Why SC quashing RBI’s February 12 circular on insolvency proceedings is good news for industry
In a welcome development, the Supreme Court on Tuesday declared as unlawful RBI’s February 12, 2018 circular, which ordered banks to refer defaulting companies for insolvency proceedings if they missed repayments even one day beyond the 180-day grace period.
The Bench led by Justice Rohinton Nariman said that in light of Section 35AA of the Banking Regulation Act, the RBI could not have issued a generic circular mandating reference under the Insolvency and Bankruptcy Code.
The controversial circular issued by former RBI Governor Urjit Patel, which targeted companies—mostly in power, sugar and fertilizer sectors—with loans of Rs 2,000 crore or more, had stunned the industry.
Crucial infrastructure projects such as coal-fired power plants were held up for want of regulatory clearances or because linkages to state-allocated coal mines had not come through.
They were unable to generate cash to pay back loans due to such factors beyond their control, which technically made them loan defaulters.
A Parliamentary Standing Committee on Energy report tabled last year had said some 40,000 megawatts of stressed power capacity across 34 projects were at risk simply because of external factors such as fuel shortage, sub-optimal loading of coal, absence of fuel supply agreements with state-run monopolies and lack of power purchase agreements signed by states who were the sole buyers of electricity in most cases.
Declaring them insolvent and selling off their assets was an easy option for bankers saddled with bad debt but such an order ignored the fact that the move would have a negative cascading effect on the economy.
Besides turning the much-needed infrastructure projects into zombie monuments to an overzealous regulator, it would obviously throw thousands of workers out of jobs and result in creating an environment where businesses would be reluctant to venture out of their safe zones to invest in mega-infrastructure projects with long gestation periods.