Supreme Court sets aside RBI's February 12 circular on bad loans, calls it 'unconstitutional'

In what has come as a big relief to power, shipping, sugar and other companies, the Supreme Court (SC) Tuesday struck down a February 12, 2018 circular of the Reserve Bank of India (RBI) on defaulting firms, declaring it unconstitutional and ultra vires (acting or done beyond one's legal power or authority.)

"We found RBI's February 12 circular to be ultra vires," the apex court ruled. The RBI circular mandated banks to take the defaulting companies to insolvency.

The two-judge bench of Justice Rohintob Fali Nariman and Justice Vineet Saran pronounced the judgement. More than 75 companies are facing insolvency proceedings owing to payment defaults.

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Essar Power, GMR Energy, KSK Energy, Rattan India Power, Association of Power Producers (APP) and Independent Power Producers Association of India (IPPAI) moved Supreme Court in August last year to challenge the constitutional validity of the RBI circular.

The SC had stayed the circular in September last year which directed the banks to report any loan account of over Rs 2,000 crore under the Insovency and Bankruptcy Code (IBC) if it was not resolved within in 180 days of default. The asset would be taken to the National Company Law Tribunal (NCLT) to initiate insolvency proceedings against the defaulting companies.

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However, the circular did not discern between the companies which questioned poor management and the ones which challenged Non Performing Assets (NPAs) owing to external aspects and factors out of their control.

The circular also pressed a one-day default rule meaning the banks would have to announce a company as a defaulter and a loan account as stressed even if it missed out on the repayment schedule by a day.

RBI Governor Shaktikanta Das had in February 2019 refused to dilute the February 12 circular and said that there would be no changes to it.

"It is reiterated that the RBI maintains its stand on all aspects of the framework as has been consistently articulated in its communications, including the clarification given during the post-monetary policy press conference on Feb. 7, 2019," the central bank said in a statement.

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