In a blow for power companies, Allahabad High Court refused to give any interim relief to the firms on the Reserve Bank of India’s (RBI) resolution of big-ticket non-performing assets (NPA).

The order will affect as many as 80 large borrowers as the 180-day grace period granted by RBI ends today. The power firms will now face the bankruptcy tribunal.

The high court mandated initiating of insolvency proceedings by lenders against defaulting projects of companies. The court has asked the centre to decide and take action under section 7 of the RBI Act within 15 days on power companies.

Allahabad HC also asked high-level empowered committee on power to decide within two months on the resolution in consultation with RBI.

Harry Dhaul, DG, Independent Power Producers Association of India (IPPAI), Ravi Krishan Takkar, MD and CEO UCO Bank, SS Mundra, former deputy governor, RBI, R Gopalan, former secretary, department of economic affairs, Suharsh Sinha, senior associate AZB & Partners, Cyril Suresh Shroff, managing partner at Cyril Amarchand Mangaldas, Sunil Srivastava, former deputy MD SBI discuss the verdict.

How have you understood, right away from August 28 you will be free to take any of the power companies to the National Company Law Tribunal (NCLT) if you choose?

Takkar: As far as the RBI circular of February 12 goes, we had already started taking the call. As a banker, we had been meeting so that some of these can be worked out. We had already taken a decision on which cases we will be going to NCLT and in other cases, there were some buyers, out of those 3 or 4 cases we have already by and large given the approval and new buyer would be stepping in.

Now as far as this Allahabad High Court judgement is concerned it has given us some relief, we definitely got some more time. But now we have to follow the RBI circular and all the cases which have not been resolved, banks will have to take a call to refer to NCLT.

Tell us what you will do in this scenario? The judgement is very clear, there is no interim relief for the power companies, will you go ahead and file these cases in NCLT? Are you hopeful of a better recovery through that process?

Takkar: We have already analysed various cases and in a few cases things were under negotiations with the buyers. Now the problem is in those cases things haven't crystallised and we would have no option now in view of this decision to have any buyout or something like that.

So, we have to go to NCLT. The issue is that as a banker's point of view I am not worried so much about my provisions which I am already providing for but once many cases which have power purchase agreements (PPA) go to NCLT, the electricity boards may cancel it because of value of these projects will go down substantially and in that case the haircut can be substantial.

What are your thoughts, you think banks will simply have to do the bidding?

Mundra: From whatever I have heard, a couple of things I would like to say. The whole discussion has centred more around the power sector but the fact of the matter is that in terms of February 12 circular, all the cases which are falling in that category have to go to insolvency and bankruptcy code (IBC).

The question here is whether differentiation can be done within the sector, that was something which was already in discussion for a long time and I think the RBI has maintained its view that there can't be a sectoral dispensation, all that is well known.

The only thing from what I just heard, I am not very sure but from whatever I recollect, Section 7 of RBI Act which is being referred to, probably the section contains the power of central government to give the directive to the RBI, I think so, I may be wrong. That being the case and as far as I know, this particular section has never been invoked by the central government in giving direction to the RBI.

If Section 7 is that and that is what the judgement is alluding to then does it mean that central government has to give a direction to the RBI and then all other things are falling in place, I think High Powered Committee (HPC) is already in place, consultations have already taken place and as very rightly said this is a much larger issue which would need to be resolved by many parts of the system to move. So, I think all that being put together, from whatever I see nothing has changed as of today.

Section 7 says, "The central government may from time to time give such directions to the Reserve Bank of India as it may after consultation with the governor, consider necessary in the public interest." So, as you said this provision has never been used but even if such a directive is given it is in consultation with the governor. So, I guess the court is only asking the governor and the government to consult with each other.

Mundra: Exactly.

I remember earlier this month you said even if you are talking about exemptions in the February 12 circular, perhaps power is not even the most deserving sector. Do you still stand by that view?

Mundra: I did not say that power is not the most deserving sector. I said that there may be sectors who are also having equal kind of problems or who may be more serving.

The essential point what we are discussing here, this is something which can be dealt with only if everyone involved will have to rise above the legalities. Within the legal framework as the things stand today, it is quite clear there is not much to debate about it.

Coming to the question that this was always known and if nothing has happened, what can happen in next two months, I have only one view on that, that so far these things were being handled in the typical way as these things are dealt with and probably the efforts were always to postpone the problem.

However, I think in recent past there had been clearly a very heightened awareness about it and about the enormity of the problem and the consequences probably are now being felt more intensely than they were ever done.

