It is difficult to find another instance where a leading corporate that commands a market value of approximately Rs2.5tn (trillion), was censured in calumnious terms by the highest court of the land!
The SC has come down like a tonne of bricks on all the participants in the farce. Even the national company law tribunal (NCLT) and the national company law appellate tribunal (NCLAT), which is presided over by a former judge of the SC, were not spared for their manner of functioning.
This article is no critique of the SC’s order which is left in better hands. It seeks to reconstruct the story of the takeover and highlight some issues that stare one in the face.
BPSL was a part of the ‘dirty dozen’, the 12 mega loan defaulters to the banks. These were put on the block in 2017 when the Reserve Bank of India (RBI) mandated the banks to show no further tolerance but take recourse to the new law on bankruptcy.
BPSL had more than Rs47,000 crore owed to various banks, with State Bank of India (SBI) and Punjab National Bank (PNB) being the major creditors.
The willing suitors included JSW and Tata Steel. The former emerged successful based on the criteria set by the committee of creditors (CoC).
Though the NCLT order sectioning the resolution plan (RP) was passed in September 2019, the ensuing litigation saw the issue move up to the NCLAT which passed the final orders in February 2020. Further appeals to the SC followed.
There was a significant delay in JSW actually effectuating the takeover, one of the reasons was the COVID-19 lock-down and the associated uncertainty in the business world. The first lot of payments to the various creditors happened in March 2021.
However, the acquisition was recognised in the books of JSW Steel only on 1 October 2021, under Ind AS 103.
The manner of acquiring BPSL is represented in a diagram and explained with the actual numbers.
At its inception, Piombino Steel Ltd was held 49% by JSW Steel and 51% by JSW Shipping & Logistics Pvt Ltd, a promoter entity.
This was the initial capital structure and may have been designed to avoid an accounting consolidation in FY20-21.
Under the approved RP, JSW Steel was supposed to infuse Rs8,550 crore as equity in BPSL’s revival.
One of the major issues that drew the ire of the SC against JSW was the fact that the route of compulsory convertible debenture (CCD) and optionally fully convertible debenture (OFCD) was used rather than pure equity.
Piombino, which acted as a vehicle to facilitate the acquisition, raised a loan of Rs2,436 crore from JSW Steel itself, to wrap up the total contribution needed of Rs8,550 crore.
The funds of Rs8,550 crore were brought into Merkel P Ltd which was a special purpose vehicle (SPV) specifically set up to acquire BPSL. Along with the funds infused into Merkel by Piombino, an external debt of Rs11,000 crore was raised, to total Rs19,550 crore, the amount payable under the RP to the creditors.
Once the RP was implemented by paying the creditors, Merkel merged into the target, under the NCLT proceedings itself. This effectively pushed the acquisition debt of Rs11,000 crore into BSPL itself!
The approach of JSW in completing the obligation under the RP, the time delay of about 900 days and the use of CCD in place of equity, came under fire from the court and the choice of the language in this regard should seriously worry the board of the company.
Para 72 of the judgement (extracted on the left) is one of the many parts of the judgement, admonishing JSW for conduct that would normally come to associate with companies or persons of a completely different class.
Equally, the castigation is severe in para 78 of the order, calling into question the motive of the company and condemning its actions as illegal. Some part of the observations of the court is extracted from the said para.
How the board of the company, especially its galaxy of IDs views these remarks, which are not any unsubstantiated and whimsical comments on X, but of the highest court in the country, is the acid test on their independence, and adherence to good governance.
Is it possible for the board to distance itself from the unsavoury episode as an executive action that did not involve them, beyond providing the requisite approvals for making the investment?
Considering that JSW Steel is the leader in the business with a strong following among the investing community and its high-profile chairman being decorated with different awards and honours, it is difficult to see any of the directors leave their lucrative posts for this reason alone.
Is this a tectonic shock, unsettling and unexpected, on the lines made out in the screaming newspaper headlines?
How feasible it is to reverse a fully implemented RP? Can the eggs be unscrambled?
It would appear that the possibility of the RP being struck down and JSW Steel being deprived of the asset (BPSL) was not entirely unanticipated.
An extract from the note to the consolidated accounts in the annual report for 2021-22 establishes the possibility of the takeover being reversed by the SC and an unwinding of the transaction.
“………………….On 26 March, 2021 the Company completed the acquisition of BPSL by implementing the resolution plan approved by NCLT basis an agreement entered with BPSL’s committee of creditors that provides an option/ right to the Company to unwind the transaction in case of unfavorable ruling on certain specified matters by Hon’ble Supreme Court……………….”
Despite this acknowledged uncertainty on this front, it is quite surprising that the latest available director’s report for 2023-24 makes no mention of this possibility as a potential risk faced by the group and its possible implications for the business and the fallout for the investors.
The relevant portion of the director’s report dealing with BPSL’s business is shown here in its entirety and no reference to the Damocles’ sword finds a mention!
Not to be outdone, the auditors did not view this as a material uncertainty in the business of BPSL continuing with the parent group.
While the exposure to various litigation for the group is a KAM and is extracted here, there is no reference to this material litigation, with an acknowledged possibility of the takeover being reversed.
Equally, the auditors of Piombino who hold 100% of the equity of BPSL and that of BPSL itself, should have brought out in their respective reports, the possibility of the court proceedings leading to the liquidation of the company.
For the court to issue an order the implementation of which is fraught with all the imaginable complexities, must have been provoked not only by the stated findings of truancy and illegal actions of all the parties to the RP, there must be something more than meets the eye!
The graphic published in Financial Express (FE) brings out the details of what the different banks need to pay back if the RP is abandoned as per the court order.
While the court has been condemnatory about the conduct of the CoC of taking contradictory positions on the delay in the settlement of the amount by JSW, the fact of a possible loss to various PSBs which, in this case, recovered higher than the norm under IBC, could have been easily put across to the court to seek a different outcome than a complete reversal of the transaction.
To avoid an abrupt end, a few questions to ponder:
Did JSW suffer from the proverbial Winner’s Curse in the BPSL take over and is now cured of it, though with a significant slur on record about its conduct?
With greater uncertainty in the steel business after president Trump’s tariffs, is JSW better off with a significant capital gain on the reversal and the use of Rs19,500 crore?
When NCLT implements the liquidation of BSPL and seeks to sell its assets, would JSW Steel stand disqualified to bid?
Has the judgement effectively punished the actual culprits?
To help those anxious to calculate the potential accounting implications of the reversal, the details of the accounting of the acquisition in the consolidated books in FY21-22 are given.
It may be interesting to see how the Q4 results of JSW Steel get impacted by the decision!
(Ranganathan V is a CA and CS. He has over 44 years of experience in the corporate sector and in consultancy. For 17 years, he worked as Director and Partner in Ernst & Young LLP and three years as a senior advisor post-retirement, handling the task of building the Chennai and Hyderabad practice of E&Y in tax and regulatory space. Currently, he serves as an independent director on the board of four companies.)
