RBI Overhauls its NPA Regime: IBC to Hold the Fort? [Part III: RBI’s First Attempt at an IBC backed NPA Resolution Framework and the 12 Mega-Defaulters] – CorpLexia

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Jan 4, 2019
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With the enactment of the Banking Regulation (Amendment) Act, 2017, RBI has been vested with the power to direct banks to initiate Corporate Insolvency Resolution Process against any borrower who has defaulted on any payment under §§ 35AA and 35AB of the BR Act. The Provisions are reproduced here-under:

[Part II of this series can be found here]

“35AA. The Central Government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016.

35AB. (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to any banking company or banking companies for resolution of stressed assets.

(2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise any banking company or banking companies on resolution of stressed assets.”

Both the Sections explicitly empower the RBI to initiate insolvency proceedings in pursuit of the recovery of NPAs. The amendments facilitate a targeted approach by the RBI to deal with NPAs in a quick manner.

  • The First Step

The above-mentioned changes to the BRA were initially brought forth by way of an Ordinance promulgated by the Hon’ble President of India in 2017. In pursuance of it, RBI, vide its Press Release dated 22ndMay, 2017, had formed an Internal Advisory Committee (IAC) to advise banking companies on resolution of stressed assets in order to formulate an action plan to implement the Banking Regulation (Amendment) Ordinance, 2017[1]. Upon the materializing of the Ordinance into an Act of Parliament, the RBI released another Press Release dated 13thJune, 2017 effectuating its new power under the BR Act[2]. The IAC had identified the stressed and non-performing[3]assets that could be sought for the purpose of initiating insolvency against them on two levels of priority. In this regard, it had derived an objective, non-discretionary criterion for referring accounts for resolution under IBC. In particular, the IAC recommended for an IBC reference, all accounts with fund and non-fund based outstanding amount greater than ₹ 5000 crore, with 60% or more classified as non-performing by banks as of 31stMarch, 2016. The IAC noted that under the recommended criterion, 12 accounts totaling about 25 per cent of the current gross NPAs of the banking system would qualify for immediate reference under IBC. As regards the other non-performing accounts which do not qualify under the above criteria, the IAC recommended that banks should finalise a resolution plan within six months. In cases where a viable resolution plan is not agreed upon within six months, banks should be required to file for insolvency proceedings under the IBC. The status of these twelve accounts (as on 29thNovember 2018) are as follows[4]:

  1. Bhushan Steel Ltd:Bhushan Steel, the largest manufacturer of auto-grade steel in India has an astounding loan default of Rs. 44,478 crores. Tata Steel has acquired a stake of 72.65% in Bhushan Steel in pursuance of its liquidation plan for a consideration of Rs. 35,200 crores[5], the single largest yield in any resolution, till date. The firm has now been renamed to Tata BSL Ltd.
  2. Lanco Infratech Ltd:A company that was one of the highest growing in the entire world, has a loan default of Rs. 44,364 crores. NCLT has ordered for the liquidation of the company after its Committee of Creditors (“CoC”) rejected resolution plans put forth by Thriveni Earthmovers.
  3. Essar Steel Ltd:Essar Steel, one of the largest steel manufacturers in India and abroad, has a loan default of Rs. 37,284 crores. The course of insolvency proceedings against this company has led to the most contentious of legal fights between ArcelorMittal, Vedanta and NuMetal revealing various facets of the Code in the process of these firms putting forth their respective resolution plans. While the resolution plan put forth by ArcelorMittal has been accepted by the CoC, challenges lie at every step in this case, literally and figuratively.
  4. Bhushan Power & Steel Ltd: A sister concern of Bhushan Steel Ltd., it has accumulated a debt of Rs. 45,000 crores. The Company has gone into CIRP and another steel manufacturer, JSW Steel, has submitted a ₹ 19,700 crore resolution plan to the former’s Committee of Creditors[6].
  5. Alok industries: The Mumbai based textile manufacturer has defaulted on loans of Rs. 22,075 crores. The Mumbai Bench of the NCLT has admitted the application for insolvency against it.
  6. Amtek Auto Ltd: Amtek Auto, one of the largest integrated component manufacturers in India, has a loan default of Rs 14,074 crore. The Chandigarh bench of the NCLT has approved the bid by Liberty House to take-over the assets of Amtek for a consideration of Rs. 4,400 crores. Unfortunately, Liberty house has reneged on the agreed payments to the lenders under the resolution plan, inviting the invocation of Section 74 of the Code.
  7. Monnet Ispat and Energy Limited: Monnet Ispat and energy had defaulted on debt of Rs. 12,115 crores. A consortium of investors including Aion Investments and JSW Steel have acquired a stake of 74.3% in the company in pursuance of the insolvency proceedings[7].
  8. Electrosteel Steels Limited: Electrosteel Steels is an Indian water infrastructure company based in Kolkata. The loan default by the company stands at Rs 10,273 crore. Vedanta Ltd. Has acquired Electrosteel for a consideration of Rs. 3500 crores[8].
  9. Era Infra Engineering Ltd: Era Infra Engineering Ltd, one of India’s leading infrastructure companies, has defaulted on loans of Rs. 10,065 crores. NCLT has since admitted the insolvency petition against it, filed by the Union Bank of India[9].
  10. Jaypee Infratech Limited: Being a subsidiary of the Indian conglomerate Jaypee Group, it has defaulted on loans of Rs. 9,635 crores. Though the NCLT had admitted an insolvency application filed by IDBI bank, in an unconventional move, the Hon’ble Supreme Court of India intervened and stayed the order after home buyers filed petitions against the order. In the culmination of the proceedings in the case of Chitra Sharma and Ors. Vs. Union of India and Ors.[10]the Hon’ble Apex Court had ordered re-commencement of resolution process against Jaypee Infratech and barred the firm, its holding company and their promoters from participating in the fresh bidding process. The Petitioners in this matter, being apartment buyers had contended that their interests found no representation in the CoC. To remedy the situation, the Insolvency and Bankruptcy (Amendment) Ordinance, 2018 was promulgated clarifying an allottee in a real estate project to be Financial Creditors[11], though the NCLAT had held to the same effect previously[12]. CIRP has been admitted against the firm since.
  11. ABG Shipyard Ltd: ABG Shipyard Ltd, an Ahmedabad based ship-building company, has defaulted on loans of Rs. 7,000 crores. With insolvency proceedings being initiated against it, UK’s Liberty House has bid a sum of Rs. 5200 crores to take over the debt-ridden entity[13].
  12. Jyoti Structures Ltd: Jyoti Structures, a power transmission and distribution company, has a loan default of Rs 5,165 crore. The company became the first among the 12 companies to face the bankruptcy proceedings. NCLAT has since stayed the order of the NCLT ordering Jyoti Structures to liquidation[14].
  • Constitutionality of the Power of the RBI to Direct for Insolvency

