The Supreme Court ruling voiding the Reserve Bank of India’s circular on treatment of defaults could affect the pace of corporate insolvency resolution and impact ongoing efforts to restructure loans of many companies including that of Jet AirwaysNSE -5.00 %, bankers said.
Senior bankers said the ruling may also lead to more litigation as promoters of stressed companies challenge such restructuring citing the court order.
Corporate restructuring proposals including that of Jet Airways may have to be abandoned as they are based on last year’s February 12 circular which has been held ultra vires to the Constitution.
The circular — which became a major bone of contention between the government, the RBI and the corporate sector — instructed banks to start negotiations for restructuring after a default of even one day and complete such discussions within 180 days, failing which the company will have to be admitted to the bankruptcy court.
Since the order deals with the RBI’s powers to direct banks with a general order on resolving defaults, it could open a new avenue for promoters unwilling to part with their assets to try and challenge banks’ decisions, said bankers and lawyers.
“We had travelled quite a distance in resolving debt of large borrowers. It will be unfortunate if the effort and time we had put in over the past year do not yield any result. We are examining the issue closely,” said the CEO of a state-owned bank.
Many cases that were referred to the bankruptcy courts using the RBI circular may become null and void, bankers and legal experts told ET.
Lenders were upbeat about the prospects of better recovery from the accounts referred to the National Company Law Tribunal, especially those accounts that went to the bankruptcy courts following the RBI circular.
The SC judgment has effectively invalidated any reference in terms of the insolvency code made under this circular. The apex court has clarified that the government has given powers to the RBI to direct banks to refer to NCLT only specific cases (where there is a default), such as the first 12 large cases, said Mehul Bheda, partner in Mumbai-based Dhruva Advisors.
Bankers will hit the drawing boards in a day or two to understand the nuances of the verdict, said people familiar with the matter.
“Voiding of the February 12 circular is credit-negative for Indian banks. The circular had significantly tightened stressed loan recognition and resolution for large borrowers.
But with the voiding, this may now have to be watered down,” said Srikanth Vadlamani, vice-president, financial institutions group, Moody’s Investors Service.