In a big win for power, sugar and infrastructure companies, the Supreme Court on Tuesday struck down Reserve Bank of India's (RBI)
February 12 circular on the resolution of stressed assets and declared it unconstitutional and ultra vires.
A two-judge bench of justice Rohinton Fali Nariman and justice Vineet Saran has pronounced the judgement.
Ultra Vires means when a body or an individual is acting beyond its legal power or authority.
"This judgment will lead to a revival of schemes such as CDR, SDR, S4A," Mahesh Agarwal, advocate for the power companies told CNBC-TV18.
Power companies such as Essar Power, GMR Energy, KSK Energy, and Rattan India Power, as well as the Association of Power Producers (APP) and Independent Power Producers Association of India (IPPAI) had in August moved the apex court, challenging the constitutional validity of the circular.
The power firms alleged that the central bank's notification was based on a 'one-size-fits-all' approach and it does not take to account factors such as the reasons for non-payment.
Some challenged the validity of the Insolvency and Bankruptcy Code itself, while others raised concerns on the constitutional validity of the February 12 circular.
The RBI, however, in defense said that 157 companies stood to be affected by the circular and not one company has been resolved in the given period or comply with the August 31, 2018 deadline.
The central bank had argued that ample time had been allowed to lenders and for firms to find a resolution and the notification 'is generic and sector agnostic'.
Shares of power companies such as Adani Power, Tata Power, JSW Energy and Torrent Power advanced on Tuesday after the Supreme Court squashed RBI’s February 12 circular, calling it ‘unconstitutional’. Shares of Adani Power jumped 6.9 percent to Rs 51.9 per share. Tata Power rose 3.63 percent to Rs 76.90. JSW Energy shares gained 4.4 percent to Rs 76.90 per share. Torrent Power rose 2 percent to Rs 268.70 per share intraday on the BSE.
The Supreme Court, in its previous hearing in September last year, had stayed the circular.
The circular had directed lenders to refer any loan account over Rs 2,000 crore under the Insolvency and Bankruptcy Code (IBC) if it is not resolved within 180 days of default. This translates the RBI allowed 180 days for debt resolution.
The notification did not distinguish firms which challenged poor management and the firms which challenged NPAs due to external and uncontrollable factors.
It had also imposed a one-day default rule where lenders have to treat a company as a defaulter even if it misses repayment schedule by a day.
In February 2019, RBI Governor Shaktikanta Das confirmed that there is no proposal to modify the circular.
If the norm is failed to be complied with, the asset will have to be taken to the National Company Law Tribunal (NCLT) to start the insolvency proceedings against them. The deadline for this has passed as it was on August 31, 2018.The stressed power companies, however, sought temporary relief from the circular only for themselves.