Banking ordinance: Sound step or halfway measure?

By Sawant Singh, Aditya Bhargava and Sriram Ramachandran, Phoenix Legal

The Banking Regulation (Amendment) Ordinance, 2017, was promulgated on 4 May to amend the Banking Regulation Act to give the Reserve Bank of India (RBI) powers to direct banks to refer certain borrowers into bankruptcy resolution under the Insolvency and Bankruptcy Code, 2016 (IBC). This step follows the failure of numerous efforts by the government to raise India’s sovereign credit rating. Coupled with the rolling out of the goods and services tax, this is another step to burnish the government’s reformist credentials and to show domestic and foreign investors that “it means business”.

Sawant Singh Partner Phoenix Legal
Sawant Singh
Phoenix Legal

Declaring that the ordinance was necessitated by the “unacceptably high levels” of stressed assets in the Indian banking system, preamble to the ordinance suggested that the mechanism introduced would enable the use of the IBC to resolve stressed assets while balancing the interests of all stakeholders.

The ordinance inserts new sections 35A and 35AA in the Banking Regulation Act. Section 35A enables the RBI to specify committees with members appointed or approved by the RBI to advise banks on resolution of stressed assets. Section 35AA enables the central government to authorize the RBI to issue directions to any bank to commence proceedings under the IBC. Pursuant to section 35AA, the government issued an order on 5 May authorizing the RBI to issue directions to banks to initiate resolution under the IBC.

Aditya Bhargava Partner Phoenix Legal
Aditya Bhargava
Phoenix Legal

In a press release on 22 May, the RBI highlighted steps taken to enhance the efficiency of resolution under the “joint lenders forum” route, the “strategic debt restructuring” scheme and the “scheme for sustainable structuring of assets”. The RBI also said it was working on a framework to “facilitate an objective and consistent decision making process with regard to cases that may be determined for reference for resolution under the IBC”.

An RBI press release on 13 June stated that: (a) the RBI had constituted an Internal Advisory Committee (IAC) to advise on cases that may be considered for reference under the IBC; (b) the IAC held its first meeting on 12 June and had recommended that all accounts with outstanding amounts exceeding ₹50 billion (US$775 million), and where 60% or more of the amounts are classified as non-performing by banks as of 31 March 2016, should be referred for resolution under the IBC; and (c) in accordance with the IAC’s recommendations in respect of 12 accounts aggregating 25% of the gross non-performing assets of the banking system that “would qualify for immediate reference under IBC”, the RBI would issue directions to banks to commence insolvency proceedings under the IBC, and these cases would be given priority by the National Company Law Tribunal (NCLT).

While the 12 companies to be immediately referred for resolution under the IBC were not named, Jyoti Structures appears to be one of them, although this case is peculiar as reports in the public domain indicate that the company did not challenge its referral under the IBC to the NCLT.

While institutions such as the Federation of Indian Chambers of Commerce and Industry have welcomed the ordinance, others have been lukewarm, raising the spectre of India’s abysmal record on implementation. Other filings before various NCLT benches across India are awaited in respect of the specific accounts highlighted by the RBI, but the general feeling seems to be that the promulgation of the ordinance (and the RBI’s subsequent steps) is a good thing. For starters, it puts on notice previously recalcitrant borrowers (and their promoters), thereby compelling them to cooperate with banks to ensure recovery of dues. Further, as the IBC contemplates supersession of the borrower’s board, banks can be confident that, through the mechanism under the IBC, they will be able to do whatever it takes to resolve the borrower so as to recover their dues. Lastly, the ordinance creates a formal link between the RBI’s directions and the regulatory mechanism for bankruptcy proceedings. Proceedings recently commenced by Essar Steel before Gujarat High Court against the reference under the IBC initiated by Standard Chartered Bank against it could throw a spanner in the works. The high court provided temporary relief to Essar Steel, and has also asked the RBI to file a reply.

To paraphrase an apocryphal Chinese proverb, we are living in interesting times. While the proceedings before Gujarat High Court will affirm or negate the effectiveness of the ordinance and the RBI’s steps, another cause for concern is that the ordinance has limited shelf life and would need to be enacted into a law amending the Banking Regulation Act for these measures to acquire permanence.

Sawant Singh, Aditya Bhargava and Sriram Ramachandran are partners at the Mumbai office of Phoenix Legal.


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