Why in news?
- The Supreme Court has ordered a stay on the implementation of RBI's February 12 circular dealing with insolvency proceedings. Click here to know more on the issue.
What is the case on?
- The RBI's circular is part of a revised RBI framework for resolution of stressed assets in the economy.
- It mandates insolvency proceedings under the new Insolvency and Bankruptcy Code (IBC) for a debt servicing default beyond 180 days.
- It also asks banks to recognise loans as non-performing even if repayment was delayed by just one day.
- Power firms have argued that the provision was unfair.
- It's because their debt repayment capacity was directly linked to revenue from power distribution companies.
- It is also depended on the availability of coal, a natural resource closely regulated by the State.
- The Allahabad High Court thus earlier refused to grant relief to troubled power companies facing action from the RBI.
- But the SC has now ordered that insolvency proceedings should not commence against the defaulting power companies.
What is the SC's rationale?
- The current insolvency resolution process has its own flaws, despite the benefits.
- Lenders could realistically expect to recover less than a tenth of their dues if stressed assets are to be liquidated.
- It's because the IBC overemphasises on speedy resolution than the recovery of maximum value from stressed assets.
- Power companies thus argue that their assets could yield better returns if resolved completely outside the IBC's purview.
- With SC's order, the distressed power companies and many other firms in shipping, sugar and textile sectors would be relieved.
- The decision is also helpful for the banks as they would have time for the recognition of bad loan losses.
What are the concerns?
- Intervention - The troubles of power companies can be traced to structural issues such as the -
- absence of meaningful price reforms
- unreliable fuel supply
- unsustainable finances of public sector power distribution companies
- So banks are unlikely to make much money out of the stressed assets until these structural problems are addressed.
- Certainly, policymakers, and not courts, would have to take charge and resolve these issues.
- So the Court’s decision to intervene will do very little good in the long run to either stressed power companies or their lenders.
- IBC - The decision will transfer all pleas seeking exception from RBI's circular to the court itself.
- This has come as the biggest challenge against the Insolvency and Bankruptcy Code (IBC) yet.
- Postponement of next hearing and the resultant delay undermines the new bankruptcy regime's feature of resolution within a strict time frame.
- It is thus likely to cause significant uncertainty in the resolution of stressed assets.
- It would also undermine investor confidence in the bankruptcy process.
Source: The Hindu