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.
