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In A Relief To Power Companies, Supreme Court Cancels RBI's February 12 Circular

Supreme Court held the RBI's February 12 circular ultra vires and unconstitutional which came as a big relief to power companies.

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In A Relief To Power Companies, Supreme Court Cancels RBI's February 12 Circular

The 180-day cap for finding a resolution plan has been struck down by the Supreme Court.


Highlights

  1. Supreme Court held Feb. 12 circular ultra vires and unconstitutional
  2. The 180 day cap for finding a resolution plan has been struck down
  3. Power firms had sought intervention of the Supreme Court

The Supreme Court today declared a February 12 circular by the Reserve Bank of India, which aimed at resolution of stressed assets in the banking system, as unconstitutional. In the circular, the central bank laid out timelines and revised the framework for resolution of stressed loan accounts. The RBI called for a resolution plan to be implemented in case a company with a loan amount of Rs 2,000 crore or more defaulted on its dues even by one day. According to the RBI circular, the banks were given 180 days from the first date of default to implement a resolution plan. If the companies failed to comply with the guidelines, the loan account would have to be referred to Insolvency and Banking Code (IBC).

Also Read: Banks May Have To Allot Rs 40,000 Crore More For Bad Debt: India Ratings

The Supreme Court held the RBI's February 12 circular as "ultra vires and unconstitutional" which came as a big relief to power, shipping, sugar and textile companies.

Several companies, especially power firms, had sought intervention of the Supreme Court saying the time given by the central bank was not enough to tackle the debt issue.

The 180-day cap for finding a resolution plan has been struck down by the top court today and now companies can approach banks for debt settlement without the fear of insolvency.

The power companies first approached the Allahabad High Court, which declined any relief, and then the Supreme Court. The top court transferred all the petitions pending in different high courts on the same issue to itself.

Essar Power, GMR Energy, KSK Energy and Rattan India Power challenged the circular, along with the Association of Power Producers (APP) and the Independent Power Producers Association of India.

Also Read: Government To Focus On Public Debt Management: Economic Affairs Secretary

The power companies told the Supreme Court that the February 12 circular is of a one-size-fits all approach, which seeks to condemn power companies for factors beyond their control.

The companies also said that there is systemic failure in this highly regulated sector, wherein uneconomic tariff determination leads to distribution companies being unable to recover dues from customers, leading to huge under-recoveries for power generation companies.

Coal India is unable to meet coal requirements and power generation companies are left to source the fuel internationally, at higher costs, power companies said.

Despite government assurances, the supply of gas to gas-based power plants is nil on account of preferential allotment to fertiliser companies and city gas distribution networks, they added.



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