NEW DELHI/MUMBAI - The Supreme Court on Tuesday quashed a Reserve Bank of India (RBI) circular on resolving bad debt, providing relief for some major corporate defaulters but throwing India's nascent bankruptcy regime into question.
The Supreme Court said the RBI's circular from Feb. 12 last year on how banks should handle defaulters was unconstitutional and "ultra vires", essentially meaning the central bank acted beyond its powers.
A spokesman for the RBI declined to comment, saying it had yet to see the court order.
The RBI circular had directed banks unable to agree upon a resolution plan with any defaulter within 180 days to drag the defaulter into a time bound insolvency process.
Several companies challenged the circular in court arguing the time given by the central bank was insufficient to tackle bad debt. Some had even challenged the validity of the RBI's directive saying its "one-size-fits-all" did not account for external factors.
The ruling gives relief to several companies, especially power companies, who have defaulted on loans due to issues with coal and gas supplies or problems tied to state governments not honouring power purchase agreements.
It also provides a breather for companies in the sugar, shipping, infrastructure and textile sectors who were under pressure, said several bankers and lawyers.
The Supreme Court said on Tuesday that the circular issued by RBI violates India's banking regulation Act, said Amit Kapur, of law firm J. Sagar Associates, which represented several power companies in the court.
"If the RBI wants to take action they have to go case specific and then initiate action. But you can't do a generic across the board cookie-cutter approach," he said, adding that the RBI may now have to come up with a new circular.
Some bankers, however, fear the ruling may result in more wrangling between banks and borrowers around soured loans and dent bankruptcy reforms.
"This will once again mean we are back to the old days when banks and companies used to delay debt resolution, with each one trying to buy time," said one banker handling non-performing accounts at a state-run bank.
Lawyers also agree the ruling could delay an already slow debt resolution process, but most said they would have greater clarity after the Supreme Court's full ruling is published.
In a statement, Indian rating agency ICRA also warned that the decision could "result in further slowdown in the already tardy pace of resolution of stressed assets in the power sector."