[Moksh Ranawat and Aman Guru are students at Symbiosis Law School, Pune.]
The problem of non-performing assets (NPAs) in the power sector holds potential to disrupt the banking industry of the country and has become a major reason for reduction in the lending capacity of banks. Five sectors alone account for around 60% of NPAs in the Indian economy - steel, power, telecom, infrastructure and textile sectors. Out of these, the power sector is responsible for 35% of the NPAs and stressed assets of the banking industry. On March 7, 2018, the Standing Committee on Energy chaired by Dr. Kambhampati Haribabu submitted a report according to which the NPAs in the power sector stood at a staggering threshold of ₹37,941 crores as of June 2017. These rising figures of non-performing assets form evidence that the power industry has become a major contributor in the twin balance sheet problem of the country, wherein the income of corporations is insufficient to pay bank loans, while the banks have subsequently become reluctant to invest due to lack of credit.
To resolve this, regulatory measures like restructuring of loans and recovery of NPAs through initiation of insolvency proceedings are being undertaken. These measures can widely be classified into two kinds – firstly, resolving NPAs as per laws like the Insolvency and Bankruptcy Code (IBC), and secondly, remedial measures for banks which are prescribed and regulated by the Reserve Bank of India (RBI) for internal restructuring of stressed and non-performing assets through various schemes released by the RBI from time to time.
Since May 2016 when the Act was passed, the IBC has become a major instrument for speeding up the task of debt recovery. It allows for initiation of insolvency proceedings against companies which have defaulted on their loan accounts above the tune of ₹1 lakh. The process starts off with an application to the National Company Law Tribunal (NCLT) which can be filed by the operational or the financial creditors of the corporate debtor or by the corporate debtor itself. Once the application is accepted by the NCLT, the corporate debtor is admitted in the corporate insolvency resolution process (CIRP) and the board of directors is suspended. An interim resolution professional (IRP) is appointed to look after the management of the company and a period of moratorium sets in on the corporate debtor wherein no suit can be initiated or continued against it. The IRP then invites claims against the corporate debtor and, after verification, forms a Committee of Creditors (CoC) in a period of 30 days. Thereafter, the CoC appoints an independent professional to manage the process of CIRP, and this individual is known as the resolution professional (RP). Once the RP is appointed, it is his/her duty to form a resolution plan for the corporate debtor and get it approved within 180 days of the CIRP from the NCLT (an extension period of 90 days is available here). If this resolution plan is approved, there is an attempt at revival of the company and timely repayment to the creditors. If it is not approved, the company goes into liquidation. Proceedings under the IBC are decided by the Debt Recovery Tribunal in case of personal insolvencies and the NCLT for initiating corporate insolvencies. There are 701 cases which have been registered and 176 cases have been resolved under the IBC as of March 2018.
The second measure to tackle NPA includes regulations introduced by the RBI for curtailing growth of stressed assets through schemes like Strategic Debt Restructuring (SDR), Joint Lenders Forum Plan and Scheme for Sustainable Structuring of Stressed Assets (S4A). The policy for banks to deal with such stressed assets is revised periodically through circulars issued by the RBI. One such circular which has become a cause for huge uproar in the power sector is the one dated February 12, 2018. Through this circular, the RBI has abolished all existing schemes and has substituted them with a time-bound framework which demands all banks to pass a resolution plan for insolvent accounts held by them within a period of 180 days since date of default, failing which the account has to be referred to the IBC within 15 days. Such a stringent policy decision by the RBI has garnered severe criticism and has become a nightmare for the power industry, which is already in severe trouble amidst its growing losses and rising NPAs.
The consequences of the circular have forced major players in the power industry to challenge the stringent measures introduced by the RBI as this could create turmoil for the power sector and its growth in India. The Supreme Court clubbed all 12 cases against the circular in various high courts of the country and the matter is now being heard by a bench headed by RF Nariman in the case of South East U.P. Power Transmission Company Limited v. Reserve Bank of India. As many companies have already crossed or are on the verge of crossing the period of 180 days, the Supreme Court has ordered a status quo on the circular preventing banks from initiating insolvency proceedings under the IBC until further notice. The hearings for this case began on November 28, 2018 and there is an immense speculation about the decision of the Supreme Court as around 76 corporate loan defaulters and 34 power companies fall within insolvent accounts of the banks, thereby coming under the radar of the IBC.
The challenge against this circular has been made on two major counts:
Firstly, the circular fails to distinguish between “genuine defaulters” and “willful defaulters”. While this is undefined in the Code, a genuine defaulter could be understood as a borrower who is unable to pay his loan account or interests accrued on such account due to reasons which fall beyond his control (for instance, lack of government help in procuring natural resources for completion of the power plant project). On the other hand, willful defaulters are those who have not paid their loan accounts even when they have the capacity to repay it.
Secondly, the circular prescribes a strict 180-day limit for accounts which hold a debt of over ₹2000 crore. This has been challenged as having no reasonable nexus to the object which is sought to be achieved by sections 35AA and 35AB of the Banking Regulation (Amendment) Ordinance, 2017. These sections empower the RBI to issue directions for resolution of banking companies from the problems arising due to stressed assets and NPAs in the banking industry.
As the circular differentiates between loan accounts on the basis of the debt owed, it is in violation of articles 14 and 21 of the Constitution of India.
While the matter is still to be decided, a quick resolution to this problem exists in the hands of the Central Government under section 7(1) of the Reserve Bank of India Act, 1934, which states that:
“(1) The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.”
Through this provision, the government indirectly has to power to issue orders to the RBI for public interest. However, the same stands as an extreme measure as it directly encroaches upon the independence of the RBI, which is an autonomous body. The use of this provision shall be a severe blow to the reputation of the central bank of the country, which is supposed to be independent from government control. While the tussle between the government and RBI on policies towards NPAs stands unresolved, the power companies have come into crosshairs of this dispute.
In this scenario, if the RBI circular is upheld by the Supreme Court, dark times lie ahead for the power companies in India as many will get dragged into insolvency courts. On the other hand, if the circular is nullified, the problem of NPAs shall be put to rest in the shorter run but still remain unsolved. Either way, one can conclude that tough times lie ahead for the power sector in India, calling for a consolidated approach by the RBI and the government to resolve the problem.