Supreme Court declaring over stepping by RBI- No Ball

Supreme Court declaring over stepping by RBI- No Ball

In order to tackle the problem of mounting Non-performing Assets, India’s Central Bank, RBI came up with a circular in February 2018 with stringent norms against the errant defaulters. This circular mandated banks to resolve stress in an account or initiate insolvency from 180 days from the first day of the default. Industry found this circular one sided and arbitrary. Many companies in power sector suffered the heat and were fuming. RBI’s circular of February 12, 2018 was challenged at various courts on the ground of virus and Division bench of The Supreme Court led by Justice Rohinton Nariman declared it as ulta virus. There were mixed reactions to these results.

Provisions and Impact: So let’s analyze what is in store for the lenders and borrowers .Before that will have a cursory look at the stringent conditions that RBI imposed through its circular of February 12, 2018, which led to such dissent among the market participants. Firstly it made mandatory , effective 1st March 2018 ,for lenders to implement a resolution plan within 180 days, starting 1st March 2018 where the bank’s aggregate exposure in particular sector exceeded Rs 2,000 crores. In case of failure by the lender to put a resolution plan within the time lines the RBI , made it compulsory for them to initiate insolvency application, singly or jointly, under the Insolvency and Bankruptcy Code 2016 (IBC) within 15 days from the expiry of the said timeline.

This circular also issued a dictat that any failure on the part of lenders to meet the prescribed timelines, or anact by lenders with the motive to conceal the actual status of accounts or the colloquial ever greening ofthe stressed accounts would be subjected to stringent supervisory/enforcement actions by the central bank for higher provisioning on such accounts and monetary penalties. This also resulted in quashing of strategic debt restricting (SDR), refinancing, and Scheme for Sustainable Structuring of Stressed Assets.

Rectification by the Supreme Court: Basically the Supreme Court’s decision is stopping a pace bowler from over stepping and allowing flexibility to banks to restructure its stressed assets. This will result in possibility of less provisioning for the banks and banks would be able to classify possible NPAs as normal borrowers for some of the clients. Big relief is coming for companies in stressed sectors like power, aviation, infrastructure, shipping, steel, and telecom. These industries were disturbed that in spite of circumstantial factors like regulation in prices, delayed government payments or cyclical downward they were treated at par with willful defaulters. Besides this also provide window for the banks which are trying to put a resolution at place sans the time factor and without going through the formal bankruptcy resolution mode.Banks will have ample time to decide on insolvency process on merit which will control the possible disruption in the lending system.

Basically The Supreme Court decision is stopping a pace bowler from over stepping andallowing flexibility to banks to restructure its stressed assets. It also paved way for the existing promoters to bid for their companies which was otherwise banned by section 29A of the IBC.The gist is that while the law empowered RBI to instruct the banks to refer specific cases for bankruptcy proceedings in consultation with the government. RBI didn’t follow the path “sab kasath” and went solo which snow -balled or no- balled as the apex court found it wanting. Big question which is now pondering is whether the existing cases referred to insolvency courts after the February 2018 circular are likely to affect. The apparent answer is “NO”as action against the borrowers in the pending proceedings is in no way springing from the February 2018 circular. RBI’s powers per se are not challenged but they need to go in to huddle and draw new game plan which won’t displease the referee in future.

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