The Supreme Court has struck down a 2018 directive from the Reserve Bank of India, which gave lenders a 180-day deadline to resolve non-performing loans before having to refer the defaulting borrowers to a bankruptcy tribunal. The verdict comes as a serious blow to the bank officials, who have been trying to tackle one of the worst bad debt problems – with some early success. But it is a huge relief to several industries, especially the power-generating companies, which are saddled with stranded capacity and too many borrowings.
They had sued the central bank, arguing that a 2017 law introduced to empower it on corporate defaults (and thereby beef up India’s new insolvency code) was unconstitutional. The verdict deprives banks of acquiring shares at a discount as they did in the case of Jet Airways where lenders took 50.1% stake in the airline by converting shares at Re 1 through the issuance of 114 million new shares. The RBI circular earlier empowered the banks to take this route for debt-laden companies having a negative net worth.
RattanIndia, Coastal Energy Pvt Ltd, KSK Energy Ventures, Meenakshi Energy, and Jindal Thermal Power are some of the ailing power plants that can now escape from a time-bound resolution as they are yet to be admitted to the NCLT.
Following the SC order, big loan-defaulting companies can now avoid being mandatorily pushed into bankruptcy. The apex court's judgment will not just be positive for the power, shipping, textile and sugar companies but also other biggies who are sitting on a mountain of debt and are in the process of being referred to the National Company Law Tribunal (NCLT).
With the SC verdict, the Banks will no longer be under pressure to refer cases to the NCLT for being tried under the Insolvency and Bankruptcy Code, 2016 (IBC). They can now exercise their discretion in referring to accounts for insolvency.