THINK THINK EQUITY Challenge SC Order, JAN 2, 2019 APR 2 ... · cumulative fund-based and non-fund-based outstanding therein amounted to `1,97,769 crore GOING FORWARD the government

The Economic Times - Mumbai, 4/3/2019 Cropped page Page: 9

Power Cos Can Explore Res-olution Directlywith Lenders

!!MONEY & BANKING

!!FINANCE & COMMODITIES

What SC Verdict Means for Banks, Cos and RBI

CHANGED LANDSCAPE

What FEBRUARY 12 CIRCULAR was all about…

ONE-DAY DEFAULT RULEBanks had to treat a company as defaulter even if it misses repayment schedule by a day

IMMEDIATE RESOLUTION PLANLenders told to put in place board-approved policies for resolution of stressed assets

TIMELINE FOR REFERRING TO IBCCircular had mandated lenders to fi le insolvency applications if default persists for 180 days from and after March 1, 2018 for debts with aggregate exposure of more than `2,000 crore

SCRAPPING OF PAST RESOLUTION MECHANISMSFramework for Revitalising Distressed Assets, Corporate Debt Restructuring Scheme, Flexible Structuring of Existing Long Term Project Loans, Strategic Debt Restructuring Scheme (SDR), Change in Ownership outside SDR, and Scheme for Sustainable Structuring of Stressed Assets (S4A) were withdrawn

RBI can not make an all-season circular for every defaulter agnostic of sectors. The February 12 circular has no legal validity

SC VERDICT

IMPACT...Relief to specifi c sectors such as power, sugar and shipyard

Defaulting borrowers in those cases may challenge banks

Resolutions contemplated for Jet Airways may be delayed

Banks plan for higher recovery through NCLT cases initiated with specifi c reference to February 12 circular becomes null and void

Bad loan recovery to be partially impacted

Credit negative for banks

NO IMPACT related to accounts mentioned in the

fi rst and second RBI lists. The fi rst list constituted

around 25% of the NPAs in the system and the

cumulative fund-based and non-fund-based outstanding

therein amounted to`1,97,769 crore

GOING FORWARD the government and RBI will have to evaluate the impact and decide the follow-up corrective measures required, especially considering the overall impact on the NPA resolution process of the Indian banking system

But under section 35AA, government has given powers to RBI to direct banks to refer to NCLT only in specifi c cases — where there is a default — such as the fi rst 12 large cases.

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Lawyers, however, believe that Tues-day’s judgement will not affect casesfiled before the February 12 circularwas announced.

“This judgement will affect the appli-cations filed solely on the basis of theRBI circular. This means all applica-tions filed on the basis of default or ac-count being NPA can proceed underIBC,” said KP Sreejith, manging part-ner at IndiaLaw LLP.

In other words, this ruling will not af-fect the 12 cases, such as those of EssarSteel. These constituted 25% of theNPAs and were directed to be specifi-cally taken to the insolvency courts bythe RBI. The 28 large cases which ma-de up 40% of the NPAs, referred late2017, will also not be effected.

“But this ruling has now opened aPandora’s box. It is entirely possiblethat anyone can approach the courtsand seek exemption from being drag-ged into insolvency by quoting this or-der,” said Babu Sivaprakasam, part-ner at ELP Law.

RBI Unlikely toChallenge SC Order,may Revise Circular

Joel [email protected]

Mumbai: The Reserve Bank of India(RBI) could revise its bankruptcy cir-cular to ensure that an amended ver-sion of the directive complies withnorms, although the regulator cannotdictate a blanket order for taking allcompanies above a threshold to insol-vency courts, lawyers said.

On Tuesday, the Supreme Court qu-ashed the RBI’s February 12, 2018 cir-cular, putting a 180-day deadline to re-fer bad loan accounts over ̀̀ 2,000 croreto the Insolvency and Bankruptcy Co-de (IBC). The apex court order was inresponse to a petition filed by powerproducers in August last year, chal-lenging the constitutional validity ofthe RBI circular.

“This order means that the RBI can-not issue a blanket guideline withoutthe approval of the government. Butthe majority part of the February 12circular is still valid,” said Sapan Gup-ta, national head, banking and financepractice at Shardul AmarchandMangaldas. “The RBI can rework thecircular after consultation with thegovernment. The only thing clear isthat the RBI has to come up with speci-fic guidelines for industries and not ageneral direction.”

The central bank is unlikely to chal-lenge the SC order.

“We do not want to challenge an or-der which is already passed now. Ourlegal team is studying the order minu-tely and we may decide on the futurecourse of action depending on that.The governor will meet the press afterthe policy announcement on Thurs-day where he may address the issue,”said a senior RBI official.

RBI will announce its monetary poli-cy decision on Thursday.

EXPERTS SAY central bank cannot issue a blanketguideline now without govt approval; however,a major part of the Feb 12 circular is still valid

nancials,” said a bank executive. “Casesthat got referred under the compulsionof IBC are at various stages.”

