RBI order on defaulters lacked govt. nod, says SC

  1. The Supreme Court has struck down the Reserve Bank of India’s Feb. 12 circular on the grounds that the regulator can give directions to banks on stressed assets only upon the central government’s authorisation and in case of a specific default.
  2. Several companies in the power,sugar,fertiliser and infrastructure sectors objected to the circular’s one size fits all approach.They petitioned the Supreme Court arguing that their financial stress was on account of government policies and other reasons not connected to the management of these companies.Their case was that the powers granted to the RBI to direct banks to file insolvency proceedings against defaulters were being used without Government authorisation.
  3. The court relied on Section 35AA of the Banking Regulation Act.The court said that RBI can only direct banking institutions to move under the Insolvency Code if two conditions are met which are,(i)that there is a Central Government authorisation to do so and (ii) that it should be in respect of specific defaults.The Section therefore prohibits the power from being exercised in any manner other than the manner set out in Section 35AA.
  4. The Banking Regulation Act was amended after the introduction of the Insolvency and Bankruptcy Code(IBC) in 2016.Under the erstwhile Section 21 of the RBI Act,the central bank had broader powers,but Section 35AA narrowed them down,limiting the scope for the central bank.