India's top court on Tuesday struck down the Reserve Bank of India's February 12, 2018 circular on bad loans, a decision that will likely stretch the stressed assets resolution process.
The RBI had, under the February 12 circular, directed banks to file for insolvency proceedings against loan defaulters with Rs 2,000 crore or more if a resolution plan was not implemented within 180 days of the initial occurrence of default. The central bank had also abolished half a dozen loan-restructuring mechanisms to expedite the clean-up of banks' books.
However, the Supreme Court declared the circular as illegal and unconstitutional, news agency ANI tweeted. The decision came on a batch of petitions that were transferred to the Supreme Court from various high courts where the RBI’s circular was challenged, ANI said.
Power, sugar and fertiliser companies were among those that had challenged the RBI circular and will benefit the most from the court ruling.
The court order is a big blow to the central bank. Moreover, the decision to tackle bad loans will be now left to the individual banks and there will be no rush to push corporate defaulters to insolvency courts.
Cyril Shroff, managing partner at law firm Cyril Amarchand Mangaldas, said that while it’s too early to assess the court order but the practical impact of the judgment will be minimal if banks voluntarily still invoke the Insolvency and Bankruptcy Code.
Abizer Diwanji, partner and national leader for financial services at EY India, said the court has not done the right thing by quashing the circular in full.
He said that there were two flaws in the RBI circular: One, the implied 100% approval of creditors and two, making it mandatory for banks to approach the National Company Law Tribunal (NCLT). While the first flat made a resolution difficult, the second flat crowded the NCLT.
"The court could have dealt with these two aspects rather than banning it entirely as the circular had some real good positives. The circular helped in quashing all form of restructuring and not making restructuring prescriptive. It allowed restructuring as long as there were checks of business performance and investment grade ratings," Diwanji said.
Diwanji also said that the bad-loan resolution will now suffer. The RBI had, in 2017, come out with two lists of defaulters to be taken to the NCLT. "Now with the court order, those 12 and 28 companies have the option to appeal against being taken to the NCLT," he said.
The RBI can now probably amend the two clauses of the circular to make taking of companies to the NCLT as optional and not mandating approval of all lenders, he added.
Ravi Chachra, co-founder and managing partner at stressed asset management firm Eight Capital Management LLC, said the RBI will now most likely come up with a new circular that will give a new direction to the lenders while complying with the SC order.
“In the meantime, lenders now have a choice to use Project Sashakt for restructuring the defaulted loans, sell the loans to asset reconstruction companies ARCs or take the company to the NCLT,” he said.