SC’s interim order on RBI circular delays resolution, raises uncertainty

What will be the impact of Supreme Court’s (SC’s) interim order staying the Reserve Bank of India’s (RBI’s) 12 February circular on power producers and companies belonging to other sectors?

Petitioners including Association of Power Producers, Independent Power Producers Association of India, a sugar manufacturing association from Tamil Nadu and a shipbuilding association from Gujarat, had intervened in the matter in different courts.

The interim order was part of the SC’s move to transfer to itself all cases petitioned against the circular in various high courts for the sake of clarity and convenience.

Essentially, all further proceedings with respect to the companies of these sectors will be in limbo until the SC hearing in November. Companies referred to the courts under the insolvency code won’t move further, those yet to be referred won’t be referred and the rest that have been languishing will continue to do so. At stake is close to ₹2 trillion worth of power sector loans, and another chunk of loans towards sugar, textiles and shipping.

What does this order do to the various stakeholders?

It changes nothing for bankers. Most banks have made provisions with respect to these accounts, especially for loans to the power sector, anticipating losses.

Of course, some lenders will take further provisioning hits in the coming quarters. A clutch of power assets are already undergoing insolvency proceedings. Eleven accounts are nearing resolution as a Mint story on Tuesday points out, and they will get relief from being dumped into insolvency courts just because the deadline was over on Tuesday.

But the fact that the power projects have been languishing for years and do not have a concrete plan of revival makes insolvency the best solution for them.

In the case of sugar, too, the story is not very different. Dharani Sugars and Chemicals Ltd was one of the petitioners. The company had said, in a 1 September statement, that a glut in the commodity had depressed sugar prices, while a drought in southern states had affected output.

Dharani Sugars has not been able to service its loans fully between May and August, but the company says the next season will be better, as cane output is expected to be higher.

While the next season’s cane output may improve, an oversupplied market is a problem. Also, the government’s policies on cane and sugar prices, and support for sugar mills are key factors on which performance depends.

If defaulting sugar mills were unable to convince banks to restructure their loans till now, what could change in the next few months is a puzzle.

The upshot is that the SC’s order delays an already slowing resolution process under the insolvency code. The larger problem is these delays dilute the code’s impact. It sets a precedent for other promoters to also petition and gain time. The biggest threat is to the powers of the central bank.

Given the petitions challenging RBI’s powers to direct banks to refer borrowers to the insolvency court, the SC’s ruling in November is critical. The two-month holiday merely kicks the can down the road.

source: livemint


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