The Supreme Court on Tuesday struck down Reserve Bank of India's
February 12 circular and ruled it as unconstitutional.
The apex court's order came after the stressed power companies moved the court requesting it to cancel the RBI's dictate which had put a question mark over the future of these companies.
Let's take a quick look at the RBI's February 12 circular and today's judgement by the top court:
What does the RBI's February 12 circular say?
In February 12, 2018, the
RBI under the then-governor Urjit Patel came up with an overarching framework for bad loan resolution to replace all existing schemes for resolution at the time, including Strategic Debt Restructuring (SDR), Corporate Debt Restructuring (CDR), Sustainable Structuring of Stressed Assets (S4A), Joint Lenders’ Forums (JLF), 5/25 (flexible structuring scheme).
The new rule mandates lenders to initiate insolvency resolution under the Bankruptcy Code if a borrower fails to pay even at the end of the 180 days of first default.
What is the new framework all about?
Under the revised framework, banks were given 180 days to resolve defaulting accounts of over Rs 2,000 crore. If banks failed to implement a resolution plan within the timeline, they were required to take the company to National Company Law Tribunal (NCLT) for insolvency proceedings within 15 days of the end of the 180-day period.
Why did it face criticism?
The new rules almost immediately faced criticism, first behind closed doors, and then more publicly. While bankers fretted the almost instant recognition of stress and the many complications that came along with it, corporates opposed it for the strictness of the timeline within which the stress had to be resolved, and the possibility of losing control of their companies in the bankruptcy court.
Why were power companies fretting over the circular? Several power companies, Association of Power Companies, Independent Power Producers Association of India challenged the validity of February 12 circular in various high courts seeking a stay on insolvency proceedings. Power companies had argued that the circular would push even power assets that were close to achieving loan restructuring in to insolvency.
Due to the 12th Feb circular:
What was the impact of 12th Feb circular on the performance of banks in Q4FY18? Banking sector reported a net loss of Rs55077 crore in Q4FY18 vs Rs 6575 crore QOQ Banking sector reported GNPA of Rs10.27 lakh crore vs Rs8.87 lakh crore, up 15.7% QOQ GNPA ratio of the sector increased to 12.13% vs 10.91%QOQ PSU banks reported a net loss of Rs 62681 crore vs Rs 18107 crore QOQ Private banks reported 17.5%QOQ rise in GNPA to Rs1.29 lakh crore PSU banks reported 15.5%QOQ rise in GNPA to Rs8.98 lakh crore What was the government's reaction to the circular?
The circular was one of the key reasons that prompted the central government to use the never-before-used section 7 of the RBI Act to hold consultations with the central bank and seek changes to the rules.
When did the case move to the Supreme Court?
Most power companies — Essar Power, RKM Power, IL&FS, GMR Energy, Rattan India and KSK Mahanadi — had filed the cases against the circular in several high courts. Apart from the power companies, shipping and sugar firms also sought relief from the circular.
Since several high courts were hearing cases on the same issue, the RBI filed a transfer of petition before the Supreme Court, including one from All India Bank Officers Confederation.
The matter has since been with the apex court, and the next hearing was scheduled for today.
A copy of the detailed judgement is awaited. "The circular is ultra vires, " Justice RF Nariman with Justice Vineet Saran said.
What did the SC say in today's judgement?