Supreme Court's cancellation of RBI circular provides relief to gencos ‘The Supreme Court recently struck down the Reserve Bank of India’s (RBI) circular dated February 12, 2018, declaring it ultra vin The controversial RBI circular had kept the industry on tenterhooks. It mandated defaulters with a loan of more than Rs 20 billion ome up with a resolution plan within 180 days or be taken to the bankruptcy court, While the Supreme Court order has brought rel RBI's next steps are now keenly awaited. Industry experts comment on the recent Supreme Court order, the expectations from the ce tral bank's revised framework and the road ahead for stressed assets in the sector, Excerpis. What are your views on the recent Supreme Court order on the RBI circular? Wat will be the impact of the order on stressed asset resolution? Amit Kanur and Vishrov Mukert tt The Supreme Court judgment was ealled ‘upon to examine the validity of the notfi- cation by the regulator of the banking Industry, issued on February 12, 2018, In striking down the notification under challenge, the Supreme Court defined the ‘overall powers of RI, holding this specif- ic exercise of power (issuing omnibus cir- culars that mandate reference to insol- vency) as excessive and beyond the do- ‘main allocated to RBI. The Supreme Cou- thas ensured that a reasoned, enquiry- based approach is taken before compa- nies are referred under the Insolvency and Bankruptcy Code (BC), The judgment has come as a relief to companies that were staring at the cer. tainty of insolvency proceedings even while restructuring processes were under way. It has also created room for otensig Parr 1 Sagar Assocs the resolution of genuine issues, giving time to companies to complete their processes and the government to add- ress the underlying cause of stress in sectors such as power and steel. ayant Kawale Many of us in the industry had chal- lenged the RBI circular because unfortu- nately it had ignored some very impor. tant sector-specific issues. As a result of, this cancellation, everyone has to go back to the drawing board. Its true that at the moment there is some uncertain- ‘9: For example, itis not clear if the ea cr circulars cancelled by the February 12 circular automatically get revived. A ‘more cautious lender would rather wait for arevised RBI circular than take a call. This uncertainty needs to be removed, and that can be done by RBI itself, Rajesh Mokashi pia RBI's circular issued on February 12, 2018 had brought in a sense of loan dis- cipline among borrowers. Also, there ‘was some urgency among the borrowers of reaching a resolution lest they we referred to the National Company Le ‘Tribunal, While we need to wait ar watch the next steps of RBI, we expe that the new framework will in no w hinder the existing process of asset res lution, Notwithstanding the scrappii of the February 12 circular, banks w continue to have the option of refer default accounts under IBC in case t resolution plan fails ‘What modifications do you see RBI making the framework for the resolution of stress assets? ‘Amit Kanur and Vishrov Mukere Any new framework will have to fll condition imposed by RBI requiri ‘company-specific reference under 1B It is likely that the new framework w provide a mechanism to identify spec je stressed assets, which would 1 referred under IBC. It may provide lower threshold for approval (it was 1 er cent under the erstwhile circuls and a slightly more realistic (elongate @ & istrov meron Jayant kawale Pater arg Draco 4. Sogar Asc Rateiraa Poser ‘nies Rajesh Molasht MO as CEO CARE Ratnge POWER LINE © May2019“The Supreme Court has ensured that a rea- soned, enquiry-based approach is taken before companies are referred under the IBC.” ‘Amit Kapur and Vishrov Mukerjee timeline for the completion of the re- | structuring process. Jayant Kawal Twould rather give my wish lst than sec- | ond-guess RBI. The good part about the February 12 circular was that it had sought to empower lenders, and had permitted a lot of flexibility: However, | there had to be unanimity among len- ders for a resolution to move ahead, which is very difficult when a large num- ber of lenders are involved. We need to censure that small lenders, In terms of exposure, are not able to exercise a virtu al veto power and stall proceedings. A sizeable majority, say, 60 per cent, shou- | Id be able to carry the day. My impres- sion is that lenders are excessively risk- averse, and resolution does not happen {in such an atmosphere. However, since 1 do not have an answer to this problem, I ‘am not hazarding it | Rajesh Mokashi We do not want to conjecture on the contours of the revised framework for | the resolution of stressed assets that RBI might come out with. However, expecta. tion from industry quarters is that the | ew framework should take into acco unt the nuances specific to certain sec- tors instead of a common approach for all sectors. What, according to you has been lacking in the resolution of stressed power assets? What more can be done? Amit Kapur and Vishrov Mukeriee ‘The stressed assets problem in the power sector isa culmination of some structur al problems, Several of these issues were identified and elaborated by the 37th “As a result of this cancel- lation, everyone has to go back to the drawing board Itis true that at the moment there is some uncertainty. This can only be removed by RBI.” Jayant Kawale land 40th reports of the Parliamentary Standing Committee on Energy. These included boosting demand for power purchase agreements, ensuring ade- quate fuel supply, providing an appropri- fate mechanism for timely payment by discoms and reducing regulatory delays in cost approvals. The government has taken a step in the right direction by implementing some of the recommen- dations of the High Level Empowered Committee. However, urgent steps need to be taken to address the poor financial health of discoms and ensure the timely payment of dues. Jayant Kawale {As far as the power sector is concerned, it is well known that the stress does not lie in the power generator segment, but elsewhere, Offtaker distribution compa- nies are simply passing on their stress to generators, which are already crippled due to the inability of coal companies and railways to produce and carry coal In the required quantities. Hanging gen- erators from the nearest pole is not going to make these underlying causes disappear, I do not think we can avoid looking at the issue from a sectoral per- spective, We need to find sector-specific solutions as the Cabinet Secretary-led committee has done. Rajesh Mokashi ‘The power projects have been stressed POWER LINE © May2019 “The resolution of stressed assets cannot be achieved through one standard framework as it does not address the root cause of the problem.” Rajesh Mokashi for quite some time now: The resolution of such assets cannot be achieved throu- ‘gh one standard framework as it does not ‘address the root causes of the problem. ‘The lack of an offtake arrangement, the weak financial position of discoms and the absence of fuel supply linkages are the Key issues. Further, the situation is, aggravated due to low power deficit, whi: ch is largely attributable to the unvwilling- ness of the discoms to purchase power due to their poor financial health. Also, the availability of cheaper power from renewable sources is contributing to the stress in the power sector. (Over the past one and a half years, the ‘government has taken several steps to address these concerns. These include the allocation of long-term coal linkages to power producers with an aggregate capacity of about 9,000 MW under the Scheme for Hamessing and Allocating Koyala (Coal) Transparently in India (SHAKTD and the launch of two sche- ‘mes for the procurement of power from plants with untied capacity ata fixed tar- iff for three years. These are modest at- tempts at reviving the power sector though they are small compared to the overall magnitude of the problem. On the distribution side, the launch of the Ujwal Discom Assurance Yojana had brought about improvement in the liq- uidity position of discoms leading to improved collection efficiency of several ggencos. However, both have seen some deterioration in recent times. Thus, dis- coms’ financial and operational impro- ‘yement should remain a key focus area for the government as stronger discoms ensure adequate power demand and timely payments to creditors including power generation companies. =