Will The Government Invoke A Rare Provision To Sidestep RBI’s Feb. 12 Circular?

Government should issue directions to RBI only on substantive reasons, says SS Mundra.

The North block of Central Secretariat building that houses the Ministry of Finance and Ministry of Home Affairs, in New Delhi, India.
The North block of Central Secretariat building that houses the Ministry of Finance and Ministry of Home Affairs, in New Delhi, India.

The Reserve Bank of India’s Feb. 12 circular on stressed assets has become a flashpoint between the government and the country’s banking regulator. So much so, that there is now a possibility that the government may consider invoking a so-far unused provision in the RBI Act, to force the RBI to dilute the circular for the power sector.

The Feb. 12 guidelines essentially asked banks to take all large accounts above Rs 2,000 crore into bankruptcy if a resolution plan is not agreed upon in 180 days.

The government has been arguing that the power sector needs special forbearance due to the large number of stressed projects and low investor interest. The RBI has so far stood its ground and maintained that the guidelines are sector agnostic.

On Tuesday, the Allahabad High Court denied interim relief in response to a plea by independent power producers. However, the court requested the central government to begin consultations with the RBI under Section 7 of the RBI Act, according to a lawyer present in the courtroom.

According to a copy of the order uploaded on Tuesday morning, the court asked the government to consider initiating the consultative process under Section 7 and conclude it within 15 days.

The central government shall consider initiation of the consultative process contemplated under Section 7 of RBI Act, and conclude the same within 15 days from today.
Allahabad High Court Order

Interestingly, the option of invoking the section 7 was brought up by the RBI counsel, who pointed out that the government could have chosen to take a view under the provision but had not done so yet.

What Does ‘Section 7’ Say?

Section 7 of the RBI Act gives the government broad powers to give directions to the RBI in public interest.

It reads: The Central Government may from time to time give such directions to the Bank as it may, after consultation with the Governor of the Bank, consider necessary in the public interest. 

The Allahabad High Court, in its order, noted that it is faced with the competing views of two organs of the State. The order said that it is for the government and the RBI to “evolve a consensual position.” It then went on to say that Section 7 of the RBI Act was perhaps intended for use in such situations.

It is perhaps for this very purpose that section 7 appears to have been placed on the statute book. The Union rather than being non committal and leaving it to the Court to resolve such differences must no longer remain ambivalent or inert. It must consider and decide whether the consultative process should be initiated. In any case it cannot be permitted to strike a discordant note before this Court and yet remain undecided on whether to initiate the process envisaged under section 7.
Allahabad High Court Order

According to former RBI Deputy Governor SS Mundra, the section has never been used so far and the government can invoke it only for “substantive” reasons. Since the section has never been invoked, it is not clear what process consultations under that provision of the RBI Act will follow.

“It could be that the government meets with the RBI Governor and then the government has to put its foot down and carry its mandate forward. Which is why I said that this has to be for substantive reasons,” Mundra told BloombergQuint in a conversation. Otherwise, it would be akin to the government impeding on the RBI’s autonomy, he added.

Is The RBI’s Stand Justified ?

Mundra believes that the RBI is well within its rights to issue new stressed asset directions which apply to all sectors. This is particularly because last year the RBI Act was amended giving the regulator explicit powers to direct banks to initiate bankruptcy proceedings against defaulters.

The government cannot claim to be an aggrieved party because the RBI exercises its powers, especially after it gave the said powers to the regulator.
SS Mundra, Former Deputy Governor, RBI

However, he added that the power sector is in extreme stress and could be seen as a special case.

According to the former deputy governor, if the power sector assets were to be referred for insolvency in the current conditions, most would go into liquidation. “This is not a fair thing to happen. All things said and done, I believe the power sector deserves another chance,” Mundra said.

Mundra suggests that for power projects the RBI could consider an extension of the timelines prescribed for resolution under the Feb. 12 circular.

About 66 gigawatts of conventional energy is under various degrees of financial stress, according to a report by the Parliamentary Standing Committee on Energy. According to the report, non-performing loans and slippages of the power sector exceeded Rs 1.8 lakh crore as of March.

Private power producers and the Ministry of Power have attributed the stress in the sector to delayed payments by discoms, lack of power purchase agreements and irregular coal supply.

“You can go to NCLT and get all these companies go through the process and get massive haircut for banks, but how will the new owner get a PPA? How will he get paid? How will he get the systemic problems bedeviling the power sector sorted out,” asked Harry Dhaul, director general of the Independent Power Producers Association of India in an interview with BloombergQuint.

The country needs these power projects, Dhaul argued.

The story has been updated with excerpts of the Allahabad HC order, uploaded on Tuesday morning.