The Bombay High Court has held that the impugned RBI circular dated June 07, 2019 on “Prudential Framework for Resolution of Stressed Assets” was a policy decision taken by an expert body in larger public interest and, in the absence of mala fides, arbitrariness, or manifest unreasonableness, the Court would not interfere with such economic and regulatory policy. The Court found no arbitrariness in the scheme merely because it repealed the earlier circulars, including those relating to flexible structuring for infrastructure projects, and accordingly upheld the circular.
The Division Bench comprising Justice Bharati Dangre and Justice Manjusha Deshpande noted that the purpose of the impugned circular was to provide a framework for early recognition, reporting, and time-bound resolution of stressed assets. It emphasized early identification of stress through SMA classification and reporting to CRILC, and required lenders to undertake a prima facie review within thirty days of default, with liberty to decide the resolution strategy or initiate insolvency or recovery proceedings.
The Bench noted that the framework required all lenders, in cases involving multiple lenders, to enter into an inter-creditor agreement during the review period, and that a decision approved by 75% by value and 60% by number would bind all lenders. The framework also contemplated resolution plans involving regularisation of overdue, sale of exposure, change in ownership, and restructuring, and defined restructuring to include modification of terms, alteration of payment period, rollover of facilities, and sanction of additional finance for curing default.
The Bench accepted the RBI’s submission that the June 07, 2019 circular was intended to address stress before default and to avoid “evergreening” of loans, where fresh lending masks defaults instead of reporting them. The Court observed that the new framework involved restructuring with supervisory review and stringent supervisory/enforcement action, while also carving out exceptions for projects under implementation, MSME revival and rehabilitation, and natural calamities.
Although restructuring could result in classification consequences, the circular provided a mechanism for upgradation upon satisfactory performance during the monitoring period, and further provided for treatment of additional finance and interim finance as standard assets subject to the conditions set out in clauses 13 and 14. This showed that the framework itself contained safeguards for both lenders and borrowers, added the Bench.
Briefly, the petitioners, being S.E. Transstadia Pvt Ltd., its Managing Director and Director, and its holding company, challenged the RBI circular dated June 07, 2019 on “Prudential Framework for Resolution of Stressed Assets” on the ground that it had removed the benefit earlier available to infrastructure projects under the flexible structuring 5/25 framework for long-term project loans. Their case was that the withdrawal of the earlier dispensation had adversely affected their infrastructure project.
Petitioner No. 1 was incorporated on December 17, 2008 for promotion of sports and entered into a partnership with the Government of Gujarat and Tourism Corporation of Gujarat for development of a multipurpose indoor and outdoor stadium and sports infrastructure at Kankaria, Ahmedabad. A lease for the indoor stadium was granted on June 14, 2012, additional loans were obtained from respondent banks, construction commenced in January 2014, and the project was completed and inaugurated in June 2017.
The petitioners relied upon the RBI circular dated July 15, 2014 on “Flexible Structuring of Long Term Project Loans to Infrastructure and Core Industries,” which recognized the long gestation and capital-intensive nature of such projects and permitted longer amortisation based on project life cycle and cash flows, including periodic refinancing. The RBI had also clarified that it would not stand in the way of banks structuring long-term project financing products so long as the prudential and regulatory framework was observed.
The petitioners’ request to apply the 5/25 structure to their loan was considered through a Joint Lenders Forum, which found the project technically feasible and economically viable, but before implementation, the RBI circular dated February 12, 2018 revoked the earlier 5/25 and related restructuring circulars and introduced a new regime.
Appearances:
Advocates Ieshan Sinha, Aayesh Gandhi, Riya Narichania, for the Petitioners
Senior Advocate Vekatesh Dhond, along with Advocates Pradeep Mane, Huzan Bhumgara, and Ridhi Badheka, for the Respondent No.1
Advocates Harsh Sheth and Niyati Merchant, for Bank of Baroda (Respondent No.3) and Union Bank of India (Respondent No.5)