For exposures exceeding `̀2,000 cro-re, corporates were given six monthswithin which they had to either resol-ve stressed assets or face the Insolven-cy and Bankruptcy Code.

At the first stage, the RBI referred 12accounts for resolution under the In-solvency Code and these constitutedaround 25% of the NPAs in the systemand the cumulative fund-based and

non-fund-based out-standing amounted to`̀1,97,769 crore.

In terms of impact onasset quality and profi-tability for banks, Icrain its earlier reportsmentioned that the totalestimated debt affectedbecause of the circularwas `̀3.8 lakh croreacross 70 large borro-wers. Of this, `̀2 lakh

crore was across 34 borrowers in thepower sector. Further, 92% of this debtwas classified as non-performing bybanks as on March 31, 2018.

“Banks have made provisions of over25-40% on these accounts and hence sho-uld not impact the reported asset qualityof profitability numbers. However, theresolution process, which was expectedto be expedited, may get delayed,” saidAnil Gupta, vice-president & sector head- financial sector ratings, Icra.

Lenders Still Have the Power to TakeCorporates to NCLT

[email protected]

Mumbai: Indian banks would still ha-ve the power to recover loans by usingthe bankruptcy code, but they wouldhave to demonstrate their seriousnessabout protecting depositors’ money.

“There is nothing preventing thebanks from… taking corporates toNCLT,” said a bank executive after theapex court struck down the February12, 2018, circular. “This momentum isset and banks will do everything toprotect the depositors’ money.”

Under the new framework, banks arerequired to identify incipient stress inloan accounts, immediately on de-fault, by classifying stressed assets asspecial mention accounts.

Under the framework, lenders are re-quired to put in place board-approvedpolicies for the resolution of stressedassets, including timelines for resolu-tion. Lenders are initiating action tocure the default.

“The consequence is now that the cir-cular is scrapped, the resolution processwill get elongated and impact their fi-

But banks must beserious about protectingdepositors’ money postSC verdict, say experts

Totalestimateddebt affectedbecause ofthe circularwas ̀̀ 3.8 L cr

Beating VolatilityMarketsET

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1292.2 1439.95

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68.78 7.270.9 0.08

69.36 68.75

SUPREME COURT ORDER ON RBI FEB 12 CIRCULAR

companies that have defaultedon loans. Jet has defaulted to itsIndian and overseas lenders.

According to the plan, lenderswill take over Jet and look for anew investor for the beleagueredairline, eventually giving an exitto its promoter Naresh Goyal andsecond majority shareholder Eti-had Airways. The Supreme Courtorder undermines the first stepand may derail the plan, said ex-perts.

“By virtue of this verdict, thevalidity of the action taken bythe banks under aforesaid circu-lar (e.g. allotment of shares at adiscount to a bank) may be chal-lenged. And if banks’ action(about allotment of shares tothemselves) is challenged, thevalidity of the transfer of title(i.e. transfer of said shares) do-ne by banks under aforesaid cir-cular can also be challenged.Therefore, the verdict may com-pel banks to take corrective ac-tion to transfer valid title (sha-

res or otherwise) to an interes-ted buyer. This might have animpact on cases like Jet Airwa-ys,” said Makarand Joshi, part-ner, MMJC and Associates LLP –a corporate compliance firm.

Others said the verdict may putthe ball back in Goyal’s court.

“Certainly, the Supreme Courtjudgement gives him (NareshGoyal) more teeth. But, if he’ssensible, he’ll make this (rest-ructuring led by the lenders)happen,” said Girish Vanvari,founder, Transaction Square, aboutique corporate advisoryfirm.

“Goyal's main challenge is toensure the airline he foundedsurvives and save many jobs,” headded.

The lenders are slated to meetbefore the weekend (Thursdayor Friday) to figure out how to re-solve the latest crisis.

“We have to reassess the JetAirways situation in light of theSupreme Court judgement. Weare still in the process for gettinga legal view on the same; and ba-sed on that, we will make a deci-sion. Since the February 12 cir-cular has been set aside, it raisesquestion marks over the restruc-turing plan which is based onthat circular. Banks are meeting

in Delhi on Thursday but that ismore to do with the process tofind a buyer for the airline,” saida senior banker involved in theprocess.

Jet’s management is waitingwith a ready plan to fly 40 air-craft, a source close to the deve-lopment said.

Jet’s lenders, led by State Bankof India, have already started totap potential investors, inclu-ding TPG Capital. Meanwhile,Goyal, apparently losing controlof Jet, has been trying to soundout investors such as Gulf carri-er Qatar Airways and Americancarrier Delta to invest in Jet.The latest rumour is that he hadapproached the Adani Groupwhich recently won the mandateto operate five Indian airports.The rumours were, however, qu-ashed by the Adani Group. “TheAdani Group denies rumours oftalks with Jet Airways. The spe-culations are baseless,” said aspokesperson.

Our Bureau

Mumbai: A mint-fresh revivalplan for financially battered JetAirways drawn by its lendershas likely come undone after In-dia’s apex court declared rulesgoverning the plan unconstitu-tional and ultra vires or donebeyond one’s legal power or aut-hority.

