Five Accounts Which Get A Breather From Supreme Court’s Ruling On RBI Feb.12 Circular

BloombergQuint spoke to analysts and bankers to understand which accounts may benefit from the apex court’s relief. 

Guru Nanak Dev Thermal Plant, a thermal power station, dominates the skyline of Bhatinda, Punjab, India. (Photographer: Prashanth Vishwanathan/Bloomberg)
Guru Nanak Dev Thermal Plant, a thermal power station, dominates the skyline of Bhatinda, Punjab, India. (Photographer: Prashanth Vishwanathan/Bloomberg)

The Supreme Court’s decision to quash the Reserve Bank of India’s February 12 circular on stressed asset management will bring relief to several large companies, which were otherwise staring at insolvency proceedings.

According to rating agency ICRA, as of September 2018, nearly 70 borrowers with bad debt worth over Rs 3.8 lakh crore, could have eventually being referred for insolvency due to provisions of the Feb.12, 2018 circular. The circular gave banks 180 days from the first day of default to resolve stress in an account or initiate insolvency.

The Supreme Court has struck this down.

While the court’s order will have no impact on the classification of a stressed account as a non-performing asset or on provisions that banks need to set aside, it will give more time and discretion to banks on finalising a resolution plan. Any eventual referral for insolvency proceedings is also no longer time-bound.

The relief will be seen across large power firms, who first challenged the RBI’s circular, and also firms like Jet Airways, where banks are attempting to put a resolution plan in place. BloombergQuint spoke to analysts and bankers to understand which accounts may benefit. The list presented below is based on these conversations and is not exhaustive.

India’s Struggling Power Producers Welcome Supreme Court’s Debt Ruling

Jet Airways

The airline has a debt of around Rs 10,000 crore and reported its first default in January this year. As part of the resolution plan, lenders to the company took over 50.5 percent stake in the airline, with a view to sell their stake to a potential buyer in the coming months.

As per the RBI circular, banks would have had to finalise a resolution plan for the airline by June if they wanted to avoid insolvency proceedings. With the SC quashing the circular, bankers have more time. However, bankers may need to rework some of the precise provisions of the restructuring plan since they were finalised using provisions of the Feb.12 circular.

The airline needs around Rs 3,500 crore in additional funding from the potential buyer. BloombergQuint reported last week that SBI has reached out to the Tata Group and TPG Capital to invest in the indebted airline.

Lalitpur Power Generation Co.

The Shishir Bajaj Group’s 1,980-megawatt thermal power project in Lalitpur, Uttar Pradesh, has been facing issues for several years.

In 2014, lenders tried to find a resolution for the account using the Joint Lenders Forum. Subsequently, restructuring was attempted under the Sustainable Structuring of Stressed Assets or S4A scheme in 2017. However, no headway was made.

Analyst reports say that the company faces large delays in repayment of dues from the Uttar Pradesh Power Corporation Ltd., impacting its cash flows. As a result, the power producer’s ability to service debt continued to deteriorate. Its total debt stands at over Rs 17,700 crore.

KSK Mahanadi Power Co.

A former subsidiary of KSK Energy Ventures, KSK Mahanadi Power, has a total debt of Rs 15,702 crore. It operates a 3,600 MW thermal power plant in Chhattisgarh, which sells power to Gujarat, Andhra Pradesh, Chhattisgarh, Tamil Nadu and Uttar Pradesh.

Delayed repayments from state-owned power distributors led to cash flow strains for the company and it could not purchase sufficient coal. That, in turn, led to reduced power supply to discoms.

The company is one of seven power producers referred under the Samadhan scheme for stressed asset resolution. While the Gautam Adani-led Adani Group bid for the asset, it later withdrew the offer.

Jaiprakash Power Venture

Set up in 1994, Jaiprakash Power Venture has an aggregate capacity of 2,220 MW comprising hydro (400 MW) and thermal (1,820 MW) power plants across the country. It owes banks Rs 14,000 crore.

In its recent filings, the company said insufficient availability of coal and non-availability of long-term power purchase agreements led to consecutive years of losses.

Last year, lenders tried to sell near 50 percent stake in the company but there was a lack of interest from buyers. It was then referred for restructuring under the Samadhan scheme but a resolution plan has not been finalised yet.

Lanco Amarkantak Power

With a total debt of over Rs 11,000 crore, Lanco Amarkantak Power operates thermal plants with an installed capacity of around 600 MW in Chhattisgarh.

In August 2018, Axis Bank Ltd. moved the National Company Law Tribunal in Hyderabad against the company over a claim of Rs 920 crore. The bank had classified the account as “doubtful” in May 2018.

According to the website of the Insolvency and Bankruptcy Board of India, the company is yet to be admitted under the insolvency process. It is unclear whether the insolvency process would be derailed due to the scrapping of the Feb.12 circular since banks still have the discretion to refer an account to insolvency.

What Experts Say

A large part of the resolution process could still be applicable under the bankruptcy code, Jindal Haria, associate director at India Ratings and Research, said. “We don’t think this will have a material impact on the non-power sectors’ assets that are under resolution,” he said. “For the power sector, the lenders can still work on resolutions but the process would take longer and will be more litigious than the process under the Feb. 12 circular.”

A senior public sector banker said the RBI’s Feb. 12 circular had introduced a lot of rigidity, citing the example of Anrak Aluminium Ltd. Promoters were willing to settle at 50 percent of the outstanding loan amount, but the RBI insisted that since the 180-day deadline has passed, the account had to be referred for insolvency proceedings. Hopefully, there will be more flexibility now, this banker said.