• HDFC securities
• 03 Sep 2018
• Knowledge Centre

Lenders have been given 15 days from 27th August 2018 to file for insolvency under the central bank’s 12th February 2018 notification. According to the notification, 60 companies that have turned defaulters -- including power firms -- will have to be taken to the NCLT by the lenders after the 180-day grace period.

 

Meanwhile, the Allahabad High Court has requested the Government to initiate the consultative process under Section 7 of the RBI Act, and conclude the same within 15 days from the abovementioned date.

 

The central bank has warned of dire consequences if lenders fail to meet this timeline.

 

“Any failure on the part of lenders in meeting the prescribed timeline, or any actions by lenders with an intent to conceal the actual status of accounts or evergreen the stressed accounts will be subjected to stringent supervisory, enforcement actions as deemed appropriate by the Reserve Bank, including, but not limited to, higher provisioning on such accounts and monetary penalties,” the notice stated.

 

An article in a financial daily quotes a banker who chose to be anonymous as saying, “Although the 180-day deadline ends on 27th August 2018, banks will not be rushing to the tribunals on 28th August 2018. The regulator has given banks 15 days to appoint legal counsels and resolution professionals. During these 15 days, if a solution is put in place for any of the accounts and approved by all lenders, those accounts would not be referred to the court.”

 

The RBI notification was challenged in court, but the Allahabad High Court vetoed the plea to make any changes in RBI’s deadline. The Independent Power Producers Association of India (IPPAI) had put forward a plea that structural problems were the reason for high stress in the power sector.

 

The order states that there is no case for the grant of interim relief at this stage. However, the rejection of interim relief was “not intended to preclude the IPPA from applying for urgent interim directions. The presence of the lenders before the court is equally important, so that their views on the subject may also be elicited and known with regard to the viability of any existing restructuring plans or schemes in respect of the petitioners or their members. The larger questions as noticed above and which arise herein may be considered when these writ petitions are posted for hearing next.”

 

Meanwhile, lenders have finalized the sale of 2 companies - GMR Chhattisgarh Energy and Prayagraj Power Generation Company. These are both large stressed power sector assets, thereby avoiding insolvency proceedings to be initiated against the companies.

 

According to an ICRA report, the 70 accounts largely comprise companies from power, engineering, procurement, construction, and the telecom sector. Within these, the power sector is the worst hit, with 34 stressed accounts and an exposure of ~ Rs 1.8 lakh crore.

 

In a June 2018 report, Moody’s projected a stable outlook for the power sector, while its Indian affiliate ICRA said that reforms for the distribution sector under the UDAY scheme have seen mixed results.

 

The statement reads, “Moody's has a stable outlook on the power sector. However, ICRA believes that the reforms for the Distribution Utilities (DISCOMs) – UDAY (Ujwal DISCOM Assurance Yojana) have seen mixed success.”

 

The Moody's statement said its stable outlook on the power sector reflects that an improvement in domestic coal availability is moderating the fuel supply risk. It stated that while distribution utilities have witnessed an improvement in their liquidity, the extent to which operational efficiency has improved is still unclear.

 

According to Moody's VP and senior analyst, Mr Abhishek Tyagi, “India's state-owned power distribution companies will demonstrate weak to moderate financial profiles. Nevertheless, we do not expect the emergence of material off-taker risk over the next 12-18 months. Consequently, India's independent power producers should maintain credit metrics consistent with their current credit quality.”