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Published on 3/04/2019 10:03:04 AM | Source: Motilal Oswal Securities Ltd

Supreme Court strikes down the RBI’s 12th Feb circular - Motilal Oswal

Posted in Special Event Reports| #Special Report #Motilal Oswal #R K Bansal

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Supreme Court strikes down the RBI’s 12th Feb circular

Resolution of stressed assets to be further delayed; recoveries to remain muted

We hosted Mr R K Bansal – MD & CEO, Edelweiss ARC – to discuss the latest judgment by the Supreme Court (SC) quashing the RBI’s 12th Feb circular. The discussion revolved around a range of topics, including (a) concerns/drawbacks in the circular, (b) implications for the lenders post the SC judgment, (c) potential changes by the RBI now and (d) broader issues concerning the resolution of stressed power assets. Key takeaways from the call:

 

Why did the RBI come out with the 12th Feb circular?

The RBI introduced the circular as the earlier restructuring/resolution schemes like SDR/S4A/CDR were ineffective in finding a resolution to these stressed assets. Moreover, the banking system was using these schemes to delay the recognition of bad loans without having any concrete resolution in sight. Hence, the RBI decided to primarily use the IBC platform for the resolution of stressed assets.

 

Concerns/ drawbacks with the circular

* Earlier restructuring schemes were slightly stringent in terms of (a) restructuring the payment period/interest rates, (b) classifying the debt into sustainable and unsustainable portion and (c) requiring approval of 75% of the lenders to initiate the resolution mechanism.

* The two major concerns with the 12th Feb circular were (a) requirement of 100% approval of the lenders to implement the resolution plan within 180 days and (b) 20% payment to maintain the account standard.

 

Implications post the SC judgment

* The SC judgment will not have any bearing on the RBI’s first and second NCLT lists, as these 28 cases were already NPA before the date of the circular and instructed by the RBI to be referred to the IBC directly.

* According to Mr Bansal, original schemes of restructuring are unlikely to be revived as the lenders have already found it difficult to solve these cases via those schemes. For example, Edelweiss ARC tried to solve one case in the power sector (Adhunik Power) under the earlier restructuring scheme but found it difficult to find buyers.

* Banks will continue having the freedom to solve the cases via the IBC route.

* As far as the cases that have already been admitted to the IBC are concerned, section 12A can be applied to withdraw the case and settle it outside the IBC, wherein the control over the asset would remain with the promoter.

 

What changes can the RBI bring in now?

* Considering the stringent rules under the 12th Feb circular, the RBI might come out with the guidelines harmonizing the existing rules:

* The central bank may look to extend the timeline of the resolution to be implemented from the current 180 days.

* The RBI may also look to reduce the percentage of lender approval required for the resolution plan to be implemented and can bring in line with the IBC (66% lenders approval required) or CDR (75% lender approval required).

* The RBI can also come out with a third list of cases to be referred to the IBC, which may include some of these contentious power assets.

 

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