New Delhi: The Supreme Court Tuesday quashed an RBI circular issued last year with provisions for declaring a company bankrupt even for overdue of one day. The bench headed by Justice RF Nariman said: “We have declared the RBI circular ultra vires.”
Reserve Bank of India has issued the circular February 12, 2018, in which it stated that lenders must provide for resolution plan within 180 days in case of large account of Rs 2,000 crore and above.
It said that if a resolution was not found by August 27, Non Performing Asset (NPA) accounts should be sent to bankruptcy courts.
However, during the pendency of the matter, the apex court September 11 last asked banks to maintain status quo and not to initiate insolvency proceedings against loan defaulting companies.
NEGATIVE FOR BANKS: Ratings agencies and industry analysts have said the Supreme Court striking down the circular as credit negative for banks as the debt resolution process may have to be started afresh.
International rating agency Moody’s in a note Tuesday said: “The circular had significantly tightened stressed loan recognition and resolution for large borrowers. But, with the voiding, this may now have to be watered down.”
Moody’s also said the resolution of stressed loans impacted by the circular will be further delayed as the process may have to be started afresh.
The bankers had asked some relaxation in the one-day default norms of the February 12 circular but without any success. This led 34 power producers to drag the regulator first to the Allahabad High Court, which asked RBI to offer some respite, but the RBI did not budge and challenged it in the Supreme Court last year.
Domestic rating agency Icra in a note said the circular removed discretion with banks on resolution on stressed accounts by requiring them to compulsorily implement a resolution plan in a time-bound manner or refer the affected borrowers under Bankruptcy Code for resolution.
“Despite quashing of the circular, banks will continue to have an option to refer such defaulting borrower under IBC, in case the resolution plans fail,” Icra said.
The agency had estimated total debt impacted due to the February 12 circular to be around Rs 3.8 lakh crore across 70 large borrowers of which Rs 2 lakh crore across 34 borrowers were in the power sector.
It had said 92 percent of this debt has been classified as non-performing by banks as of March 2018 and also made provisions of over 25-40 percent on these accounts.
“Hence the quashing of circular should not impact the reported asset quality of profitability numbers, however the resolution process, which was expected to be expedited, may get delayed,” Icra said.
LEGAL FRATERNITY DIVIDED: Legal experts, meanwhile, have given mixed views on the Supreme Court judgement. Leading law firm Cyril Amarchand Mangaldas termed the order a major development.
“While it is too early to say but if banks voluntarily still invoke the IBC, practical impact will be minimal,” Cyril Shroff, managing partner at Cyril Amarchand Mangaldas said.
The Supreme Court order holding the circular as unconstitutional is a great set back in respect of the actions initiated by banks before NCLTs against the defaulting companies which were covered under the impugned circular, said Rajesh Narain Gupta, managing partner at the city-based law firm SNG & Partners.
The order may require banks to decide on case-to-case basis to initiate action under the IBC at their discretion as per policy and not being guided by the RBI circular on such a decision, he said.
Ashish Pyasi, a principal associate with Dhir & Dhir Associates, opined that it will be a relief for some companies where the CDR was at a advanced stage but due to the RBI circular they couldn’t take that forward and instead taken to NCLT.
“With the RBI circular being struck down, the earlier circulars of RBI would stand revived which were changed by the impugned circular and now those companies can request the lenders to reconsider their restructuring plans,” he added.
Govt to study judgement
New Delhi: The Government Tuesday said it will examine the judgement of the Supreme Court that struck down the controversial RBI circular that mandated banks to immediately resolve all bad loans above Rs 2000 crore. “We will read the judgement and I am sure the RBI will also now decide on the present condition of the market as to what is to be done with the various aspects contained in it,” Finance Minister Arun Jaitley said.