So, putting all that in perspective, rather than everyone trying to protect their turf very strongly, if one chance can be given with a time-bound framework that something visible has to happen in that otherwise, it is status quo. I think it will be something which is worth considering in the larger interest of the economy.

What are your key takeaways from the judgement? Just explain to us how the RBI would understand the judgement?

Sinha: One must give a lot of credit to the RBI for holding its fort and not really covering down under some of the pressure that has been coming from the central government.

We were faced with a very rare situation where you have got central government, the power ministry, the finance ministry siding with the power association and you have got the RBI on the other side. Effectively you had two arms of the government fighting against each other with the RBI saying that the circular should be read in its entirety and whereas the central government saying that there should be an exception made for the power sector.

So, I would say that it is a big win for the regulatory freedom and independence of the RBI. Secondly one must also acknowledge that to a great extent, the central government has itself been responsible for issues in the power sector.

First of all, if you look at the state of the discoms -- the distribution companies at the state levels -- they are very distressed and unable to make payments. Secondly, there is long-term unprofitable power purchase agreements and the coal linkages, so all of these issues the government has contributed.

These are issues which everybody has been aware of for a very long time, these are not new issues.

What is in it for the RBI, what is the judgement?

Sinha: We also need to note that there are other petitions going on in the Delhi High Court and Madras High Court challenging the February 12 circular and tomorrow there is also a hearing in the Supreme Court again on this issue.

So, this judgement certainly acts as a boost to the stand taken by the RBI in the other proceedings. Some of them have been challenged by the sugar industry. So various other industries are also asking for dispensations.

On the point which was being raised earlier of Section 7 of the RBI Act and whether the central government will actually get into issuing directions to the RBI, I would like to believe that it would be a very extraordinary step. I doubt if the central government is going to exercise it and as was pointed out earlier it is only in consultation with the governor.

Can you tell us the details of the judgement?

Dhaul: The details as available with me right now is that there is no interim relief granted at this stage. Second, any person having urgency can independently approach with all material facts.

Third, the central government has to initiate consultation under Section 7 of the RBI Act and complete it within 15 days. Fourth, the HPC will decide within two months from the date of its constitution and to have a representative of the RBI on the empowered committee to decide on the future course for the power sector.

Financial institutions can initiate proceedings under the IBC and the RBI can exercise power to notify specific companies under 35AA and 35AB.

What this means is there is no substantive relief given by Allahabad High Court which is available today.

However, there is matter coming up in the Supreme Court tomorrow where the SC issued notice earlier on, on the transfer petition request of the RBI and the SC had said it will not interfere with the Allahabad order in spite of the SC lawyer pressing for it.

Now it really means is there is a window available for banks to press the button. If they want to initiate proceedings and if that happens then some asset for which there are buyers will go through the process and there will be a massive haircut, which the public sector banks will have to take around 50 percent or 70 percent.

But what is important is that there are around seven to eight power projects in the resolution process, while the number of total stress assets in power sector which are around 40 and is likely to rise to about 80.

So, I think the thing to watch out for is what is the RBI, the banks and the government is going to do because merely going through this process is not going to resolve the problem.

Even if, we took the case of Meenakshi Energy where 4,000 crore of equity was wiped out and sold for one dollar per Rs 68 and it is back in NCLT after 12 months and the new owner has taken over.

So whether you are a point of resolution profession or whether you do anything else. The problems that are there are not trying to find a financial solution to the systemic problem, you are shooting the wrong person.

So while we respect the judgement of the Allahabad HC and we assure that they have gone through all the facts. The fact that remains is that it was not a matter which the judiciary or the RBI or the banks need to look at, in fact, it is the HPC, which needs to take a call on this because it is a sectoral problem.

When you say the central government in consultation under Section 7 of the RBI Act…

Dhaul: I think the court has correctly put this in perspective, there are substantive issues that have been pleaded before the court. What the court is saying is that let the government talk to the RBI and see that is it worthwhile getting this one lakh, two lakh, three lakh crores worth of haircut and are we going to solve the problem at the end of the day.

While we respect the sanctity of the IBC and it is a great initiative of the government and hats off to the government for picking this up so quickly and acting so fast but the fact of the matter remains that DFS has submitted a 126-page report to the Allahabad High Court recommending a moratorium.

What do you say, the law clearly says that on August 28 all cases over Rs 2,000 crore have to take them to NCLT. Now the Allahabad High Court is not standing in the way. Do you think that is what they should do or there should be a process of waiting for this high powered committee?

Gopalan: I would say we should look at this issue in a more pragmatic manner, the reason is that this sector has been affected by host of issues like lack of PPA, lack of FSA, supply of coal to power plants and also those power plants which were wanting to sell through the exchange, not enough takers for discoms because there were not able to raise the tariffs in time.

