NEW DELHI: In a big relief to over 70 firms that were facing insolvency proceedings due to payment defaults, the Supreme Court on Tuesday scrapped the controversial February 12, 2018 circular of the Reserve Bank of India.
“We found RBI’s February 12 circular to be ultra vires (beyond one’s legal power or authority),” the two-judge bench of Justice Rohinton Fali Nariman and Justice Vineet Saran said.
The RBI notification on ‘Resolution of Stressed Assets —Revised Framework’ dated February 12, had mandated banks to classify even a one-day delay in debt servicing as default, formulate a resolution plan within 180 days of default, and refer the case to National Company Law Tribunal.
This meant banks had to report any loan account of over Rs 2,000 crore under the Insolvency and Bankruptcy Code if it was not resolved within 180 days of default.
According to ICRA, the RBI circular impacted Rs 3.8 lakh crore worth of debt across 70 large borrowers, of which 34 borrowers responsible for Rs 2 lakh crore debt were in the power sector.
Many large power companies such as Essar Power, GMR Energy, KSK Energy, and Rattan India Power as well as The Association of Power Producers and Independent Power Producers Association of India had in August last year moved the SC challenging the constitutional validity of the RBI circular.
The circular was one of the factors that resulted in a public spat between the mint street and the north block, finally resulting in the ouster of RBI governor Urjit Patel. However, the position of RBI was not altered with change in its leadership.
RBI Governor Shaktikanta Das also refused to dilute the February circular.Terming it a positive and pro-industry judgment, Supreme Court lawyer Dipak Bhattacharya said, “It sets legal limits to a regulator as it should.”
Mahesh Agarwal, a lawyer who represented power and shipyard firms in the case said: “Banks would now be in a position to take an independent decision with regard to the resolution of debts, which can now be done by way of settlements rather than forced insolvency proceedings.”
Experts maintain that while it will not impact the asset quality, it may drag down the resolution process.