In what comes as a major setback for the Reserve Bank of India (RBI), the Supreme Court has declared the central bank's bad loan resolution framework which came into effect from February 12, 2018, as ‘unconstitutional’. About 50 petitions were filed by power, shipping, sugar and other companies challenging the circular.
The central bank had replaced all frameworks for bad loan resolution with the February 12 circular, forcing banks to recognise defaults by large companies within a single day and find a resolution plan within 180 days of default. It was applicable to loans over Rs 2,000 crore and failure to find a resolution plan would mean the initiation of bankruptcy proceedings.
In an interview to CNBC-TV18, Ashok Khurana, director general of Association of Power Producers, Abizer Diwanji, partner at EY, RK Bakshi, former executive director at Bank of Baroda, R Gandhi, former deputy governor of RBI, and Suharsh Sinha, senior associate at AZB & Partners, discussed how this verdict will impact banks and debt-ridden companies that are currently under resolution.
Here's what they had to say:
R Gandhi: “One point is true that RBI cannot give such direction, that is what the court has said. However, the banks on their own can definitely come to the conclusion that this Non-Performing Asset (NPA) is unrecoverable and so we want to have resolution under the IBC process. So, as a voluntary process instead of being mandated or directed by the RBI, I think that will be well in order. So, earlier the banks took the position that it is RBI which is mandating us, that is why we are going to resolution and bankruptcy but now on their own, the creditors should be taking such a decision in case they come to that kind of conclusion then certainly IBC process can be followed."
Abizer Diwanji: "It (the judgement) doesn’t say that the provisions of the circular pertaining to IBC have been withdrawn. It says the impugned circular is ultra vires."Suharsh Sinha:
"The February 12 circular relies on 2 Sections of the Banking Regulation Act – Sections 35AA, Section 35AB and Section 45. Section 35AA is the section which authorises the central government to issue directions to the RBI to file IBC against specific companies. The Supreme Court has said that the February 12 circular is ultra vires of Section 35AA."