The Insolvency and Bankruptcy Code has reset the relationship between corporate borrowers and banks as it made major shareholders losing control over their defaulting firms a real and immediate possibility. (Vipul Sharma/Mint)
The Insolvency and Bankruptcy Code has reset the relationship between corporate borrowers and banks as it made major shareholders losing control over their defaulting firms a real and immediate possibility. (Vipul Sharma/Mint)

RBI 12 February circular no more: What it means for banks, IBC cases

  • Supreme Court setting aside RBI's 12 February circular gives banks a free hand to explore out-of-court settlements for defaulting firms
  • The decision also opens up the possibility of less provisioning as banks can now drop the tag of NPA in the case of some borrowers

Mumbai: The Supreme Court setting aside the Reserve Bank of India’s (RBI’s) 12 February 2018 circular to replace all loan restructuring schemes with a formal bankruptcy process has restored previous debt recast options for defaulting companies and given a free hand to banks to explore steps to rescue such companies outside the court. The apex court’s decision on Tuesday to strike down the RBI circular will significantly impact lenders and defaulting firms.

For lenders, who were asked by RBI to put in place an early recognition system for bad loans, the decision opens up the possibility of less provisioning requirements as they could drop the tag of non-performing asset (NPA) in the case of some borrowers.

The ruling also invalidates all the decisions taken by banks and investors under the Insolvency and Bankruptcy Code (IBC) in putting together new corporate turnaround schemes which are at various stages, explained Manoj Kumar, partner at law firm Corporate Professionals.

Anil Gupta, vice-president and sector head (financial sector ratings) at Icra Ltd, said the total debt estimated to have been impacted due to the RBI circular was 3.8 trillion across 70 large borrowers, of which 2 trillion was from 34 borrowers in the power sector. These companies will now get the earlier options for restructuring.

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Experts also said that in such cases where resolution plans will be explored outside the bankruptcy code, the ban on promoters bidding for their companies before clearing the companies’ dues will not apply.

“The Supreme Court decision is the correction of a flaw and will provide flexibility to banks to restructure stressed assets without going through the formal bankruptcy resolution system. Lenders will also not be constrained by section 29A of the IBC (dealing with the ban on promoters bidding for their companies before dues are cleared) wherever they have confidence in the existing promoters," said Sumant Batra, managing partner of law firm Kesar Dass B & Associates.

In the meantime, the government said the central bank will take appropriate action following the apex court ruling.

“We are trying to get the judgement of the Supreme Court. We will read it and I am sure the RBI will also decide with the present situation of the market, what is to be done with various aspects contained in the circular," finance minister Arun Jaitley told reporters.

Cyril Shroff, managing partner of Cyril Amarchand Mangaldas, said if banks continue to voluntarily invoke the bankruptcy code, there will be minimal practical impact of the court’s decision.

Experts also said the court ruling also complicates the bankruptcy resolution process and could lead to litigation.

In the 12 February circular, RBI had withdrawn all the previous restructuring schemes. “Now since the circular is set aside, those restructuring schemes are back," said Saumil Shah, partner at Dhruva Advisors.

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