Ahmedabad/Mumbai: An innocuous sentence in a Reserve Bank of India (RBI) press release is at the centre of a challenge filed by Essar Steel Ltd against the initiation of bankruptcy proceedings by its lenders.
If the Gujarat high court’s observations over the past week are any indication, then a lot rides on the contents of this 13 June press release that set in motion the new bankruptcy laws.
On Friday, RBI’s lawyer admitted it had no additional documents to submit before the court to support the decision-making process that went into the press release. It was prepared from an internal meeting, an RBI lawyer said, prompting justice S.G. Shah, who is hearing the case, to say his order will be based on this.
Even before that, the press release was at the centre of controversy.
What exactly did it say? The focus of the plaintiff as well as the high court is one specific line: “Such cases (bankruptcy proceedings) will be accorded priority by the National Company Law Tribunal (NCLT).”
While Essar Steel’s petition objected to the RBI directive on several counts such as calling it arbitrary and the clubbing of the company with 11 other defaulters, its lawyers also brought to attention this particular phrase which seemed to suggest that the central bank was encroaching on the domain of the NCLT.
The Gujarat high court was quick to seize on this, and said as much in its 4 July order: “Initially, it would be appropriate to call upon the respondents to explain what they mean.”
Legal experts say the court has a point in questioning RBI’s directive to the NCLT.
“RBI is a statutory authority to make rules and give directions to the intermediaries under it. In exercise of the powers given to it under the ordinance, RBI issued directions to banks to refer these cases to NCLT. RBI directive can be questioned to the extent of directing NCLT to accord priority to these cases as the two—NCLT and RBI—come under a different acts and RBI does not exercise power on NCLT,” said Sitesh Mukherjee, partner, Trilegal.
Subsequently, on 7 July, RBI’s lawyers conceded that it had erred in including the directive in the press release and added that it would issue a corrigendum withdrawing the line. A day later, RBI redacted that line from its press release.
RBI didn’t reply to an email seeking comment.
Whether the Gujarat HC gives its nod to this flip-flop by RBI is unclear, but it showed up the central bank for its shortage of legal capacity.
“RBI suffers from low capacity in legal drafting (referring to RBI press release directing NCLT to accord priority to these cases),” said Pratik Datta, a researcher at the National Institute of Public Finance and Policy, New Delhi. “Most of the time, press releases by RBI and FAQs (frequently asked questions) by Sebi (the Securities and Exchange Board of India) are being used by the market as legal documents; however, legally, they do not hold sanctity. This was also highlighted by the FSLRC (Financial Sector Legislative Reforms Commission) in its reports that there needs to be only two types of legal papers from regulators—that is, regulations and emergency regulations. However, this is not being followed.”
However, it is likely, now that RBI has redacted its statement, the focus of the Essar case will turn to other aspects of the petition such as the criteria for selecting the 12 delinquent accounts.
“The second issue is more serious. RBI’s press release does not explain why the non-performing status of the accounts as on 31 March 2016 was considered for classifying the accounts in June 2017,” said Datta. “If RBI’s lawyers can provide the court with a clear rationale for choosing that particular date, the court may dismiss Essar’s challenge.”