The Supreme Court on Tuesday quashed a Reserve Bank of India circular asking banks to classify a loan account as stressed if there was even a day of default, Live Law reported. The top court declared the circular unconstitutional and ultra vires.
A bench of Justices Rohinton Fali Nariman and Vineet Saran pronounced the judgement while hearing a batch of petitions challenging the RBI circular. More than 75 companies are facing insolvency proceedings because of default in payments, The Times of India reported.
In February 2018, the RBI put out a circular on classification of non-performing assets that required banks to refer any account with a loan of more than Rs 2,000 crore to bankruptcy court if it is not resolved within 180 days of a default. The decision caused panic for many companies, in particular those in the power sector. Industry and government have tried to push for RBI to relax its regulations, and had even approached the Allahabad High Court, which then suggested that the government could use Section 7 of the Reserve Bank of India Act to modify the order.
In March, the RBI had stated that it maintains its stand on all aspects of the revised framework on resolution of stressed assets as per the 2018 order.
Several companies including power firms such as Essar Power, GMR Energy, KSK Energy, and Rattan India Power, and The Association of Power Producers and Independent Power Producers Association of India had in August moved the Supreme Court, challenging the constitutional validity of the RBI’s February 12 circular.
The power companies, in their pleas, had alleged that the central bank’s order was based on a “one-size-fits-all” approach without considering the reasons for non-payment. The companies had also stated that they have been facing stress due to factors beyond their control, such as lack of availability of fuel and cancellation of coal blocks, Bar and Bench reported.