SC holds ultra vires RBI’s February 12 circular mandating insolvency proceedings

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The judgment is a relief for stressed industries, including those in the power and sugar sectors.

The Supreme Court on Tuesday declared the Reserve Bank of India circular of February 12, which mandates insolvency proceedings for a debt servicing default beyond 180 days, to be ultra vires.

A Bench of Justices Rohinton F. Nariman and Indu Malhotra pronounced the judgment meant to be a relief for stressed industries, including those in the power and sugar sectors.

On September 11 last year, the court had transferred the cases against the RBI circular pending in various high courts to it.

The apex court had also ordered that insolvency proceedings not commence against the defaulting companies.

The circular, in a bid to efficiently realise bad loans, is part of a revised RBI framework.

The power companies have argued that the provision was unfair as their debt repayment capacity was directly linked to revenue from power distribution companies and availability of coal, a natural resource closely regulated by the State.

The RBI circular gave a revised framework for resolution of stressed assets in the economy.

“In view of the enactment of the Insolvency and Bankruptcy Code, 2016 (IBC), it has been decided to substitute the existing guidelines with a harmonised and simplified generic framework for resolution of stressed assets,” the RBI said.

If a resolution was not found by August 27, NPA accounts should be sent to bankruptcy courts, the circular said.

The banks have exposure of around ₹1.74 lakh crore to stressed power assets.

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