The Constitutionality of the exercise of the statutory power of the RBI to direct banks to initiate IRP against their stressed assets has been challenged before the Hon’ble High Court of Gujrat in the case of Essar Steel India Limited and Ors. Vs. Reserve Bank of India and Ors.[15]where the Petitioners had contended that RBI through its decision dated 13thJune 2017 (via Press Release[16]), had acted arbitrarily and in violation of Article 14 of the Constitution of India in so far as it had directed a consortium of banks to initiate insolvency proceedings against the Petitioner company among other 12 companies, which had led to the failure of implementation of the package of debt restructuring approved by the Board of Directors of the Petitioner Company. Conversely, the RBI had contended that the Petitioner Company was an NPA of great financial magnitude that was a drain unto the financial performance of the banks and the economy, and thereby, such a move was necessitated in exercise of its statutory power to the same effect. Additionally, RBI had asserted in the Press Release that the applications instituted by the Banks, under the Code, as directed by RBI would be accorded priority by the National Company Law Tribunal[17].

Issues: The following issues were formulated by the Hon’ble High Court:

  1. Whether the Press Release dated 13June 2017 violated the fundamental right to equality of Essar enshrined under Article 14 of the Constitution?
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  3. Whether RBI should have considered Essar like the other companies who’s NPAs haven’t met the criteria laid down on the press note and let them have 6 months to settle their ongoing consideration of a resolution plan?
  4. Whether the RBI went beyond its limits in affirming of making these cases a ‘priority’ over other cases and in asking the banks to take actions against the Identified Accounts[18]?

Judgement: The Hon’ble High Court upheld the constitutional validity of the RBI Press Release dated 13thJune 2017 and rapped RBI which for whatever reason had affirmed for a priority treatment of the cases referred to the NCLT by it. It answered the abovementioned issues as follows:

Firstly, the Press Release dated 13thJune, 2017 communicating the decision of the RBI to direct banks to immediately initiate insolvency proceedings under the Code against inter alia the Petitioner company didnot have the effect of violating the Fundamental Rights of the Petitioner Company as the decision was based on an intelligible differentia in so far as the sound and objective criteria for identifying these companies with stressed assets was clearly laid out in the Press Release[19]and only upon the application of this criteria, the intelligible differentia materialised between inter alia, the Petitioner Company and other stipulated companies materialised owing to huge magnitude of their stressed and non-performing assets. This was a great financial strain on the banks and the RBI was statutorily mandated to direct banks to initiate Resolution Process under the Code against such stressed assets and thus, the RBI was not bound to consider the Debt Restructuring Plan put forth by the Petitioner, which was only a proposal. It would be expedient to note that the above-mentioned point has now been aptly clarified by RBI in its Notification dated 12thFebruary, 2018 where it is clearly stipulated that the new regime would prevail over accounts where tools of the previous regime are invoked but not yet implemented[20].

