Loan moratorium case: India’s power sector players want the Supreme Court to ‘plug’ the loopholes in RBI’s restructuring scheme

Loan moratorium case: India’s power sector players want the Supreme Court to ‘plug’ the loopholes in RBI’s restructuring scheme
India's power sector players ask Supreme Court for relief as COVID-19 adds to debtBCCL

  • The Supreme Court of India has asked the power sector and other parties to submit any suggestions they may have to the Reserve Bank of India and the Finance Ministry before the next hearing, likely to be held next week.
  • Senior advocate Abhishek Manu Singhvi, representing the power sector, said the RBI’s restructuring scheme has created loopholes that exclude his clients from relief.
  • Singhvi also pointed the finger at banks for not proceeding to recover loans but looking to recover guarantees instead.
The Reserve Bank of India’s restructuring scheme may have come as a relief to many, but the power sector players aren’t happy that they were left out. Senior advocate Abhishek Manu Singhvi has asked the Supreme Court to ‘plug’ the so-called loophole.

“The circular of the RBI dated October 6 has created inadvertent exclusions,” Singhvi told the court during today’s loan moratorium hearing, which finally took place after being deferred thrice due to unavailability of the Solicitor General Tushar Mehta.

The Supreme Court has asked power producers and all other parties to submit their suggestions to the RBI and the Finance Ministry before the next hearing, likely to be scheduled next week.
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Why are power producers facing a problem?
According to Singhvi, the problem is that power producers have huge arrears, which arise out of unpaid dues. This was true even before the COVID-19 pandemic hit. The total debt of the sector currently stands at around ₹1.2 lakh crore.

He argued that a large number of the borrowings — most of them by the Life Insurance Corporation of India (LIC) — can’t be restructured due to certain exclusions. Singhvi also pointed the finger at banks for not proceeding to recover loans but looking to recover guarantees instead.

“Benefit of restructuring should be allowed at an opt in or opt out stage. Here centre says restructuring can only be initiated at the instance of the lender. Minor tweaks are required. RBI needs to revisit the circular and make these changes,” he told the Supreme Court bench headed by Justice MR Shah.
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The power sector during COVID-19
Some of the issues plaguing the sector include the absence of meaningful price reforms, unreliable fuel supply, and the unsustainable level of subsidising offered by public sector power distribution companies.

Power distribution is the weakest link in the value chain of India’s power sector, and it was already facing a demand slowdown last year. The COVID-19 pandemic only exacerbated the problem, with demand plummeting by 19% at the end of the June quarter.

However, Credit Suisse’s latest report points out that the power sector has seen improvement over the last three months as compared to when the outbreak initially occurred. The number of power companies with an interest coverage ratio of less than 1% has come down from 11 to 8 between the first and second quarter of the financial year 2021.
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Even though Mehta tried to convince the bench that no further intervention is required, the Supreme Court has asked the central government and the RBI to reply to suggestions put before by the bench today. It also disposed of petitions where petitioners were satisfied with the compound interest waiver.

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