Electoral bonds to block black money, Centre tells Apex court

The Supreme Court on Tuesday set aside a circular issued by the Reserve Bank of India (RBI) on February 12, 2018 by which banks were directed to initiate insolvency proceedings against companies that defaulted on payment of loans of over Rs 2000 crore. The RBI circular was to kick in when the period of default crossed the 180-days mark.

The bench of Justices RF Nariman and Vineet Saran quashed the circular on a plea by companies which approached the Court under various sector-specific associations. The Court had ordered status quo on September 11, 2018 as it proceeded with hearing the case which practically meant stay on operation of the circular. On Tuesday, the stay became absolute with the verdict favouring the affected companies.

Senior advocate Abhishek Manu Singhvi who appeared for Association of Power Producers argued that in the power sector, the market is restricted as power tariffs remains fixed and any change in the distribution or trading licensees could be done with the prior approval of State Electricity Regulatory Commissions. There are 34 stressed projects in the Electricity Sector with a debt exposure of Rs 1.74 lakh crore. Of these non performing assets (NPA) amounting to Rs 34,044 crore was primarily on account of Government policy changes, failure to fulfil commitments by the Government, delayed regulatory response and non-payment of dues by distribution companies, Singhvi said.

The Court accepted his contention that to apply a 180-day limit to all sectors of the economy without going into the special problems faced by each sector would amount to treating unequals equally and thus be a discriminatory practice, violative of Article 14 of the Constitution of India.

Besides power, other sectors such as telecom, steel, infrastructure, sports infrastructure, sugar, fertilizer, and shipyard industry narrated their difficulties in complying with the circular. However, the RBI put forth its case defending the move as a warning to banks to clear their bad debts within reasonable period of six months (180 days) or move under the Insolvency Code. Thus, RBI acted in public interest to make available this money back in the economy for further development works.

The Court noted that Section 35AA of the Banking Regulation Act which created this power with RBI to issue instructions to banks would operate in cases of specific default by companies and cannot lead to general directions to be issued to all banking companies, as was being done by the circular in question. The Court found the circular to be ultra vires Section 35AA. As a result, any proceeding initiated against any financial creditor under Section 7 of the Insolvency Code by the operation of the RBI circular was also declared invalid by the Court from its very inception.

Bonds Sale Up

SBI sold electoral bonds worth Rs 1,716 crore in Jan and March this year against Rs 1,056 crore of bonds sold in six months in 2018, signalling the maximum amount of donations are being made via this route.