Secondly,it was held that the Code gives banks and financial institutions inherent power to move an application for the initiation of insolvency proceedings against its corporate debtors and the impugned action by the banks against the Petitioner Company was only in exercise of such power. The role of the Press Release was merely to provide a time frame for the effectuation of such proceedings. Therefore, the insolvency proceeding will be initiated but the on-going corporate restructuring will be taken into consideration while deciding the merits of the case but cannot form a ground for rejection of the insolvency application[21]. It would be expedient to note that the NCLT in the case of Bank of Baroda Vs. Amrapali Infrastructure Pvt. Ltd.[22] has held that the talks in the course of the JLF proceedings are wholly irrelevant considerations for the purpose of determination of the insolvency application as the same is devoid of any support under the Code.

Lastly,the Court rapped RBI for affirming in the Press Release that the cases referred to the NCLT as forming under the scheme would be accorded priority by the latter. This was held by the Hon’ble Court to be clearly beyond the constitutional and statutory limits of the RBI. The Hon’ble High Court observed that the governmental institution cannot guide the adjudicating authority under the IB Code, 2016. Therefrom, RBI has issued a corrigendum which removed the affirmation to the effect of directing the NCLT proceedings in the Press Release dated 13thJune, 2017[23].

  • Abuse of Process and an Implied Limitation

The power (under the Press Release dated 13thJune, 2017), though just, has not been free from abuse of its process. The case of SEL Manufacturing Company Ltd. and Ors. Vs. Union of India and Ors.[24] elucidates one such instance. In this case, the Petitioner Company had entered into and was implementing a Master Restructuring Agreement (MRA) in relation of its debt with a banking consortium. In violation of the MRA and RBI rules and regulations to the effect of honoring of the MRA, State Bank of India had sought an application for insolvency against the Petitioner Company under Section 7 of the Code. The Hon’ble High Court of Punjab and Haryana, in a writ petition, held that the Petitioner Company does not fall in the criteria for immediate action stipulated by RBI vide its Press Release dated 13 June, 2017[25]. Moreover, RBI had clearly stated that in relation to companies that do not fulfill the aforementioned criteria devised by the IAC, the banks should finalize a sound resolution plan within 6 months, only failing which, the banks could file for insolvency[26]. Therefore, RBI has imposed an implied limitation upon the exercise of the right of the banks under the Code in the best interest of the market and in exercise of its mandate as a regulator. The Hon’ble High Court of Punjab and Haryana thereby, stayed the order of the NCLT – Chandigarh Bench dated 11thApril 2018[27]along with its consequent order appointing an IRP for the company and allowed the Petitioner Company to prefer statutory appeal under the Code.

  • Takeaway

According to the RBI, As on March 31 2017 the gross NPAs in India aggregated more than Rs. 7,28,768 crores, i.e., about five per cent, of the GDP. About 12 per cent of the total advances by public sector banks are NPAs. Consequently, several banks, which should have been instruments for rejuvenating the economy, have been bogged down leading to systemic crisis in the banking sector. NPAs cause economic loss to the country[28]. While empowered to direct insolvency against stressed assets, the RBI has acted fairly, as is clear from the perusal of the Press Release dated 13thJune, 2017, whereby it had laid out a rational criteria for determination and directed the banks to form a sound resolution plan in relation to the outstanding accounts which form below the criterion of the IAC to initiate insolvency immediately, only failing which, the Banks could seek an application for the initiation of IRP against the defaulters. The RBI has therefore, put a bar on the power of the Banks and Banking Institutions to initiate insolvency proceedings against their defaulting[29]Corporate Debtors, the vires of which are contentious in their very implications.

This Article is a part of an authoritative series of which other parts are available as under –

[1]Reserve Bank of India Outlines the action plan to implement the Banking Regulation (Amendment) Ordinance, 2017; RBI Press Release (22.05.2017).

[2]RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC), RBI Press Release (13.06.2017).

[3]Section 2(o), the Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act, 2002, No. 54, Acts of Parliament, (2002).

[4]Pragya Srivastava, India’s Bad Loans: Here is the list of 12 companies constituting 25% of the total NPAs, Financial Express (23rdOctober, 2017; 09:33 PM), https://www.financialexpress.com/industry/banking-finance/indias-bad-loans-here-is-the-list-of-12-companies-constituting-25-of-total-npa/903396/.

