Essar Steel not singled out on bad loans, RBI tells Gujarat HC
RBI counsel Darius Khambatta tells Gujarat HC that Essar Steel’s bad loans rose in FY17, and that Insolvency and Bankruptcy Code ‘not draconian’, but ‘protects interests’ of a firm
Ahmedabad: Essar Steel is not being singled out and all big defaulters are being taken through a structured process for speedy resolution of the bad loans problem plaguing the Indian banking system, Reserve Bank of India (RBI) counsel Darius Khambata told the Gujarat high court on Wednesday.
The court was hearing Essar Steel’s petition challenging the central bank’s decision to recommend bankruptcy proceedings against the company.
Although the Insolvency and Bankruptcy Code (IBC) is a time-bound process, it is “not draconian” and “protects interests” of the company as well, Khambata argued.
“IBC is not for winding up a company but to resolve and restructure to avoid winding up,” said Khambata.
Essar’s petition asked the high court to set aside RBI’s directive to banks on the grounds that it was already discussing a restructuring proposal with its lenders. The petition said the central bank chose “objective and non-discretionary criteria” for selection, which ignored factors such as operational performance and the resolution process that was underway.
Khambata said that “records show that in Essar Steel case, it was very, very far from completing the restructuring”.
He said that Essar owed lenders some Rs45,000 crore in total, of which Rs31,671 crore were non-performing assets (NPAs) as on 31 March 2016. He further said that this rose to Rs32,864 crore as on 31 March this year.
The outcome of this case will also decide whether the lenders—State Bank of India (SBI) and Standard Chartered Bank—can proceed with their petitions at the National Company Law Tribunal (NCLT).
It will also provide key inputs in other cases where banks have dragged companies to the tribunal, according to lawyers and bankers.
Essar’s counsel Mihir Thakore argued that the Rs5,000 crore criterion used by RBI was not reasonable. The central bank, in its 13 June press release, had said that all firms which had an aggregated exposure of Rs5,000 crore to the banking system, 60% of which had turned bad as on March 2016, should be first taken to bankruptcy court.
Questioning the arbitrariness of the 13 June press statement, Essar Steel representatives told the court on Wednesday that out of the 500 NPA cases identified by RBI, the central bank had categorized 12 companies, including Essar Steel, against whom insolvency proceedings are to be initiated before NCLT. The remaining 488 companies would get six months for restructuring, failing which they would go to the NCLT.
Thakore, while challenging the central bank’s decision to classify the company among those identified for initiating insolvency proceedings, said that Essar Steel should fall in the second category. The reason, he said, is that the company had taken enough steps to tackle the issue of NPAs and that the joint lenders forum formed for corporate debt restructuring of the company had not rejected the company’s restructuring plans. The company was on a path to recovery and that their steel plants were working at 80% capacity.
Essar Steel’s lawyers told the court that the company had a revenue of Rs12,000 crore for the last two years and this year it was aiming at clocking Rs21,700 crore.
Thakore said if Standard Chartered went to NCLT on its own and not based on RBI’s directive, it could not do so as per law and that the bank was in active discussion with Essar Steel for debt restructuring.
Essar lawyers argued before the court that as per a gazette notification by the central government, RBI is empowered to take action on certain debts to initiate the insolvency resolution process in respect of defaults under the provisions of IBC and it has to be done on a case-to-case basis.
Thakore also argued that the central government cannot give a general directive to RBI. He said that there was nothing on record to show that the central government or RBI considered “specific cases”.
In his reply to the court, RBI’s Khambata said that SBI had declared Essar Steel as an NPA way back in 2013 and that the company had not done enough to repay its debt. He said that while RBI had identified 12 cases for insolvency proceedings, the creditors could approach NCLT on their own as well.
The court has ordered further hearing of the petition on Thursday and it has halted proceedings against Essar Steel listed at NCLT till then.