Bankers said the amendments to the Act dilute the powers of the Insolvency and Bankruptcy Code, even as sugarcane politics plays out in Uttar Pradesh, where Assembly polls are ongoing.
Bankers are expecting the Centre and the Reserve Bank of India (RBI) to intervene after the Uttar Pradesh government amended the Sugarcane Act to allow the state to attach the assets of sugar mills in case of default of payments.
The amendment was recently used by the UP state electricity board to “adjust” the dues owed to power company Lalitpur Power Generation Company Ltd (LPGCPL) by crediting Bajaj Hindusthan Sugar Ltd’s (BHSL), LPGCPL’s parent company, with payments instead.
What is the issue?
Bankers believe that while the move to introduce timely payment to farmers is important, the amendment goes against existing banking principles and undermines the Insolvency and Bankruptcy Code (IBC).
Bankers say the amendment dilutes the power of the ‘waterfall’ mechanism that is present in the IBC. Section 53 of the IBC essentially sets out the priority of the dues being cleared in case of default for any corporation. Under the provisions of the code, the workmen of the defaulting corporation and secured creditors have the highest priority for having their dues cleared.
"The new amendment is not just problematic but against the basic banking rules. We will take this up with the centre and will seek guidance from the RBI," a senior banker told The Economic Times.
"How will banks recover their dues, if states start attaching assets? This will kill the insolvency code," another banker told ET.
What happened with LPGCPL & BHSL?
BHSL owed around Rs 1,000 crore in payments to sugarcane farmers. Using the provisions of the Act, the state government allowed the state’s power utility to divert payments from one entity to the other.
The UP Power Corporation Ltd (UPPCL) transferred its payment to BHSL, even though the amount was owed to LPGCPL, the power arm of BHSL which operates three power plants of 660 MW.
But bankers emphasise that the two entities are distinct legal entities, especially when it comes to their debt obligation. The transfer of payments puts LPGCPL at the risk of defaults, a senior bank official told Business Line.
“If one state can do this, nothing prevents the others from amending their respective state acts. If adjustment of dues happens in this manner, bankers will think twice before taking fresh exposure to state government undertakings,” the official added.
Sugarcane politics has become a major political point, especially in the sugarcane belt of Uttar Pradesh, where the Assembly polls are underway.