Illustration: Binay Sinha
Insolvency concerns might have caused further distress in a large number of infrastructure companies but the power sector is being dealt with by the government differently. The financial stress in the sector has, in fact, brought to fore a rare instance of a regulator and the government taking a different stand on an issue of utmost industry importance.
For the steel sector, however, the Union government never took any visible stand opposing the June 13, 2017 notification of the Reserve Bank of India (RBI), despite protectionist measures by the Centre that had led to improved market conditions for five steel companies that were impacted by the circular. There is clearly a special dispensation, which is being sought by the government for power companies. This includes a 180-day window for 12 stressed power companies that will otherwise automatically get onto the insolvency route after August 27.
Punit Dutt Tyagi, executive partner, Lakshmikumaran & Sridharan Attorneys, says, “The government is attempting to shield the power sector from the implications of the RBI circular, while the regulator has refused to change its stance. The most likely reason for this appears to be that while the government has the flexibility to look beyond the letters of a policy or a circular, the RBI being the regulator has to restrict itself to the policy decisions only.” This, he feels, is because the government has to look at the bigger picture and thus believes that keeping the power sector out of the ambit of the circular is a better decision.
Another reason, according to him, could be that the RBI is “hesitant to set a precedent which can be misused in the future to dilute the essence of the Insolvency and Bankruptcy Code (IBC)”.
Power is one of the most financially stressed sectors, with a potential non-performing asset of Rs 2.6 trillion. Insolvency in this sector could create a buyer’s market where banks could be left dealing with even bigger haircuts than in steel.
Private producers had filed a case against an RBI circular of February 12, 2018, in the Allahabad High Court. Accepting the view of power producers, the government, too, submitted before the court that the RBI should give six months (180 days) more for the resolution of cases where debt restructuring was currently going on. The government said future buyers will continue to face issues of low power demand, lack of reliable coal supply and non-payment of dues unless the high-level committee formed under the Cabinet Secretary succeeds in tackling them.
The government stand in the court came despite RBI representatives repeatedly turning down the request in their meetings with the Department of Financial Services and the Ministry of Power.
The government fears that some more projects may also come in the stressed category. Besides 34 coal-based power plants, there are around 10 gas-based plants with a capacity of more than 6,000 MW that are under stress, primarily because of lack of availability of natural gas.
The High Court on May 31 had put on hold action against the power sector under an RBI circular issued in February. The court also directed the finance ministry to hold meetings with stakeholders and find a solution outside the RBI’s resolution process. Following the meetings, the department of financial services prepared a report that sought an extension for 12 power plants.
In its submissions to the court on August 9, the RBI maintained that resolution of stressed assets through this route (the February 12 circular) was a commercial decision taken by it and lenders that are regulated by it, and, therefore, the judiciary should not be “thrust” upon with a decision. It also dismissed the argument of other parties by saying that there was no category of “genuine defaulters” in law.
A policy and regulatory confusion?
It has panned out to be a case where the government as a creator of the IBC is seeking an exemption, though the legislation was intended to create an ambient financial market by bringing out stressed asset from the books of financial institutions. Though not a regulator of the IBC per se (Insolvency and Bankruptcy Board of India is the IBC regulator), the RBI is responsible for the health of financial market in the country.
Tyagi, however, sees no immediate implication of the contradictory stand on the IBC as yet but says it definitely creates uncertainty. “When the sector regulator is at loggerheads with the government on major policy decisions, the corporations and other stakeholders are left clueless.”
He says the RBI is known to assert its independence as a strong regulator which refuses to toe the line of the government. “It is not an indication of a regulatory confusion. In fact, these differences provide an opportunity where diverse perspectives, posed by the RBI and the government, respectively, eventually balance out, resulting in an optimum solution.”
Whatever be the outcome in the Allahabad HC, the losing side in all probability will appeal against it. So just like everything else in the power sector, a resolution of financial distress is no way possible in the coming few months.
What triggered the face-off?
The RBI on February 12 issued a revised framework for the resolution of stressed assets. Resolution process outside of the IBC halted with the exception of MSMEs and those where the change of ownership has already happened. Defaulting accounts put in three types of Special Mention Accounts, based on the number of days for which an account was overdue. The circular is applicable to accounts with aggregate exposure of Rs 20 billion and above on or after March 1, 2018, and if resolution plan is not implemented under the following timelines: (i)If default is on the above date, then 180 days from the reference date, (ii) If default after the date, then 180 days from the date of first such default
Lenders required to file insolvency case within 15 days from above timelines if resolution plan is not implemented. There shouldn’t be any default after implementation of resolution plan till 20 per cent of outstanding principal debt has been paid