what constitutes as non-performing assets ? Supreme Court to decide ...

Monday, 10 November 2014 - 6:22am IST | Place: Mumbai | Agency: DNA

Several promoters of distressed companies have dragged the ReserveBank of India to the Supreme Court alleging that its prudential norms defy the right to equality under Article 14 of the Constitution of India. The case comes up for hearing on this Wednesday where it's just not the definition of non-performing assets (NPA) as defined by the Securitisation Act of the parliament but also that as defined by RBI that have been challenged as `unconstitutional'. Both the definitions have been found contrary and contradictory to each other, say legal experts.

In the meantime, the apex court had granted status quo to the companies and promoters, about 55, from Gujarat and Tamil Nadu, till the case comes up for hearing on November 12. Some of the petitioners include Deccan Chronicles Holdings, Goldstar Jewellers, Seema Jewellers, Natraj Ships Agency and Shelter Pharma. The case dates back to the Gujarat High Court's April judgment in a common civil petition filed before it. The high court had struck down the powers of different regulators defining NPAs (under section 2(1)(o)(a) of the Securitisation Act, 2002). indicating that RBI's NPA classification be adhered to. The judgment now mandates RBI to enact guidelines for all such institutions, but as of now the RBI cannot issue any guidelines as the case will continue in the Supreme Court, legal experts said.

Banks and financial institutions which are governed by its own Act but not under the RBI as regulator can define their own timeframe to classify an asset as an NPA. The days range between RBI's prescribed 90 days and 180 days. A few such institutions are EXIM Bank, under Section 39 of the EXIM Act, National Housing Bank under NHB Act, and so is the case with Power Finance Corporation, Nabard, Rural Electrification Corporation and Indian Railway Finance Corporation.

Interestingly, Power Finance Corporation (PFC), which was notified as a public financial institution in 1990 under the Companies Act 1956, has a six-month period to classify an asset as an NPA. It subsequently registered itself in 2010 as a non-banking finance company (NBFC) with the RBI and has classified itself as an infrastructure finance company.

Advocates Vishwas Shah and Masoom Shah had argued in the high court, that the Securitisation Act and Reconstruction of Financial Assets & Enforcement of Security Interest Act, (Sarfaesi Act) 2002 should be applied uniformly across all borrowers and challenged the RBI guidelines on income recognition, provisioning and asset classification under prudential norms as being unconstitutional. The high court quoting an earlier Supreme Court judgment of Mardia Chemicals said the RBI guidelines were taken note of by the apex court and had upheld the provisional norms of RBI as intra-vires, meaning within its legal power.

"There is no justification of declaring the guidelines by the RBI to be invalid because different period of default has been indicated for declaring an asset as NPA of banks on one hand and NBFCs on the other." The order further stated: "The high court in writ jurisdiction should not interfere with such guidelines unless those are found to be contrary to any statutory provisions or the Constitution." The petition had questioned the constitutional validity under the right to equality as per Article 14 of the Constitution of India and that NPA classification of RBI were not as defined by the Sarfaesi Act which does not specify the any period to declare an asset an NPA.

"The regulators, by virtue of the amendment of Section 2(1) (o) of the Securitisation Act, can, at any point of time, take a liberal approach thereby inducing the citizen to take loan from them by fixing a relatively longer period as NPA and at the same time, without any valid reason, for the benefit of only the financial interest of those financial institutions, can also take a stringent policy fixing a relatively shorter period of time for declaring the existing secured assets as NPA," the high court had said.

The advocates who partially succeeded in the common civil petition filed before theGujarat High Court had made two-fold submissions before the court. The first was Section 2 (1) (o) of the Securitisation Act was ultra-vires (illegal) the Constitution of India, violating Article 14 and the principal of the original act. The principal grievance of advocate Shah is that paragraph 2.1 of the RBI Guidelines is discriminatory, arbitrary, unreasonable and ultra vires the Securitisation Act and that the definition of the NPA as per RBI is contrary, distinct and contradictory to the definition of the NPA under the Central Act, and hence the same is unconstitutional.