to the industry),” Khurana said, Business Line reported.
V.G. Kannan, head of the Indian Banks’ Association, said that the decision will lead to clarity. Kannan said, “IBC (Insolvency and Bankruptcy Code) as a process has proven effective in the resolution of stressed assets.” He further said that the SC’s decision could delay resolutions, “It is a new law and there are precedents which are being set. While delays are not good and this order will likely delay some resolutions for another two months, it will give clarity on resolving these issues in the long run,” the Economic Times reported.
What was the RBI’s circular?
According to its February 12 circular, the RBI had asked banks to do away with all debt restructuring mechanisms and begin the resolution process if a company delays payment even by a day. However, the RBI’s circular did not do well within the industry, and power firms claimed that the provision was unfair, as their debt repayment capacity was directly linked to revenue from power distribution companies and availability of coal.
Power producers sought an extension of the deadline
In March, power producers had asked the RBI to revise its February 12 circular. They demanded that while some guidelines had already been invoked, the provisions be allowed to be carried over for at least 12-18 months.
Recently, in August, the companies approached the Allahabad high court and sought an extension of the September 11 deadline to refer their stressed power projects to insolvency court. The companies had urged the RBI for an extension of the deadline so that they can refer their plants to insolvency court by 60-90 days in order to complete the ongoing resolution process.
The Supreme Court’s decision gives lenders more time to complete resolution proceedings for borrowers such as KSK Mahanadi, Prayagraj Power, Jhabua Power, and GMR Chhattisgarh Energy, all of whom were hopeful of escaping bankruptcy process. In terms of stressed assets, if the issue is not resolved now, stressed assets may find it difficult to attract suitors since their debt situation might worsen.
Elton Gomes is a staff writer at Qrius