The first step of the plan is to gi-ve Jet’s lenders a controlling50.1% stake in the airline for avalue of `̀1. This is based on a cir-cular by the Reserve Bank of In-dia on February 12 that overhau-led debt restructuring rules for

Jet Revival Plan may Hit Airpocket 320

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Jet Airways (I)

JAN 2, 2019 APR 2, 2019

Share Price on BSE (`)

263.75264.9

Experts say validity ofaction taken by lendersunder the circular could be challenged

ters unwilling to part withtheir assets to try and chal-lenge banks’ decisions, saidbankers and lawyers.

“We had travelled quite a dis-tance in resolving debt of largeborrowers. It will be unfort-unate if the effort and time wehad put in over the past year donot yield any result. We are ex-amining the issue closely,” saidthe CEO of a state-owned bank.

Many cases that were refer-red to the bankruptcy courtsusing the RBI circular may be-come null and void, bankersand legal experts told ET.

Lenders were upbeat aboutthe prospects of better recove-ry from the accounts referredto the National Company LawTribunal, especially those ac-counts that went to the bank-ruptcy courts following theRBI circular.

The SC judgment has effective-ly invalidated any reference in

terms of the insolvency code ma-de under this circular. The apexcourt has clarified that the go-vernment has given powers tothe RBI to direct banks to refer toNCLT only specific cases (wherethere is a default), such as thefirst 12 large cases, said MehulBheda, partner in Mumbai-ba-sed Dhruva Advisors.

Bankers will hit the drawingboards in a day or two to under-stand the nuances of the ver-dict, said people familiar withthe matter.

“Voiding of the February 12circular is credit-negative forIndian banks. The circular hadsignificantly tightened stres-sed loan recognition and reso-lution for large borrowers.

But with the voiding, thismay now have to be watereddown,” said Srikanth Vadla-mani, vice-president, finan-cial institutions group, Moo-dy’s Investors Service.

Ruling may Derail Resolutions,Open the Way for More Litigation

Our Bureau

Kolkata: The Supreme Courtruling voiding the ReserveBank of India’s circular ontreatment of defaults couldaffect the pace of corporateinsolvency resolution andimpact ongoing efforts torestructure loans of manycompanies including that ofJet Airways, bankers said.

Senior bankers said the ru-ling may also lead to more liti-gation as promoters of stres-sed companies challengesuch restructuring citing thecourt order.

Corporate restructuring pro-posals including that of JetAirways may have to be aban-doned as they are based on lastyear’s February 12 circularwhich has been held ultra viresto the Constitution.

The circular — which becamea major bone of contention bet-ween the government, the RBIand the corporate sector — in-structed banks to start negotia-tions for restructuring after adefault of even one day andcomplete such discussions wit-hin 180 days, failing which thecompany will have to be admit-ted to the bankruptcy court.

Since the order deals withthe RBI’s powers to directbanks with a general order onresolving defaults, it couldopen a new avenue for promo-

The Big Picture

● Older DebtRestructuringSchemes may beRevisited

● PSBs can FindResolution underProject SashaktNow

● Ongoing Bank-ruptcy Cases toRemain Unaffect-ed Despite Ruling

MUMBAI: Building on its previousthree-session gains, the BSE bench-mark Sensex Tuesday added another185 points to hit an all-time closinghigh of 39,056.65 and the NSE Niftyended above the key 11,700-level onintense buying in auto, IT and bankingstocks amid RBI rate cut hopes androbust global sentiment.

The 30-share Sensex started on apositive note at 38,988.5 and swungbetween a high of 39,121.6 and a lowof 38,846.9. During the course, it alsoset its new intra-day record by tou-ching 39,121.6. The gauge finallysettled the day at 39,056.6, 184.78points or 0.48 % higher, marking itshighest ever closing.

Similarly, the NSE Nifty openedhigher at 11,711.5 and rose to a high of11,729.3. It closed at 11,713.2, up44.05 points,or 0.38 %. – PTI

Sensex MarksHighest Ever Close of 39,056

NEW YORK: A three-day surge in USstocks stalled on Tuesday, as a down-beat forecast from drugstore chainWalgreens Boots hit the pharmasector and economic data did little toease growth concerns. The Dow JonesIndustrial Average was dragged downby a 12.2% slump in Walgreens BootsAlliance Inc after the company cut its2019 profit growth forecast andreported a quarterly profit thatmissed analysts’ estimates. The S&Pconsumer staples index was down0.7%, leading declines among nine ofthe 11major S&P sectors that weredown. Rival CVS Health Corp fell 3%,while shares of several drug whole-salers also took a hit. Data showednew orders for key US-made capitalgoods slipped in February and ship-ments were flat. At 12:43 p.m. ET, theDow was down 106.92 points, or0.41%, at 26,151.50 and the S&P 500was down 3.47 points, or 0.12%, at2,863.72. – Reuters

Wall StreetPauses AfterRecent Surge

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