The Banking Regulation (Amendment) Ordinance, 2017 introduced sections 35AA and 35AB as amendments to the Banking Regulation Act on 4th May, 2017, which were replaced by Banking Regulation (Amendment) Bill, 2017 dated 14

The Banking Regulation (Amendment) Ordinance, 2017 introduced sections 35AA and 35AB as amendments to the Banking Regulation Act on 4th May, 2017, which were replaced by Banking Regulation (Amendment) Bill, 2017 dated 14.07.2017. Sections 35AA and 35AB were legislatively introduced as follows: 35AA. The Central Government may, by order, authorise the Reserve Bank to issue directions to any banking company or banking companies to initiate insolvency resolution process in respect of a default, under the provisions of the Insolvency and Bankruptcy Code, 2016. Explanation - For the purposes of this Section, "default" has the same meaning assigned to it in clause (12) of Section 3 of the Insolvency and Bankruptcy Code, 2016. 35AB (1) Without prejudice to the provisions of section 35A, the Reserve Bank may, from time to time, issue directions to any banking company or banking companies for resolution of stressed assets. (2) The Reserve Bank may specify one or more authorities or committees with such members as the Reserve Bank may appoint or approve for appointment to advise any banking company or banking companies on resolution of stressed assets. Facts of the Case and the Impasse: (a) The real bone of contention was a Reserve Bank of India ["RBI"] Circular issued on 12.02.2018, by which the RBI promulgated a revised framework for resolution of stressed assets in respect of borrowers whose exposure is over ₹ 2,000 crores. (b) In terms of the Circular, unless a restructuring process in respect of debts with an aggregate exposure of over ₹ 2,000 crore is fully implemented on or before 195 days from the reference date or date of first default, the lenders will have to file applications as financial creditors under the Insolvency Code. (c) The circular had been issued under section 35A of the Banking Regulation Act read with the Central Government's circular dated 05.05.2017, as well as under sections 35AA, 35AB and Section 45 L of the Reserve Bank of India Act, 1934. The petitioners contended that: (a) Circular issued by RBI is arbitrary and discriminatory and violative of Article 14 of the Constitution as the circular applied a 180-day limit to all sectors of the economy without going into the special problems faced by each sector thus would treat unequals equally. The circular has picked defaults of ₹ 2,000 crores randomly and the lender whose stake is 1 per cent can also stall the resolution process. (b) The impugned circular was ultra vires the provisions of Banking Regulation Act and the RBI Act. It was stated that section 35A and section 35AB of the Banking Regulation Act cannot possibly be the source of power for the impugned circular. Section 35A was introduced by an Amendment Act of 1956 and cannot, therefore, be used to empower the RBI to relegate companies to insolvency under the Insolvency Code as it did not exist at the time, or to give directions for resolution of stressed assets. RBI's functions under Section 35A are confined to the boundaries of the RBI Act and the Banking Regulation Act and not to other statutes, such as the Insolvency Code. (c) It was argued that sections 35AA and 35AB are part of one composite scheme. Section 35AA alone refers to, and can alone be the source of power for directing banking and non-banking companies to file applications under the Insolvency Code. Section 35AB clearly refers to resolution of stressed assets in a manner which is de hors the Insolvency Code. On behalf of the Union of India, following arguments were advanced: (a) Sections 35AA and 35AB are regulatory provisions made in public interest that cannot possibly be said to be manifestly arbitrary in any way. The aforesaid Sections cannot be said to be unguided provisions as the RBI gets sufficient guidance from the Preamble as well as other provisions of the Banking Regulation Act. (b) Ideally there ought to be a sector wise contingency analysis by the RBI before exercising power provided by the Central Government to it under Section 35AA. In any case, so far as the power sector is concerned, RBI ought to have treated it differently from all other sectors in view of the steps that the Central Government is taking in order to bring back the power sector on its feet. In the light of the above arguments and the decided case, answer the following questions: Whether RBI can give directions under Section 35A of the Banking Regulation Act to the Banks to exercise their powers under the Insolvency Code?