Supreme Court's order quashing Reserve Bank of India's February 12, 2018 circular on the resolution on bad loans will only the delay resolution of stressed power assets in India, say experts.
Promoters of around 30 thermal power projects including GMR Chhattisgarh Energy, RattanIndia Amravati, Avantha Power's subsidiary Jhabua Power Plant, Jaiprakash Power Ventures, GVK, IL&FS, Essar, Jaypee, Coastal Energen, that had got classified as non-performing assets (NPA) as per the circular, stand to get a "breather".
Though the apex court has termed the circular as "ultra vires", clarity on what all points or provisions of the circular have been struck down is awaited.
RBI's February 12 circular prescribed rules for recognising one-day defaults where the exposure is over Rs 2,000 crore. It directed the banks to initiate insolvency process if a resolution plan was not arrived at within a period of 180 days.
The circular had also done away with the earlier restructuring schemes such as the Corporate Debt Restructuring (CDR), Sustainable Structuring of Stressed Assets (S4A), Strategic Debt Restructuring (SDR), Flexible Structuring of Existing Long Term Project Loans and Joint Lenders Forum for resolving potential bad debts.
"Does this order mean that all these schemes have come back to resolve such power projects?," asked Ashish Chhawchharia, partner – Restructuring Services, Grant Thornton Advisory Pvt Ltd. "In a couple of days situation should get clear on what is the way ahead," he added.
Another expert said even though the circular has been set aside, "the Insolvency and Bankruptcy Code (IBC) has constitutional validity and the bankers or lenders still have the right to take stressed companies or projects under the IBC. This right has not been taken away from the lenders."
Icra's senior vice president Sabyasachi Majumdar believes that the Supreme Court's decision is likely to result in a further slowdown in the already tardy pace of resolution of stressed assets in the power sector. "This apart, the resolution process is in any case subjected to regulatory risks, as exemplified in the case of the Prayagraj Power asset, where the regulator has given a recent directive for a discount in power purchase agreement tariff while allowing the shareholding change approval for the same," he said.
On the other hand, the power sector has hailed the order relating to loan repayment of stressed accounts. The companies said it will provide much-needed respite and alleviate the stress in the sector.
Shares of power companies gained up to 12% on Tuesday. RattanIndia Power zoomed 12.18%, KSK Energy Ventures 4.60%, Adani Power rose by 2.88% and Jaiprakash Power Ventures 2.69% on BSE.
Independent Power Producers Association of India (IPPAI) director general Harry Dhaul told DNA Money, "We welcome the order in recognising the fact that RBI's circular of one-size-fits-all cannot be a mechanical application to resolve a systemic problem. We also thank the government for recognising the peculiar and complex issues that need to be resolved in the power sector and for the support that IPPAI received in this matter."
Association of Power Producers (APP) said the circular had outlined impractical conditionalities and timelines for resolution and also had an inbuilt bias against the existing owners of stressed projects. "We welcome this decision since, with the threat of Insolvency and Bankruptcy Code proceedings mitigated, power companies and lenders will have some breathing space as well as flexibility to restructure debts in a manner which ensures continuity and value maximisation for lenders as well as power companies. This provides much-needed relief to power companies which had been taken to National Company Law Tribunal (NCLT) under the RBI Circular including RattanIndia, GMR, GVK, ILFS and Coastal Energen, noted APP director general Ashok Khurana.
He said APP in its representations to RBI had clearly stated that the circular would not help either the developers or the lenders or the sector at large. Instead, it would lead to significant erosion of value as the assets were stressed due to factors which would be faced even by new promoters, in case of a change in the ownership as fallout of the impugned circular.
The parliamentary committee report had also named Adani Power Maharashtra and Adani Korba West among the 34 stressed power projects. Later, in September, the Supreme Court had barred banks from referring power firms to the NCLT under the RBI's February 12 circular.
Because of this, several power producers including power producers associations, Sugar Manufacturing Association from Tamil Nadu and a Gujarat-based shipbuilding association had intervened on the subject in different courts. Thereafter, all the pleas on the matter were transferred to the apex court and the judgment was pronounced on Tuesday.