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Banking & Finance: Legal Milestones in 2019 and a Look Ahead

28 Feb 2020

Tax Updates
In 2019, the banking and finance sector witnessed major developments with the Supreme Court striking down RBI's circular on resolution of stressed assets and the RBI subsquently introducing a revised framework. The year also saw judicial and legislative developments in the insolvency and bankruptcy space and an overhaul of the External Commercial Borrowings framework. This update summarises some of these developments along with our expectations for the year 2020.

THE YEAR THAT WAS

In 2019, the Indian economy witnessed a decline in its growth rate with a slump in demand in various sectors such as real estate, aviation, construction and automobiles. Consequently, the Ministry of Finance was tasked to take measures to alleviate the growing concerns of the state of the Indian economy and the banking sector.

To improve the landscape of the Indian banking sector, the Finance Ministry announced the amalgamation of ten public sector banks into four major banks, subsequently reducing the total number of Indian public sector banks from 27 to 12. Once the merger takes effect, the enhanced capital base is expected to enable public sector banks to offer larger loans.

Following the recommendations made by the Bimal-Jalan expert committee, the Reserve Bank of India (RBI) decided to provide surplus funds to the Indian government which is expected to revive economic growth in a time of scarce consumer demand and scant investment.

Additionally, this year saw a significant overhaul in the process of stressed asset management. The RBI introduced a new framework for resolution of stressed assets – aimed at bringing about a change in the approach of banks to monitor exposures and resolution of non-performing assets. Simultaneously, the year saw major developments under the Insolvency and Bankruptcy Code, 2016 (IBC) through legislative amendments and important court decisions such as in the Essar Steel insolvency case which provided a much-needed closure to legal quagmires.

MAJOR LEGAL DEVELOPMENTS IN 2019

  • New Regime for External Commercial Borrowings

    On 16 January 2019, the RBI introduced the new External Commercial Borrowings (ECB) framework, in supersession of its extant master directions.

    The new ECB framework has simplified the three-track regime for ECBs into a dual framework governing foreign currency ECBs on one hand, and INR-denominated ECBs on the other. Additionally, masala bonds are also subsumed within the INR ECB framework. To further simplify the process, the following changes have been made under the new framework:

    • the minimum average maturity period for all ECBs is now capped at 3 years, subject to certain exceptions;
    • any entity eligible to receive FDI can also borrow under the ECB framework, as also units in special economic zones, registered societies/ trusts and NGOs;
    • the list of eligible lenders has been revised to cover residents of Financial Action Task Force or International Organization of Securities Commission compliant countries, equity-holding individuals and multilateral financial institutions;
    • the ECB limits have been revised and eligible borrowers can borrow up to USD 750 Million (approx. Rs. 5,250 crores) through ECBs; and
    • the negative list of end uses for which the ECB may be used remains largely unchanged.
  • Supreme Court strikes down RBI Circular on Resolution of Stressed Assets

    The RBI issued a revised circular on the framework for resolution of stressed assets on 12 February 2018 (February 12 Circular). This framework provided for early identification and reporting of stressed assets and strict timelines for resolution, failing which a petition would have to be filed under the IBC. However, the Supreme Court in Dharani Sugars and Chemicals Limited v. Union of India through its order dated 2 April 2019 struck down the February 12 Circular for falling foul of the Banking Regulation Act, 1949.

    The Court referred to the Section 35AA of the Banking Regulation Act, 1949 that empowers the Central Government to authorize the RBI to direct any bank to initiate the corporate insolvency resolution process against debtors for a ‘default’ under the IBC. The Court held that section 35 AA of the Banking Regulation Act, 1949 refers only to specific defaults by specific debtors as authorised by the Central Government. However, February 12 Circular acted as a general direction to initiate IBC proceedings under certain circumstances without any specific authorisation and hence, failed to comply with the requirement stipulated under Section 35AA of the Banking Regulation Act, 1949. Therefore, the February 12 Circular was struck down and all proceedings initiated under it discontinued.

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