[5]Press Trust of India, Tata Steel Completes Acquisition of Controlling Stake in Bhushan Steel, The Times of India (18thMay, 2018), https://timesofindia.indiatimes.com/business/india-business/tata-steel-completes-acquisition-of-controlling-stake-in-bhushan-steel/articleshow/64226210.cms.

[6]Press trust of India, JSW Steel makes ₹19,700 crore offer for Bhushan Power and Steel, Live Mint (16thAugust, 2018; 11:41 PM), https://www.livemint.com/Companies/Iohk1oDZ68j3SB0T2kaLSM/JSW-Steel-makes-19700-crore-offer-forBhushan-Power-and-St.html.

[7]Press trust of India, Aion Investments, JSW Steel to pay Rs 2,892 crore to pick 74.3% stake in Monnet Ispat, First Post ( 27thJuly, 2018; 10:16 AM), https://www.firstpost.com/business/aion-investments-jsw-steel-to-pay-rs-2892-crore-to-pick-74-3-stake-in-monnet-ispat-4832581.html.

[8]Saiket Das, Standard Chartered Bank lends Rs 3,500 crore to Vedanta, The Economic Times (24thJuly, 2018; 11:20 AM), https://economictimes.indiatimes.com/markets/stocks/news/standard-chartered-bank-lends-rs-3500-crore-to-vedanta/articleshow/65114303.cms.

[9]Aditi Singh, NCLT admits UBI’s insolvency plea against Era infra, Live Mint (9thMay, 2018; 12:04 PM), https://www.livemint.com/Companies/Thwjr3tP7h6Os1W5Ioic1N/NCLT-admits-Union-Bank-of-Indias-insolvency-plea-against-Er.html.

[10]Writ Petition (Civil) No. 744 of 2017 (Supreme Court of India, 2018) (India).

[11]The Insolvency and Bankruptcy Code, Act No. 31 of 2016, Explanation to § 5(8)(f) (2016).

[12]Nikhil Mehta and Sons Vs. AMR Infrastructure Ltd., Company Appeal (AT) (Insolvency) No. 07 of 2017, decided on 21stJuly, 2017 (National Company Law Appellate Tribunal, 2018).

[13]P Manoj, UK’s Liberty House nears takeover of ABG Shipyard, Business Line (March 27, 2018), https://www.thehindubusinessline.com/economy/uks-liberty-house-nears-takeover-of-abg-shipyard/article23366416.ece.

[14]Express News Service, NCLAT grants stay on Jyoti Structures liquidation proceeding, Indian Express (21stAugust, 2018; 04:52 AM), http://www.newindianexpress.com/business/2018/aug/21/nclat-grants-stay-on-jyoti-structures-liquidation-proceeding-1860464.html.

[15]II (2018) 141 CLA 45 (Guj.) (India).

[16]RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC), RBI Press Release (13.06.2017).

[17]Id.,¶ 5.

[18]Essar Steel India Limited and Ors. Vs. Reserve Bank of India and Ors., II (2018) 141 CLA 45 (Guj.) (India).

[19]RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC), RBI Press Release (13.06.2017), ¶ 3.

[20]Resolution of Stressed Assets – Revised Framework,RBI Notification (12.02.2018), ¶ 19.

[21]Essar Steel India Limited and Ors. Vs. Reserve Bank of India and Ors., II (2018) 141 CLA 45 (Guj.) (High Court of Gujrat, 2018).

[22]CP No. (IB)- 123(PB)/2017, ¶ 19 (Principal Bench, NCLT, New Delhi; 2017), Decided on 25.09.2017.

[23]Corrigendum, RBI Press Release (08.07.2018).

[24][2018] 147 SCL 426 (Punj&Har) (India).

[25]RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC), RBI Press Release (13.06.2017), ¶ 3.

[26]RBI identifies Accounts for Reference by Banks under the Insolvency and Bankruptcy Code (IBC), RBI Press Release (13.06.2017), ¶ 5.

[27]State Bank of India Vs. SEL Manufacturing Company Ltd., Order dated 11.04.2018 (India), (NCLT – Chandigarh Bench, 2018).

[28]Essar Steel India Limited and Ors. Vs. Reserve Bank of India and Ors., II (2018) 141 CLA 45 (Guj.) (India).

[29]The Insolvency and Bankruptcy Code, Act No. 31 of 2016, § 3(12) (2016).

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Siddharth is the Founder of CorpLexia and serves as its Editor. He is a student of BBA LL.B (Hons.) and has a special focus on corporate, commercial, insolvency, arbitration, securities and competition laws. He can be reached at siddharth@corplexia.com