Mumbai: The Supreme Court on Tuesday quashed the Reserve Bank of India’s (RBI) 12 February circular which prescribed rules for recognising one-day defaults by large corporates and called for insolvency action as a remedy.

"We have declared the RBI circular ultra vires," Bloomberg quoted Justice Rohinton F. Nariman as announcing the judgment. Since the central bank had also cancelled all its previous restructuring schemes in favour of 12 February circular, lenders will now have to individually look at resolution plans.

In its 12 February circular, the central bank had asked lenders to institute a board-approved policy for resolution of stressed assets. Banks were told to start the resolution process as soon as a borrower defaults on a term loan and were given 180 days to cure it, failing which the account would have to be referred to the National Company Law Tribunal (NCLT).

Under previous guidelines, lenders had the freedom to initiate the resolution process after 60 days of default.

Following these norms, several petitioners, including GMR Energy Ltd; RattanIndia Power Ltd, a Punjab-based textile company; Association of Power Producers (APP); Independent Power Producers Association of India; Sugar Manufacturing Association from Tamil Nadu and a shipbuilding association from Gujarat, had intervened in the matter in different courts.

In September last year, the Supreme Court had granted an interim relief to stressed power firms, directing lenders to maintain a status quo on the Reserve Bank of India’s circular for banks to resolve these cases within 180 days. The apex court directed that all pleas filed by the central bank related to the February circular should be transferred to it.

As mentioned, the one-day default norms were not received well by the industry and a section of lenders. So much so that in April last year, RBI deputy governor N.S. Vishwanathan explained in a speech that the revised framework tries to reduce the arbitrage borrowers are currently enjoying while raising funds through borrowing from banks, as against raising funds from the capital markets.

He had said that if a borrower delays coupon or principal payment on a corporate bond even for a day, the market would penalize the borrower heavily, but defaults in bank borrowings have not led to a similar reaction. “There is a need to change this and restore the sanctity of the debt contract, lest bank debt becomes subordinate even to equity," he had said.

According to RBI data, the top 100 large borrowers accounted for 16% of gross loans and 21.2% of gross NPAs of banks at the end of the September quarter of FY19.


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