So a host of difficulties had bedevilled this particular sector in real terms. So there was a case of people going to the court and asking there must be a separate dispensation for this sector alone because of conditions which are totally extraneous to their own industry functioning.

The other side is if one sector starts asking there are other sectors which may go to the court and ask the same thing. Two things should happen in my view. One, where there is a possibility of getting a better price, the banks should go and file before the NCLT and get the money as much as they can. In regard to other cases, this 15 days and two month consultation will not do any harm.

If the law says RBI is firm on its stand then what we are going to see starting tomorrow is filing of cases, isn't that inevitable?

Gopalan: I think so. But being a spectator to all the conversations that looking at the enormity of the problem there is something to be looked at. Power sector exposure of the banks is Rs 5.65 trillion crore and 66 Giga Watt of power projects are facing various degrees of financial stress and Rs 3 trillion crore are involved in those projects, so the problem is enormous and if we look at the sectors affected by gross NPAs, you will see power tops the entire list followed by transport, textile, engineering and telecom. And gross NPAs to increase from 11.6 percent in March 2018 to 12.2 percent in March 2019.

So there is a clear issue regarding financial stability as we look at it. So, the RBI cannot keep quiet and not let these issues get resolved as soon as possible. At the same time, the government also has a view on this because the government would also have to take part of the blame because they were not able to deliver what was required to be delivered for this power projects.

So, as Mundra said the economic costs will be pretty high and therefore, I only hope there is a balance in what decision is being taken by the RBI and the government to ensure that the losses to this sector- some of the projects which are looking at NCLT, you know what they are looking at, they are looking at Rs 35 lakhs per Mega Watt as against Rs 5 crore plus Mega Watt the capital involved in those projects.

It will be a great economic loss to the banking system and to the country. The country has to compensate the banking system through equity infusion. So these are all big problems therefore we have to take fine balance, a golden mean has to be evolved regardless of whatever the legal things are, whatever the RBI circulars are and whatever the Supreme Court has to say.

How have you understood this judgement, banks just have to now take cases to NCLT?

Shroff: I have not seen the judgement. I have just got some reports coming through but from what I have heard the next step is they have to take them to NCLT. Though, I suspect that there will be an appeal on this. So, may be the last word hasn't been spoken until the Supreme Court says something about it. However, leaving that aspect aside for a second, it is quite binary in terms of its impact namely NCLT.

When you say binary?

Shroff: Binary means it has to go to NCLT, there is no other choice.

There were some seven cases which the bankers were very confident that will be signed, sealed and delivered in a few days, do you think that will wash?

Shroff: It depends on the state of how final it is. If over the next few days if it does become final, of course, that will be a relevant factor and even if the case if referred to NCLT it may not proceed. But it will have to be a signature away level of finalisation and not just an in-principal stuff.

The Allahabad High Court telling that RBI circular stands as of now. Anything can happen tomorrow, the IPPAI can go to the Supreme Court and get a stay, it looks a little unlikely considering the lower court did not give a stay. The Supreme Court is hearing other cases under IBC, so there are all these legal ambushes that are lined up but as things stand today banks not just have the leeway but are enjoined, are mandated by RBI to take all these cases to the court. What do you think will be the upshot, we will get only 10 percent of the value of Rs 1.7 lakh crore of power assets?

Srivastava: It is rather unfortunate but here the banks are the favourite football of the RBI, the government and the courts. Nobody is able to take a call as to what should be the future of the power industry.

I am just asking you what is the mathematical loss? As SS Mundra said in the second lot barely 30 percent is expected maybe 70 percent will be the haircut. In this lot of power companies, will they all go for liquidation value is what I am asking?

Srivastava: Some of them which have partial PPAs and partial FSAs will have greater value than those which are incomplete or those which have no PPAs or no FSA.

Those which are on imported coal and those which are on pitheads there will be a differential value for all these. You can't say that it is across the board 70 percent haircut. Each plant will have a different value.

There is a plant in Chhattisgarh which is perhaps not even 15-20 complete, it will have perhaps higher haircut than 70 percent but then there is a plant in Chhattisgarh which is 87 percent complete, that may not have a 70 percent haircut.

On an average, it will all depend on how much PPAs are given by the state governments or how fast the state governments move to the market.

Now we are in a quandary where you have the coal also controlled, the PPA also controlled and yet we want to get into the market. So, in the transition we will be faced with higher energy costs because none of the banks are looking at financing any power plants going forward, not only in the thermal but also in the renewables. So, it requires a greater thought on the part of the government, the RBI and the banks.

First Published:Aug 27, 2018 10:45 PM IST