A day after Supreme Court set aside the February 12 circular of the Reserve Bank of India that dealt with resolution of stressed assets, cash-strapped Jet Airways on Wednesday told its employees that it has deferred the March-salary payments, citing “complexities” with the resolution plan, under which SBI-led consortium of lenders have taken over the control of the airline.
This marks a reversal of its position, given that only on Saturday, the airline’s CEO Vinay Dube had noted in a letter to its employees that Jet was remitting the salaries for December and said that the management was working as fast as possible to implement the resolution plan agreed with the consortium of its lenders.
A key part of the resolution plan proposed by the lenders, and cleared by Jet Airways’ board, was conversion of the airline’s debt into equity for a notional value of Re 1 per share picking up 50.1 per cent stake in the company. This move was based on the same RBI circular that the Supreme Court declared as ultra vires. “In the current difficult times, the management team has been working with the lenders and other institutions to finalise a resolution plan, which will help us stabilise our operations and build a sustainable future for the airline. However, given the complexities of such processes, it has taken us longer than expected.
However, please be assured that we continue to strive and are in continuous deliberations with the lenders and institutions to find a solution. In light of the current situation, please note that salaries for March 2019 will be deferred,” Jet Airways’ chief people officer Rahul Taneja wrote Wednesday in a letter to its employees. On March 25, Jet’s board had approved the resolution plan, under which the lenders had also agreed to infuse Rs 1,500 crore in the airline to meet immediate requirements. However, banking sources said that only a part of this amount was disbursed to the airline so far.
While banks are trying to resolve Jet Airways, many private power sector companies were on the verge of being referred to the National Company Law Tribunal (NCLT) for resolution under the Insolvency and Bankruptcy Code (IBC). Some stressed coal based-power plants — such as Athena Chhattisgarh Power, East Coast Energy, KVK Nilachal Power and Lanco Babandh Power — were referred for resolution under the IBC. Some of these cases will now get leeway as banks will have the option to restructure loans or devise plans resolve these assets outside IBC. For cases that could have been referred to the NCLT, bank will now have the flexibility to restructure these loans.
As a result of the February 12 circular, a total of 75-80 companies were at various stages of being admitted under the IBC, said Manoj Kumar, Partner & Head at advisory firm Corporate Professionals Capital Pvt. Ltd, which is dealing with some of the insolvency cases under the IBC. “Now because of this voiding, NCLT benches will have to scrap these cases as the Court has declared these to be non-est, unless lenders prove that they brought them due to reasons other than the circular,” he said. The Supreme Court Tuesday ruled that the RBI’s February 12, 2018 circular by which the central bank promulgated a revised framework for resolution of stressed assets was ultra vires of Section 35AA of the Banking Regulation Act, 1949. A bench of Justices R F Nariman and Vineet Saran said that as a result “all actions taken under the said circular, including actions by which the Insolvency Code has been triggered must fall along with the said circular”.
Rating agency CRISIL said stressed power sector assets in the private sector will get the biggest respite as most of them were on the verge of being referred to NCLT. The additional flexibility on timelines does away with the imminent threat of significant haircuts on these exposures for lenders. “Going forward, we should see banks having greater flexibility in deciding which stressed assets to be resolved using the IBC. The IBC is a very effective mechanism that has been upheld by courts in its entirety and the banks’ decisions to resolve stressed accounts through IBC could be led by whether such accounts involve wilful defaults or have become stressed due to adverse business conditions and environmental factors,” said Krishnan Sitaraman, senior director, CRISIL Ratings.
While banks will get flexibility, the improvement in credit discipline in the past year and the expectation of quick turnaround in stressed assets resolution could come under some cloud. Improvement in credit discipline can be gauged from the fact that incremental NPA formation is estimated to have halved to 3.7 per cent (of opening net advances) for the full year ended March 31, 2019, compared with 7.4 per cent in fiscal 2018