The Indian banking sector has been plagued with a spate of corporate loans going bad, resulting in recognition of such loans as Non-Performing Assets (NPA’s) in the last few years. The aggregate bad loans of banks have already crossed Rs 10 Lakh crore & continue to mount. On the top of this bad debt pile, sits two sister concerns owned and controlled by the Singhal family, namely Bhushan Steel & Bhushan Power. These two entities had an astronomic combined total debt figure of Rs 81,726 crores in 2017 when the RBI decided to initiate proceedings against 12 stressed accounts under Insolvency & Bankruptcy Code (IBC). Bhushan Steel owed Rs 44,478 crore and Bhushan Power & Steel owed Rs 37,248 crore debt respectively.
According to a report released by RBI in June of last year, just 12 companies were estimated to account for 25% of the total gross NPA’s in the banking system and were identified for immediate bankruptcy proceedings, hoping to set in motion, a resolution of the crisis for the entire banking sector.
Prior to setting up of the National Company Law Tribunal (NCLT) on June 1st 2016, recovery of stressed assets was the domain of the Company Law Board (CLB), which lacked the legal teeth to initiate an effective mechanism of recovery against well protected, politically connected and heavily leveraged corporate borrowers & thus bank loan recovery was a never-ending process.
The new system of recovery under IBC mechanism shifts the focus from a debtor-driven recovery model to a creditor-driven one. This effectively shifts the balance of power to the creditors such as banks, institutional lenders, financial creditors etc. who, unlike the debt-riddled promoters, actually have a vested interest to complete the resolution in a time-bound manner. With this backdrop, the IBC lists down a maximum period of 180 days (plus 90 days of additional time at the discretion of the tribunal) from admission of the case, to draw up a plan for its resolution. If a resolution cannot be drawn up within this time frame, bankruptcy proceedings are initiated against the defaulting company.
The petition for launching the insolvency process against Bhushan Steel was filed by State Bank of India (SBI), the lead bank of the consortium of lenders, with NCLT allowing the lenders to initiate insolvency proceedings against the defaulter on 26th July 2017. As circumstances would have it, the complex nature of Bhushan’s road to resolution required maximum use of the grace period accorded by IBC, with the resolution professional (RP), VijaykumarIyer, a partner with Deloitte, making a plea for extension beyond 180 days so as to allow interested parties to submit their resolution plans, which was granted by NCLT. Finally, after being identified as the highest bidder in March of this year, ahead of JSW Steel, Tata Steel emerged as the victorious candidate for a takeover of the largest manufacturer of auto-grade steel in India in May 2018.
The resolution process wasn’t devoid of all drama, with opposing pleas filed by Bhushan Steel employees, Larsen & Toubro looking for priority over others in repayment of debt, and even the tainted Bhushan Steel promoter Neeraj Singhal trying to halt the process by writing to lenders asking them to restructure the debt. The Tribunal (NCLT) rightfully rejected all these claims in favour of a smooth resolution process. With this acquisition, lenders to Bhushan Steel have received Rs 35,200 crore from Tata Steel to settle their dues worth over Rs 56,000 crore, which works out to a 37% haircut for the financial creditors. This agreement gives Tata Steel 72.65% controlling stake in Bhushan Steel. Bhushan Steel has become the first of the 12 large corporate accounts to be resolved under the Insolvency & Bankruptcy Code (IBC).
The story of Bhushan Power is nothing short of a dramatic opera, with numerous interested parties awaiting the result on the sidelines. With a mountain of debt amounting to 37,248 crores due last year and no inclination to pay-up, Bhushan Power was admitted to Insolvency & Bankruptcy court in late July of last year. It was Punjab National Bank (PNB), one of the financial creditors and the lead bank in the consortium of lenders to Bhushan Power, that initiated the insolvency proceedings with a claim to NCLT.
The resolution process can be divided into two bouts, with the main contenders being Tata Steel, JSW Steel and Sanjeev Gupta promoted Liberty House of UK. In round one of bidding, which closed on Feb 8th, Tata Steel had offered Rs 17,000 crore and JSW Steel offered Rs 11,000 crore. Liberty House, which had made an offer of Rs 18,500 crore, submitted their bids 12 days late and did not comply with all the directions issued by the resolution professional, and hence was disqualified. In a dramatic, unsolicited move, JSW Steel upped its offer by 60% to Rs 18,000 crore on July 27th, following which lenders decided to invite revised bids from all applicants.
A naturally disgruntled Tata group objected to this proposal and appealed to the Appellate Tribunal (NCLAT), which ruled in favour of accepting revised bids, to Tata Steel’s disappointment. Tata Group also tried to reason with the Supreme Court, which also refused to stay proceedings on the NCLAT order. With this backdrop, the results of round two of bidding, submitted in sealed envelopes late night on August 13th was as follows, Tata Steel gave an unmodified offer of Rs 17,000 crores. Liberty House increased its offer by Rs 500 Crore, taking the total compensation offered to Rs 19,000 crore. Sajjan Jindal led JSW Steel finally emerged as the winner with a total offer of 19,700 crores payable upfront to the Bhushan Power to resolve a debt owed by the company which by now had swelled to a handsome amount of roughly Rs 45,000 crores.
As mentioned earlier, Tata Steel had beaten JSW Steel to bag the 5 million tonnes capacity Bhushan Steel with its bid of ₹35,200 crores. On the other hand, JSW Steel had bagged Monnet Ispat and Power for ₹2,800 crores. With the buyout of Bhushan Power, JSW Steel will retain its position as the country’s largest private sector steel producer with a capacity of 22 million tonnes while Tata Steel, with a capacity of 19 million tonnes, will remain the second largest.
Just as the Singhal family began to see a dim ray of light at the end of a long, dark tunnel and thought the worst of their problems were behind them, the Serious Fraud Investigation Office (SFIO) decided to flex its muscles, and deploy its newly acquired power of arrest (just last year, the SFIO was given the power to arrest individuals for violations of company law).
The SFIO, in its first case of arrest of an individual, has taken Neeraj Singhal (former Promoter & MD of Bhushan Steel) into judicial custody on 9th August and remanded him until 14th August, on charges of siphoning off more than Rs 2,000 crores from Bhushan Steel’s bank loans, using 80 different companies. The companies were used for rotating funds through bogus loans and advances, as well as investments, the ministry of corporate affairs said. This arrest of Neeraj Singhal must have come as a bit of a dejavu to those closely following the Bhushan group of companies. In 2014, the CBI arrested six persons, including chairman and managing director of Syndicate Bank, S.K. Jain for allegedly taking a bribe of Rs.50 lakhs for increasing credit limit of some companies in violation of banking rules. No prizes for guessing that Neeraj Singhal was among those arrested for bribery & corruption. It is no mystery that he was in the pursuit of further loans to cover up his previous financial transgressions, and this habit of spinning a web of lies & deceit to cover up bad loans eventually got too sticky for the spider itself and culminated in the demise of one of the country’s top industrial behemoths and the arrest of its promoter in the latest saga to unfold in the most influential corridors of Industrial India.