HC verdict on stressed power assets aided govt on Section 7 of RBI Act

The Allahabad High Court judgment on stressed power companies’ plea became an armour for the government to invoke a rare provision to initiate dialogue with the Reserve Bank of India (RBI) on a series of issues.

In the first fortnight of October, the finance ministry had sent three letters to RBI Governor Urjit Patel making suggestions on a dozen issues, using the provisions of consultation with the governor under Section 7 of the RBI Act.

Using this provision, the first communication to the RBI Governor was sent to seek his views on providing relief to some stressed private power companies from the RBI’s new non-performing assets (NPA) norms, now famous as the February 12 circular. “When we had sent the letter, meant to be addressed to the RBI governor, for the law ministry’s vetting, we were advised by the latter to mention Section 7 of the RBI Act to initiate a dialogue based on the order passed by the Allahabad HC,” said a senior finance ministry official, requesting anonymity.

“This became a basis for utilising this provision to also raise other issues where there were disagreements with the RBI,” the official added.

Now, all eyes are on the hearings in the Supreme Court, slated to begin from Wednesday. The top court had in September stayed the RBI’s circular, preventing insolvency proceedings against stressed power assets.

“We will decide the future course of action, on whether we will issue a direction to the RBI or not related to its stressed assets circular, based on the Supreme Court’s directions,” the official said

The RBI, in its February 12 circular, mandated banks to classify even one day’s delay in debt servicing as default. The notification mandates resolution proceedings against stressed accounts to be completed in 180 days.

The Centre, in its submission to the Allahabad High Court in July, had sought regulatory relief and time extension for close to dozen power projects with debt exposure of about Rs 1 trillion of a total of 34 stressed assets.

On August 27, the Allahabad High Court had, however, decided not to provide any interim relief and instead directed the Centre to start consultations with the RBI under Section 7 of the RBI Act, and conclude it in 15 days. According to it, the central government may issue directions to the RBI as it may “consider necessary in public interest” after consultation with the RBI Governor. Section 7 deals with “management” of the RBI and has never been invoked by the government to invoke directions to the regulator so far.

The finance ministry was initially sceptical in using Section 7 of the RBI Act to hold dialogue with it on the grounds that the powers have never been used, relates to the management of the RBI, may lead to litigation, has a likelihood of “severe resistance”, and such directions will need “strong legal footing.”

Among other issues, the finance ministry suggested that the RBI does away with the requirement on exposure limit of 20 per cent of the foreign portfolio investments in corporate bond portfolios of a single corporate group and remove the requirements of mandatory hedging for infrastructure loans of less than 10 years’ maturity. Also, it suggested setting up a special refinance window for non-banking finance companies, housing finance companies and mutual funds, create a facility for banks to raise $30 billion, and a review of the economic capital framework for bringing it in line with the requirements of the RBI Act.

Other suggestions were related to the application of Basel III norms to banks that are not internationally active, building up a capital conservation buffer during periods of stress, the need for keeping the RBI capital adequacy norms at 1 per cent higher than Basel III norms, the efficacy of the framework for prompt corrective action for banks in restoring banks to health, the need for high-risk weights for credit to micro, small and medium enterprises (MSMEs), and enhancement of opportunities for rectification and restructuring of MSMEs’ loan accounts.

The government will raise all these issues in the forthcoming meeting of the central board of the RBI set to be held on November 19.