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Supreme Court stays RBI bankruptcy court deadline, gives relief to firms facing insolvency

Defaulting companies in the power sector as well as some sugar, shipping and textile companies that had seemed destined for bankruptcy court under the RBI's new norms on stressed assets got a last-minute breather from the Supreme Court yesterday.

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Supreme Court stays RBI bankruptcy court deadline, gives relief to firms facing insolvency
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Defaulting companies in the power sector as well as some sugar, shipping and textile companies that had seemed destined for bankruptcy court under the RBI's new norms on stressed assets got a last-minute breather from the Supreme Court yesterday.

The apex court has stayed the RBI's controversial February 12 circular and asked banks not to initiate insolvency proceedings against the loan defaulting companies. Citing bankers the Economic Times said that this decision will delay the resolution process at least until November 14, when the next hearing is scheduled.

The bench, comprising Justices RF Nariman and Indu Malhotra, also directed that the 12 cases related to this issue that are pending before different high courts should be transferred to the Supreme Court.

In February, the RBI had issued a circular outlining a revised, stricter, framework for resolution of stressed assets. The new framework made it mandatory for banks to identify signs of incipient stress in loan accounts and classify stressed assets as Special Mention Account (SMA), immediately on default. Furthermore, lenders were asked to finalise a resolution plan in case of a default on large accounts of Rs 2,000 crore and above within 180 days, failing which insolvency proceedings have to be invoked against the defaulter.

Challenging this circular, several petitioners, including the Independent Power Producers Association of India, Association of Power Producers (APP), the Sugar Manufacturing Association from Tamil Nadu as well as groups representing shipyards and textile makers, had moved different courts.

The RBI circular had particularly impacted the power sector because, as pointed out by the 37th report of the Standing Committee on Energy, which was presented to the Lok Sabha in early March, the sector was already reeling. Many power plants were already under SMA-1/2 stage or on the brink of becoming non-performing assets (NPAs) due to unforeseen circumstances ranging from fuel shortage to regulatory clearances that hit their cash flows, credit rating, and the like. Banks currently have exposure of around Rs 1.74 lakh crore to stressed power assets.

No wonder, power companies welcomed the Supreme Court verdict. "Where cases have been referred to NCLT [National Company Law Tribunal] after the RBI circular, there will be a status quo, and where they have not been filed, they will not be referred to NCLT now," said senior advocate Mahesh Agarwal, who represented the power companies.

The Supreme Court decision gives lenders more time to completing resolution proceedings for borrowers such as KSK Mahanadi, Prayagraj Power, Jhabua Power and GMR Chhattisgarh Energy, which were hopeful of escaping the bankruptcy process. Meanwhile, biggies like Resurgent Power, Adani Power, JSW Energy and Vedanta Plc have been eyeing a chunk of stressed power assets through the bidding route at as much as half the project cost.

"SC order has provided a great relief to power sector stressed assets," Association of Power Producers director general Ashok Khurana told the daily. "This would provide time for bankers to finalise resolution plans for about 13 GW of projects which are presently in their final stages and the high-level empowered committee under cabinet secretary to submit its report on corrective actions that the government intends to initiate to mitigate stress factors."

But according to experts, the challenge now will be ensuring that the resolution process for these defaulting companies do not move at a snail's pace, else they risk going from stressed to unviable.

Significantly, since the verdict is not a general order - it reportedly only applies to the companies that had moved court - it is expected to prompt other borrowers affected by the RBI circular to rush to Supreme Court seeking similar relief.

Edited By Sushmita Choudhury Agarwal

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