Bhushan Power sale to JSW Steel halted in test for bankruptcy law

The National Company Law Appellate Tribunal (NCLAT) stayed the transfer of the payment by JSW Steel to the creditors of BPSL till investigation into allegations of fraud and money laundering by the former owners of the steel mill is decided. NCLAT will issue final orders on 25 October.

The tribunal’s ruling could have far-reaching implications, especially for BPSL’s lenders, as the resolution process has lingered on for more than two years. Swift resolution of distressed assets such as BPSL is key to the government’s effort to free up bank capital and revive credit growth.

Mahendra Khandelwal, resolution professional in the BPSL case, however, remained hopeful of a quick resolution. “I expect everything to be sorted out at the next hearing. The NCLAT has addressed all of JSW Steel’s concerns. The ministry of corporate affairs has called for a meeting of officials from all departments of financial services and all government agencies. This includes the ED too," he said.

The government too is keen to settle soon the question of fraud affecting resolution. In court, Sanjay Shorey, director (legal prosecution)at the ministry of corporate affairs (MCA), argued that ED has no jurisdiction to attach the property of BPSL, which is undergoing corporate insolvency resolution process. MCA argued that the rights of secured financial creditors (banks) are to be protected through the resolution process.

“Once a resolution plan is approved, it is binding on all stakeholders, including government agencies," MCA’s submission reads in the stay order from NCLAT.

On 5 September, after a two-year-long resolution process, NCLAT finally approved the sale of the stressed steel plant to Sajjan Jindal’s JSW Steel for ₹19,700 crore.

A person privy to discussions within JSW Steel indicated that if the ED attachment on BPSL’s assets holds firm, then the value of JSW Steel’s bid will also fall proportionately, forcing a much larger haircut on bankers in their ₹47,000 crore exposure to the bad loan. The spokesperson for JSW Steel did not respond to queries seeking comment. Officials of two of BPSL’s creditors declined to comment.

The action by ED is related to an alleged bank loan fraud being investigated under the Prevention of Money Laundering Act, 2002. Investigations by the Central Bureau of Investigation, the Serious Fraud Investigation Office and ED were a result of a forensic audit by the Punjab National Bank, one of the lenders to BPSL that detected that 85% of its exposure to the bankrupt steel mill had been siphoned off and that the company had misappropriated bank funds and manipulated account books.

After winning the bid for BPSL, JSW Steel had approached NCLT seeking protection from litigation, considering that a forensic audit of BPSL’s finances had revealed potential fraud and siphoning off of money by its erstwhile promoters, the Singhal family. However, the court refused to grant these protections to JSW Steel at the time.

After ED moved to attach BPSL’s assets on Saturday, Seshagiri Rao, joint managing director and group chief financial officer of JSW Steel, said: “It vindicates JSW Steel’s stand of seeking immunity from attachment of properties of corporate debtor (BPSL). This may happen even in cases where the control is changed under IBC."

“For a buyer of distressed assets, this (move by ED) creates major uncertainty," said Sudip Mahapatra, partner at law firm S and R Associates. “If you don’t know the potential liabilities, how do you factor them in your resolution plan and that will make the bidding process more uncertain and unattractive.

“The BPSL case is now likely to be resolved at the Supreme Court stating that when a resolution plan is approved, you cannot hold the company responsible for financial crimes committed by past promoters or management or if the government brings an ordinance to provide that protection," Mahapatra said.

“The government has been receptive to issues surrounding the Insolvency and Bankruptcy Code given the large sums involved. This issue can impact resolution of approximately ₹70,000-90,000 crore worth of stressed assets. I expect that in the next two-three months, we should see some definitive steps being taken on resolving this issue," he said.