Published: Sat, April 06, 2019
Markets | By Otis Pena

Power stocks gain, RattanIndia Power surges 12% on SC order

Power stocks gain, RattanIndia Power surges 12% on SC order

Shaktikanta Das, the Reserve Bank of India (RBI) Governor, attends a news conference in Mumbai, December 12, 2018.

The Supreme Court (SC) order scrapping the Reserve Bank of India (RBI) circular on resolving bad debt will provide relief to power companies and lenders and flexibility to restructure debts.

Crisil said the stressed power sector assets in the private sector will get the biggest respite from the judgment as a lot of them were on the verge of being referred to bankruptcy court, the National Company Law Tribunal, for insolvency resolution process. "The Supreme Court has instead - on a technicality - struck down the February circular as being 'ultra vires" (or beyond the legal ambit) vis-a-vis Section 35 AA, under which the RBI issued the circular.

According to Anil Gupta, Sector Head (Financial Sector Ratings) at ICRA, "Banks have made provisions of over 25-40 per cent on these accounts and hence quashing of the RBI circular should not impact the reported asset quality or profitability numbers, however the resolution process, which was expected to be expedited, may get delayed". The quashing of the RBI's diktat has, however, turned the clock back on resolution of stressed assets.

Das said the central bank would have to comply with the directions of the Supreme Court and act accordingly, but, would remain committed on enhancing the momentum of resolution of stressed assets and adherence to credit discipline.

"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 PPA tariff while allowing the shareholding change approval for the same", he said.

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However, a partner at a top law firm in India told Reuters that Jet's debt resolution plan might not be derailed as lenders could have taken the decision even without the central bank's circular.

This circular was made applicable to all loan accounts over Rs 2000 Crore and also abolished all existing debt restructuring schemes for stressed accounts. The RBI warned banks that not adhering to the timelines laid down in the circular, or attempting to evergreen stressed accounts, would attract stringent supervisory and enforcement actions.

The ruling gives relief to several companies, especially power companies, who have defaulted on loans due to issues with coal and gas supplies or problems tied to state governments not honoring power purchase agreements.

Now, the RBI can ask for a review from the SC on whether its circular can still work without the specific clauses that the court disagreed with.

The finance ministry, through a report issued with its backing, had earlier argued that the "one size fits all" approach was "erroneous". "But, with the voiding, this may now have to be watered down", he said. Further, 92 per cent of this debt was classified as non-performing by banks as on March 31, 2018.

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