RBI likely to seek EC approval before releasing new guidelines to banks

The Reserve Bank of India (RBI) is likely to seek the approval of the Election Commission (EC) before releasing its new set of guidelines to banks, which will replace its February 12 circular that was quashed by the Supreme Court earlier this week. The new circular is expected to be out in the coming week.
 
“While the matter of issuing a circular does not relate to publicity or elections in any way, the Election Commission does have a remit over any new announcement. As a matter of formality, the RBI will seek the EC’s permission before issuing the new circular,” said a top government official.

 
Officials from the finance ministry and the central bank have started discussions on the new circular. These discussions will also include Finance Minister Arun Jaitley and RBI Governor Shaktikanta Das talking to each other. As reported earlier, the government is planning to authorise the RBI to refer companies to the Insolvency and Bankruptcy Code (IBC) on a case-by-case basis.
 

The EC’s Model Code of Conduct, in force from March 10 till the end of the Lok Sabha elections, restricts announcement of new schemes/projects and also grant of new reliefs after the announcement of elections (see box).
 
As reported earlier, the Centre’s view is that the Supreme Court verdict does not curtail the government’s powers to give directions to the RBI to initiate recovery proceedings. The government will invoke Section 35AA of Banking Regulation Act to soften the Supreme Court verdict on the February 12 circular.

 
This will be well within the rules set under the Banking Regulation Act and would be hard to challenge in court. Section 35AA of the Banking Regulation Act gives power to the central government to authorise the Reserve Bank “for issuing directions to banking companies to initiate insolvency resolution process.”
 
The Supreme Court ruling by Justice Rohinton Fali Nariman and Justice Vineet Saran largely centred on the fact that the RBI should have sought authorisation from the government before sending companies to the bankruptcy code on a case-by-case basis, as laid down under Section 35AA.

However, a circular such as February 12 nets a whole bunch of companies that meet the cut-off set by the central bank, in this case Rs 2,000 crore of outstanding debt for each account. The RBI had said if the account servicing has been delayed even by a day, it would be in default and a resolution process has to be drawn by the banks and if need be, referred to the National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy Code (IBC).

 
The February 12 circular affected 157 accounts, each with outstanding debt of at least Rs 2,000 crore, and totalling Rs 12 trillion-plus.
 
Former NITI Aayog vice-chairman Arvind Panagariya said at an event in New Delhi on Friday that the RBI will bring in another circular which is consistent with law. “The SC ruling does not impact existing cases going into IBC. None of the powers is gone,” he said.
 
What the rule says
 
Given that the new RBI circular may guide banks on dealing with non-performing assets before the option of taking them to IBC, it be broadly come under a ‘relief’, an official said.

The only specific guideline that the MCC contains for the RBI is that the “Reserve Bank of India may continue to take decisions unhindered on monetary policy issues”. Officials expect that the EC will have no issues with the new guideline.