Transmission towers stand partially under water. (Photographer: Prashanth Vishwanathan/Bloomberg)

From Power Firms To Government-RBI Relations — Implications Of The Allahabad High Court Order

The Allahabad High Court, on Monday, quashed a plea by India’s private power firms to protect them from the Reserve Bank of India’s new stressed asset rules. The rules ask lenders to refer defaulting firms for insolvency proceedings within 180 days if a resolution plan is not worked out.

In its order, the Allahabad High Court, denied interim relief to the power companies. The court put the onus on the government to bring the matter to a final conclusion by beginning a ‘consultative process’ with the RBI under Section 7 of the RBI Act, which allows the government to give directions to the regulator in ‘public interest.’

The central government shall consider initiation of the consultative process contemplated under Section 7 of RBI Act, and conclude the same within 15 days from today.  
Allahabad High Court Order

What Does This Mean For The Power Sector?

The immediate implication for the power sector is that a number of stressed firms may need to face insolvency proceedings, unless a resolution plan is finalised within days.

The RBI’s new stressed asset circular was released on February 12. As a result of this, firms that had delayed payments by even a day as on March 1, came under its purview. The 180-day resolution period for these firms ended this week.

The country’s largest lender State Bank of India is working with a list of 23 power companies, BloombergQuint reported on Monday. Of these, seven accounts are likely to be resolved outside the purview of the Insolvency and Bankruptcy Code (IBC). Others will likely face insolvency proceedings.

However, unlike in the case of steel firms, which have seen strong investor interest, the concern is that a number of power assets may eventually face liquidation. “If some of these power assets were to go to NCLT in the current form, barring a few, most would go to liquidation,” SS Mundra, former deputy governor of the RBI told BloombergQuint.

To avoid this, individual power firms can try and resolve their individual cases. “There is provision within the IBC will allows for resolution to be done with consent of 90 percent of the lenders. I think that provision will be back in focus,” said L Viswanathan of Cyril Amarchand Mangaldas. “Several cases where plans were in preparation, I would expect stakeholders to try and close resolution and implement it,” Viswanathan told BloombergQuint.

A wider system-wide solution could be to look at a government or public sector funded asset reconstruction company, specific to the power sector, said Bank of America Merrill Lynch in a report on Tuesday.

We expect Delhi to form a PSU power ARC to manage banks’ power non-performing loans either directly or via a backstop to bids invited by the NCLT. This has been recommended by both RBI deputy governor Viral Acharya in the past as well as the recent Sunil Mehta committee.
BofA-ML Report

What Does This Mean For Lenders?

For banks and lenders to the power sector, the Allahabad High Court judgement would mean some addition to the stressed asset burden.

While a number of these stressed power projects were already tagged as non-performing assets, the fact that these assets would go into insolvency raises the risk of larger haircuts.

“This is challenging for banks, but the matter was under consideration and part of recognition and provisions have largely happened over last few quarters or factored in the watchlist and stress pool,” said brokerage house Edelweiss in a report on Tuesday. “While the RBI’s circular is not directly applicable to infra lenders, they too would be affected due to their participation as consortium members,” the report added.

According to the latest report of a standing committee, 34 stressed power assets have outstanding loans of Rs 1.8 lakh crore.

Edelweiss noted that while banks have a window to get a resolution plan in place, there are several challenges including:

  • A resolution must be found in next 15 days while bringing every lender on board, which is challenging given current risk adverseness.
  • Uncertainty on power purchase agreements, if account is referred to NCLT.
  • Lack of potential bidders given sheer capacity that will come up for bidding and prohibition of promoters from participation.
  • Efficiency of NCLT as progress till date has been slower.

Also read: At Least 60 Stressed Firms Set To Face Insolvency Action Starting September

What Does This Mean For Government-RBI Relations?

The trickiest part of the situation may be the tight-rope that the government must now walk on managing relations with the RBI.

The Allahabad High Court, in its order, noted that it is faced with the competing views of two organs of the State. The order said that it is for the government and the RBI to “evolve a consensual position.” It then went on to say that Section 7 of the RBI Act was perhaps intended for use in such situations.

  It is perhaps for this very purpose that section 7 appears to have been placed on the statute book. The Union rather than being non committal and leaving it to the Court to resolve such differences must no longer remain ambivalent or inert. It must consider and decide whether the consultative process should be initiated. In any case it cannot be permitted to strike a discordant note before this Court and yet remain undecided on whether to initiate the process envisaged under section 7.
Allahabad High Court Order

“Section 7 of the RBI Act is essentially a section pertaining to management and the power has been given to the central government from time to time to give directions to the RBI after consultation with the governor of the bank provided it is necessary for public interest,” Shardul Shroff, chairman of Shardul Amarchand Mangaldas & Co. explained.

The court has construed it, saying that two central organisations of the country cannot have an ongoing dispute and that they must have a dialogue, he told BloombergQuint in an interview. “If you disagree, the decision still lies with the Reserve Bank of India. That's what the court says,” he said.

If the government does direct the central bank in any way, “it will affect the autonomy of the RBI and that's something the government is not likely to do,” he added.

L Vishwanathan added that whether to invoke Section 7 or not is a “delicate question” that the government will have to answer. “I think the government has a larger role. They have to balance the interest of all the stakeholders,” he said.