Here’s why India's Supreme Court just delayed the resolution of 34 stressed power projects

• After a 180-day deadline for the resolution of stressed accounts expired at the end of August, 34 power projects were supposed to undergo insolvency proceedings.
  
• On September 12th, the Supreme Court issued a directive that imposed a stay on all bankruptcy proceedings against defaulters in the power sector.
  
• The stressed accounts have been given a deadline of November 14th to undergo resolution.
  

After a 180-day deadline for the resolution of stressed accounts expired at the end of August, as many as 34 struggling power projects were expected to be referred to insolvency courts. At the time, the promoters of these projects filed an appeal in the Allahabad High Court requesting a stay against bankruptcy proceedings because they needed more time to devise a resolution plan with their creditors. The court refused relief and the issue was subsequently taken to the Supreme Court.

On September 12th, the Supreme Court issued a directive that imposed a stay on all bankruptcy proceedings against defaulters, not only in the power sector, but also sugar producers and shipping and textile companies. The stressed accounts have been given a deadline of November 14th, when the next hearing on the matter will take place, to undergo resolution.

The ruling will delay the resolution of trillions of rupees worth of bad loans. So what is the Supreme Court’s rationale behind the directive?

For one, power companies will be given more time to negotiate a resolution plan with their creditors. In fact, nine of the 34 projects such as GMR Chhattisgarh and Jaiprakash Power Ventures were nearing an insolvency agreement with their creditors, so the grace period will benefit these projects the most.

If the August 27th deadline for insolvency proceedings had been followed, then it would have been difficult to achieve an effective resolution process for each account. Given the lack of demand, they would have likely undergone immediate liquidation with creditors having to take a huge haircut on their claims.

During the 180 day period commencing from the release of the RBI’s February 12th circular, the government drew up the Pariwartan scheme to resolve stressed power assets. Under the plan, the power assets that aren’t bought by investors will be transferred to an asset reconstruction company (ARC), which will be managed by the state-owned utiltities- Rural Electrification Corp and NTPC Ltd.

However, the scheme is yet to receive the approval of the RBI and the main creditors of the power projects. The two-month grace period granted by the Supreme Court will give the government time to finetune the scheme and gather creditor support.