Allahabad HC Grants Temporary Relief For Power Projects From RBI Circular On Revised Framework For Resolution Of Stressed Assets [Read Order]

In a respite to power projects under severe financial stress and facing the threat of being pushed into insolvency proceedings, the Allahabad High Court on Thursday temporarily stayed the circular issued by the Reserve Bank of India (RBI) which gives borrowers 180 days’ time to clear their dues.

The Bench comprising Chief Justice D.B. Bhosle and Justice Suneet Kumar asserted that "action may be avoided on the basis of the impugned Circular". This has however been made subject to the condition that the members are not willful defaulters.

The Court further directed the Ministry of Finance to hold a meeting in June, 2018 with the Secretaries from RBI, Ministry of Power, Ministry of Petroleum and Gas, and Ministry of Coal, along with a representative of the Petitioner Association, to consider their grievance and see whether any solution to the problem is possible, in the light of observations made by the 37th report of the Standing Committee on Energy presented to the Lok Sabha on 7 March.

The Court was hearing a Petition filed by the Independent Power Producers Association of India, challenging the RBI circular issued on 12 February this year as being violative of Articles 14 and 19 of the Constitution of India.

Among other things, the Circular mandates that banks will have to disclose defaults even if the interest repayment is overdue by just one day, and will have to put a resolution plan in place within 180 days. Failing to find a resolution within this stipulated time, the defaulting company will have to be referred to insolvency courts as the RBI had abolished all the extant debt resolutions mechanisms such as the CDR, SDR, S4A and JLF.

The Circular has now been challenged as suffering from non-application of mind, as it fails to draw a distinction between various forms of "stressed assets" from different industrial sectors. It further points out the failure of the Circular to distinguish between genuine and willful defaulters.

The Petitioners claim to fall in the category of genuine borrowers, asserting that they were unable to service their loans for reasons beyond their control, such as want of Government support in respect of allocation of natural resources, Power Purchase Agreement Support etc. To this end, they rely on the report of the 31-Members Committee of Parliament on Energy.

The report discusses in detail the reasons for stressed/ non-performing assets in the electricity sector, the role of the RBI/ the Ministry of Finance/ Banks in the financing of power projects, and the need for consideration of the various factors that are responsible for assets becoming NPAs. It specifically states,

"These projects were commissioned on the basis of national need/ demand of electricity, availability of all other essentials required in this regard. However, due to unforeseen circumstances, these plants are suffering from cash flows, credit rating, interest servicing etc. Hence, simply applying the RBI guidelines mechanically by the banks, financial institutions, joint lender forums will push these plants further into trouble without any hope of recovery.”"

Besides, the Circular has also been challenged for prescribing the 180-day timeline only for a debt of over Rs. 20 billion. This has been challenged as having no reasonable nexus to the object sought to be achieved by Sections 35AA and 35AB.

The Petition impugns the vires of Sections 35AA and 35AB of the Banking Regulation Act as well, both of which were inserted by way of an Ordinance in May last year. The provisions had empowered the Centre to issue directions to the RBI to effectively deal with stressed assets. It was pursuant to these provisions that the impugned Circular had been issued.