Smoke rises from a chimney at a thermal power station in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

No Interim Relief For Power Producers From RBI’s Stricter Debt Resolution Norms

Lenders will be allowed to initiate insolvency proceedings against power producers, which didn’t get an interim relief from the Allahabad High Court against the Reserve Bank of India’s stricter debt resolution framework.

The high court will pass no interim order at this stage, it said at today’s hearing. Petitioners are free to approach the court separately after putting the matter and facts on record, it said. The order will not inhibit financial creditors to proceed under section 7 of Insolvency and Bankruptcy Code, the court said.

Private power producers wanted the RBI to allow special relief as the central bank’s Feb. 12 circular laid down strict timelines after which insolvency proceedings are to be initiated. Banks were told that they must start working on a resolution plan even if an account is overdue by a day. Failure to come up with a solution in 180 days would lead to initiation of insolvency proceedings. The deadline since the March 1 implementation ended on Aug 27.

“You won’t really achieve anything by going through the Insolvency and Bankruptcy Code’s NCLT process,” Harry Dhaul, director general of Independent Power Producers Association of India, told BloombergQuint, adding that the problem lies in systemic issues that built up over the years. “You can go through this [NCLT] process… where you will end up with a haircut of maybe Rs 4-5 lakh crore” but haircuts won’t solve the problem till the systemic issues are resolved.

Consultations Under Section 7 Of RBI Act

The Allahabad High Court asked the central government to begin a consultative process with the RBI under Section 7 of the RBI Act. That section gives the government broad powers to give directions to the RBI in public interest. It has almost never been used to push the regulator to alter its banking regulations.

The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest.   
Section 7 (1) Of RBI Act

Also read: Will The Government Invoke A Rare Provision To Sidestep RBI’s Feb. 12 Circular?

Feb. 12 Circular: A Flashpoint

The Feb. 12 circular has become a flashpoint between the government and the RBI because of its implications for the health of PSU banks and government-owned power financiers.

About 66 gigawatts of conventional energy is under various degrees of financial stress, according to a report by the Parliamentary Standing Committee on Energy. It said non-performing loans and slippages of the power sector exceeded Rs 1.8 lakh crore as of March.

Private power producers and the Ministry of Power have attributed the stress in the sector to delayed payments by discoms, lack of power purchase agreements and irregular coal supply. Power generation companies want the RBI to extend the 180-day deadline, a demand that the central bank has rejected. The RBI had reiterated that it won’t relax norms exclusively for one sector.

The lenders were hoping for a 180-day extension given the complexity of the factors related to the stress on the power sector, PV Ramesh, chairman at state-run Rural Electrification Corporation Ltd. said after the Allahabad High Court order. “We were disappointed that this time it’s not been granted. We will have to now go through the process that has been laid out under the law.”

The RBI had moved the Supreme Court on Aug. 8, seeking to club all pending petitions against its Feb. 12 circular on bad loans and seek a stay on Allahabad High Court proceedings. The top court, however, denied interim relief and posted the matter for Aug. 28.