The Supreme Court's surprise verdict of quashing the Reserve Bank of India's (RBI) February 12 circular will weaken the banks' ability to change the management of defaulting companies and resolve the debt of Rs 3.8 lakh crore across the stressed sectors such as power, sugar and shipping. Of the total debt, the power sector alone accounts for loans of up to Rs 2 lakh crore. The verdict deprives banks of acquiring shares at a discount as they did in the case of Jet Airways where lenders took 50.1% stake in the airline by converting shares at Re 1 through the issuance of 114 million new shares. The RBI circular earlier empowered the banks to take this route for debt-laden companies having a negative net worth. RattanIndia, Coastal Energy Pvt Ltd, KSK Energy Ventures, Meenakshi Energy, and Jindal Thermal Power are some of the ailing power plants that can now escape from a time-bound resolution as they are yet to be admitted to the NCLT. R Gandhi, former deputy governor, RBI, said, "It will weaken the banks' ability to resolve the debt and they will be at the mercy of the borrowers. The conversion of debt into equity at a discount and a time-bound resolution are the positive aspects of the RBI circular that the Supreme Court could have retained. RBI can now appeal to the apex court to retain these aspects of the circular." The debt-conversion clause in the circular had boosted the case of the banks. "By virtue of the verdict, the conversion of shares at a discount to banks will be challenged. The transfer of the said shares can also be challenged. The verdict may, therefore, compel banks to take corrective action to transfer valid title (shares or otherwise) to interested buyers. This might have an impact on cases like Jet Airways," said Markand Joshi, partner MMJC and Associates LLP, a corporate compliance firm. Following the SC order, big loan-defaulting companies can now avoid being mandatorily pushed into bankruptcy. A senior banker said, "Mandatory reference will go away. It will delay resolutions for sure for close to Rs 3.8 lakh crore stressed assets, particularly in the power, sugar and shipping sectors. Now RBI will have to come out with appropriate notification on how to deal with this debt. Earlier, once the resolution plan was in place, we were getting RBI approval." The apex court's judgment will not just be positive for the power, shipping, textile and sugar companies but also other biggies who are sitting on a mountain of debt and are in the process of being referred to the National Company Law Tribunal (NCLT). In a strongly worded verdict, the two-judge bench of Justice Rohinton Fali Nariman and Justice Vineet Saran declared RBI's February 12 circular to be "ultra vires". Banks will no longer be under pressure to refer cases to the NCLT for being tried under the Insolvency and Bankruptcy Code, 2016 (IBC). They can now exercise their discretion in referring to accounts for insolvency. "No bank will have the guts to pull any of these out of the NCLT. The borrowers, on the other hand, will now have the right to appeal against our action," said another banker. With the RBI striking down all the earlier restructuring schemes like Strategic Debt Restructuring in favour of the February 12 circular, banks will now have to come out with their own resolution plans. Under the circular, companies which were unable to implement a resolution plan by August 27, 2018, were scheduled to be referred to NCLT under IBC by September 11. It was applicable to all loan accounts of over Rs 2,000 crore, leaving IBC as the only mechanism to deal with stressed accounts. Abizer Diwaji, partner & national leader financial services, EY, expressed surprise at the judgment. "We believed that the circular was sound. As of now, we have no RBI-backed scheme to restructure debt," he said. Added Hari Hara Mishra, director UV ARC, "It is back to the banks again. Having gone through the rigours of the last 14 months, bankers will hopefully continue to address non-performing assets (NPAs) on a war footing through a flexible process in deserving cases. RBI may come out with some initial response in the first bi-monthly policy on April 4." According to the circular, lenders had to classify a loan account as stressed if there was even a day of default. The bankers had to mandatorily refer all accounts with over Rs 2,000 crore loans to the NCLT or the bankruptcy court if they failed to resolve the problem within 180 days of default and implement the resolution plan in another 90 days. WHAT IS FEBRUARY 12, 2018 CIRCULAR? A revised framework on resolution of stressed assets It invalidated all other resolution mechanisms Asked banks to mandatorily recognise even one-day defaults Banks were asked to resolve the account in 180 days, failing which they had to take the borrower to NCLT for bankruptcy proceedings It was for large accounts of Rs 2,000 crore and above The circular also withdrew earlier restructuring schemes, including CDR, SDR and S4A RattanIndia, Coastal Energen, KSK Energy, Meenakshi Energy are some of the ailing power plants that can escape from a time-bound resolution Around Rs 3.8 lakh cr – Total debt impacted due to the circular (across 70 large borrowers), as per an earlier estimate by Icra, of which Rs 2 lakh cr – Is across 34 borrowers in power sector 92% – Of debt was already classified as NPAs as of March 2018 Source: https://www.dnaindia.com/business/report-supreme-court-verdict-deals-blow-to-banks-npa-recovery-efforts-2735866 I hope we can keep this free of any political bashing.