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Allahabad HC on power sector NPAs: What is section 7 of the RBI Act?

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The court has asked the centre to consult with the RBI under Section 7 of the RBI Act, and take action on the fate of the power companies within the next 15 days while allowing lenders to initiate insolvency proceedings against defaulting power producers.

The Allahabad High Court on Monday refused to grant interim relief to private power companies against the Reserve Bank of India’s February 12 circular, paving the way for several large defaulters to be sent to the National Company Law Tribunal (NCLT).
The court has also asked the centre to consult with the RBI under Section 7 of the RBI Act, and take action on the fate of the power companies within the next 15 days while allowing lenders to initiate insolvency proceedings against defaulting power producers.
The Allahabad High Court order read the following:
“We are of the opinion that interim relief, at this stage, need not be granted. IPPA or APP are at liberty to apply for urgent interim relief if need so arises, placing the requisite factual details on record. The Central Government shall consider initiation of the consultative process contemplated under Section 7 of RBI Act, and conclude the same within 15 days from today. The High Level Empowered Committee shall submit its report within two months from the date of its constitution. The Ministry of Power shall invite a senior representative of the RBI, after consultation with the Governor of RBI, as a member of the High Level Empowered Committee forthwith. This order shall not curtail the rights/powers of a financial creditor under Section 7 of the IBC or even of the RBI in issuing directions in specific case(s) under Section 35AA of BR Act to initiate corporate insolvency resolution process under Chapter II of Part II of IBC, in any given case, including the petitioners or members of the petitioners' Association.”
In addition to this, the court directed the high level empowered committee on power to decide on the resolution of stressed power assets in consultation with the RBI in two months.
Under Section 7 of the RBI Act:
  1. The Central Government may from time to time give such directions to the Bank as it may, after consultation with the governor of the Bank, consider necessary in the public interest.
  2. Subject to any such directions, the general superintendence and direction of the affairs and business of the Bank shall be entrusted to a Central Board of Directors which may exercise all powers and do all acts and things which may be exercised or done by the Bank.
  3. Save as otherwise provided in regulations made by the Central Board, the Governor and in his absence the Deputy Gover­nor nominated by him in his behalf, shall also have powers of general superintendence and direction of the affairs and the business of the Bank, and may exercise all powers and do all acts and things which may be exercised or done by the Bank.
  4. So far, Section 7 of the RBI Act has never been used by the centre. Even in the eventuality of it being used, RBI governor Urjit Patel would have to be consulted, before the government can issue directions on the fate of these power producers.
    Soon after the February 12 circular kicked in, concerns were raised across the power and finance ministries, power producers and banks alike on the repercussions of such a rule on power projects.
    The February 12 circular laid down a strict six month or 180-day timeline for resolutions, after which bankruptcy proceedings would have to be initiated. The deadline for resolution of several power projects started soon after by March 1 and comes to an end on August 27.
    As per the finance ministry Report titled “Impact of RBI's Revised Framework for Resolution of Stressed Assets on NPAs in the Electricity Sector” presented to the parliamentary committee on August 7, 34 coal-based thermal power plants were categorised as stressed for reasons ranging from non-availability of fuel, lack of enough power purchase agreements by states, delays in project implementations and project overruns to issues related to banks and other financial institutions.
    The committee stated that of the total coal-based power capacity in the private sector of nearly 90,000 MW out of which 75,000 MW was already operational,  approximately 60,000 MW to 65,000 MW capacity was under financial stress. It added that lenders had an exposure of approximately Rs 3 lakh crore, and were facing balance sheet pressures as a result.
    Of these 34 projects spanning Rs 1.77 lakh crore of debt, the report said about 14 cases were either admitted in NCLT, or in the process of being referred to NCLT. The remaining 20 were categorised as stressed.
    Monday's Allahabad High Court order means that several of these, and more may find themselves in the bankruptcy court. According to Harry Dhaul, DG, Independent Power Producers Association of India (IPPAI), the number of stressed power accounts could go up to 80 cases from 40 identified cases currently.
    Banks say the haircuts on such power cases could range anywhere upwards of 50-70 percent, which does not augur well for the already-stretched balance sheets of lenders.
    “There are concerns that stressed projects have drawn bids for around Rs 35 lakh per megawatts under the insolvency and bankruptcy code, which is a fraction of the Rs 5 crore per MW needed to build them,” R Gopalan, former secretary, department of economic affairs, told CNBC-TV18.
    But lawyers like Cyril Amarchand said that the last word is not said unless the Supreme Court says it. While the Allahabad High Court order may have been a blow for power producers, the case is far from being closed. The Supreme Court will hear the arguments in the case tomorrow.