Skip to main content

SC verdict on RBI's Feb 12 circular may delay resolution of stressed assets

The experience of banks with IBC cases so far has been mixed with banks taking an average haircut of 50% With the Supreme Court striking down the Reserve Bank of India's (RBI's) February 12, 2018, circular, the resolution of default accounts, which were filed in various tribunals under the Insolvency and Bankruptcy Code (IBC) after the circular was released, will get delayed further. For erring promoters, it comes as a shot in the arm as they will get an opportunity to resolve their accounts with the banks. 
“The SC order puts into question everything the banks have done pursuant to the February 12 circular, including any case filed for insolvency proceedings. It gives all of them (default accounts) another lease of life, but the RBI needs to clarify under what guidelines these debt resolutions will be considered," said Sanjiv Krishnan, partner & leader (deals), PwC India. It would appear that all the restructuring mechanisms such as S4A (Scheme for Sustainable Structuring of Stressed Assets), which were scrapped by the RBI earlier, will become options again or new mechanisms are likely to be set up, he added.
Bankers said the SC verdict might prolong the resolution process and force lenders to bring back cases to the drawing board. "Despite the quashing of the circular, banks will continue to have the option of referring such defaulting borrowers under the IBC, in case the resolution plan fails," said the head of a large public sector bank. "It would not impact the reported asset quality numbers. However, the resolution process, which was expected to be expedited, may get delayed," he added. The experience of banks with IBC cases so far has been mixed, with banks taking an average haircut of 50 per cent and more in these accounts. In cases like Alok Industries, banks have taken a haircut of 85 per cent.
The good news for promoters is that they will be able to resolve the default accounts faster, as long as 66 per cent of the consortium agrees to the settlement, compared to 100 per cent voting required under the scrapped RBI circular. The IBC cases, which were filed between June 2017 and February 2018 and have already been resolved, will not be affected, said corporate lawyers. "The IBC cases filed before February 12 will not be affected as the order has not said anything specific about these older cases," said R S Loona, managing partner at Alliance Law. Amit Kapur, joint managing partner, J Sagar Associates, said the cases that the RBI had asked banks to take for insolvency proceedings (12 cases in the first list and 28 in the second) would not be affected by the SC verdict. The reference for IBC action happened before the February 12 circular came into force.
"The SC verdict reaffirms the power of the regulator and lenders to refer cases for resolution based on reasonableness and in accordance with the laws," Kapur said. According to the circular, banks had to refer companies to the National Company Law Tribunal (NCLT) for debt resolution, even if there was a delay of one day after the 180-day grace period. The circular also mandated that if 1 per cent of the voting power of the committee of creditors disagreed with the resolution plan, it could be sent to the NCLT. "Now, as the circular itself is invalid, the reference to the NCLT is invalid. The management of these companies will cite the SC judgment and ask to be pulled out of the NCLT," said a bidder of a stressed asset, adding: "So, there is uncertainty on all the work and the bids for these assets".
The chief executives of various stressed assets said banks sometimes sent them to the NCLT, even when only one bank disagreed with other consortium members. "Arbitrary action of banks by referring companies to the NCLT, despite a viable resolution plan, acceptable to other lenders of the consortium, has resulted in huge value erosion for banks and massive job losses," said the CEO of a company that has been referred to the NCLT. Citing an example, the CEO said in the case of a telecom infrastructure company, around 125,000 direct and indirect jobs were lost, after one bank with less than 5 per cent voting power did not clear the debt resolution package agreed to by other banks.
The Business Standard, 3rd April 2019


Popular posts from this blog

GST Refund of Rs 20,000 Cr Pending: Exporters’ Body

GST Refund of Rs  20,000 Cr Pending: Exporters’ Body Refund of over Rs 20,000 crore on account of Goods and Services Tax (GST) is pending with the government with more than half the amount stuck as input tax credit, Federation of Indian Export Organisations said on Tuesday. While claims over Rs7,000 crore were cleared in March, the amount was Rs 1,000 crore in April.However, after exporters’ request, the GST council and tax department are organizing a second phase of Special Refund Fortnight starting May 31, which will enable exporters to draw their refunds at a speedy pace. Many exporters have been unable to file the refund of input tax credit due to technical glitches, exports and claim happened in different months. The major challenge lies on ITC refund especially because the process is partly electronic and partly manual which is cumbersome and add to the transaction cost, the exporters’ body said. On IGST, refunds are getting delayed due to airline and shipping companies not submitt…

RBI rushes in to prop up falling rupee

RBI rushes in to prop up falling rupee India’s central bank reportedly intervened in the currency markets on Monday to prevent a further slide in the local unit, which breached the 67 mark to a dollar for the first time in 15 months amid a widening trade gap and runaway import bills fuelled by high crude-oil prices. Some state-owned banks were seen selling dollars aggressively, interventions that market dealers attributed to the central bank’s strategy to stem the decline of the Indian rupee against the US currency. The rupee is the worst performing among a dozen Asian monetary units in the past three months. It lost 4.25 per cent to the dollar during the period, show data from Bloomberg. On Monday, the Reserve Bank of India (RBI) is said to have sold about Rs 800 million collectively on the spot and exchange traded futures markets, dealers said. An email sent to RBI remained unanswered until the publication of this report. The currency market has seen such a strong central bank interven…

SC order on RBI circular: More options for banks to tackle defaulting firms

Lenders also have the option of restructuring the loans Lenders to companies which are under stress could now have three options to deal with them if they default on loans: take a haircut as part of a one-time settlement, restructure the loans for a longer tenure as they did when corporate debt restructuring schemes were allowed, or go to the Insolvency and Bankruptcy Code (IBC) for redress. These changes in the options available to lenders come, according to PE funds and bank lawyers who are involved in the IBC process, in the wake of the Supreme Court on Tuesday setting aside the 12 February RBI circular, which allowed a 180-day window to banks to resolve a company default.But they can still find a resolution. According to a Reserve Bank of India circular, a loan becomes a non-performing asset when banks cannot find a way of recovering their money in 90 days. In short, banks still have a window to resolve the default. Lenders can take a haircut as part of a one -time settlement of du…