Khurana said APP had also highlighted the circular would not help either the developers or the lenders or the sector at large, and instead it would lead to significant erosion of value as the assets were stressed due to factors which would be faced even by new promoters, in case of change in ownership as fallout of the impugned circular.
Revised framework for resolution of stressed assets issued on February 12, 2018 invited criticism from various quarters, including a parliamentary panel.
Under this plan, stressed power projects would be nursed back to health through equity support from banks and power sector lending agencies and operational support from an asset management company or power generating entity like NTPC. The plan would have required 100 percent of lenders to consent.
The top court said the RBI only had the power to use the Insolvency Code-Section 35AA-in this manner if the centre authorised it, and if it specified which businesses were to qualify.
The RBI will issue a revised circular under section 35 AA which authorises the central bank to authorise initiation of insolvency in respect of a default, he said.
The finance ministry, through a report issued with its backing, had earlier argued that the "one size fits all" approach was "erroneous".
The Supreme Court Tuesday held that the circular was "ultra vires" - meaning it went beyond the scope of what the RBI can do when coming up with rules and regulations.
Under the circular, companies which were unable to implement a resolution plan by August 27, 2018, were scheduled to be referred to NCLT under IBC by September 11. But with the voiding, this may now have to be watered down.
"Voiding of the February 12 circular is credit negative for Indian banks", said Srikanth Vadlamani, vice president, Financial Institutions Group, Moody's Investors Service.
The Indian Banks Association had sought a relaxation in the RBI's norms for infrastructure and power companies.
Further, as the judgment makes government authorization a necessary condition for the RBI to direct banks to initiate the insolvency process on specific accounts, insolvency processes for all other stressed loans may come under a legal cloud, it further warned.
If the verdict had gone against them, then banks would have had to provision assets against these loans. I would imagine there could be an impact on the cases that are outside it. A lot of water has flowed under the bridge.
Lawyers and bankers also agree the ruling could delay an already slow debt resolution process and that it may hurt banks' earnings. "Provisioning will keep increasing for banks for the time being, with or without the February 12 circular", the banker, who declined to be named, said. However, the resolution process, which was expected to be expedited, may get delayed, Gupta said. As a result, around 75 large borrowers will also be let off the hook.