Impact of overturned JSW and Bhushan Steel resolution plan

Implications of recent SC order on liquidation of Bhushan Power & Steel Limited (BPSL)

Recently SC declared JSW Steel’s Rs 19,700 crore resolution plan for BPSL “illegal” and ordered the company’s liquidation due to many reasons, viz., Violation of IBC Section 30(2) – Use of OCDs instead of equity, Delay in implementation, Misrepresentation of facts by JSW Steel, Failure of CoC, and resolution professional.

JSW Steel had acquired a 49% stake in BPSL in 2021 through the IBC process, gaining access to a 2.75 MTPA steel manufacturing facility in Odisha. By October 2021, the company had increased its stake to 83%.

Key violations

1. The acquisition was executed through a mix of equity and optionally convertible debentures, despite the court’s earlier position that such takeovers must be conducted solely through equity to keep the process transparent.
2. The resolution plan was not implemented within the mandated timeline.

On JSW Steel Limited

1. JSW Steel shares fell 5.46% to ₹972.15 on BSE; the market cap dropped to ₹2.37 lakh crore post the order of the liquidation.
2. Loss of 2.75 mtpa capacity in Odisha’s manufacturing facility; This accounted for 12.5% of JSW Steel’s total capacity: jeopardizes plan to expand to 5 mtpa by FY27.
3. There will be of Rs 4,000–4,500 crore shortfall in FY25 (13% of JSW capacity, 10–11% EBITDA loss).
4. Potential lower recoveries than 41.03% offered under JSW plan; PSU banks like SBI & PNB affected.
5. BPSL contributed approximately ₹21,800 crore in revenue and ₹671 crore in profit for FY24. Its liquidation could result in a revenue loss of around ₹22,000 crore for JSW Steel.
6. JSW had planned to expand this to 5 MTPA via Phase II. The ₹4,488 crore capex earmarked for this is now at risk. Some expansion-related facilities have already been commissioned.
7. A likely write-down of nearly 25,000 crores (investment + capex already incurred).
8. Reversal of tax benefits amounting to approximately ₹7,000 crore that were availed during the BPSL acquisition.
9. Despite financial creditors agreeing to refund JSW Steel if the Supreme Court invalidates the resolution plan or denies immunity concerning money-laundering cases involving previous promoters, analysts believe JSW Steel could still incur substantial losses.
10. Need to see how the impact will unfold on rights over earnings and cash outflow on this asset for the past four years, on opportunity cost for JSW on acquisition value, and on legal recourse available with JSW. But as of now, even with the refund, it looks like a loss of about INR 15,000 crore for the company."

 

On Banks

1. SW Steel had also availed a loan of ₹10,800 crore from State Bank of India (₹7,300 crore) and Bank of Baroda (₹3,500 crore) to acquire BPSL.
2. BPSL itself also has total secured loans of around ₹4,000 crore.
3. With the resolution now overturned, these recoveries are at risk of being legally questioned or reversed during liquidation. If JSW Steel’s investment is deemed invalid, banks could be forced to reclassify the exposure as non-performing again, potentially triggering fresh provisions or write-downs.

On IBC law

1. Such reversals can deter potential investors and resolution applicants who may fear that their investments could be undone due to procedural lapses, even years after implementation.
2. Importance of adhering to the 330-day timeline for insolvency resolution processes, including time spent in litigation. This strict interpretation could lead to more companies being pushed into liquidation if resolutions are not completed within the stipulated timeframe, potentially resulting in value erosion and job losses.
3. The unpredictability introduced by this ruling may lead to a decline in investor confidence, particularly among foreign investors. Several international funds have reportedly reconsidered or paused their investment plans in Indian distressed assets, citing concerns over legal certainty and the enforceability of resolution plans.
4. Raises a serious question on the IBC law and its rules, finality of the judgements.

Conclusion

The Supreme Court's decision to liquidate BPSL has significant ramifications for JSW Steel, the banking sector, and the broader insolvency framework in India. It underscores the need for strict adherence to legal provisions and timelines under the IBC while highlighting the potential risks of procedural lapses. The ruling may prompt a reevaluation of the IBC's implementation and could lead to legislative or regulatory reforms to restore investor confidence and ensure the efficacy of the insolvency resolution process.