Ruling On JSW-Bhushan Steel May Push Up Borrowing Cost

The apex court’s order serves as a clear message to companies, banks, government departments and other stakeholders that any breach of legal guidelines will not be tolerated, and action can be taken at any given point in time.

What is noteworthy is that while the Supreme Court ruling came on May 2, JSW Steel’s resolution plan was approved in 2019 after being vetted and approved by the Committee of Creditors.

The plan went through the scrutiny of the National Company Law Tribunal (NCLT), as well the National Company Law Appellate Tribunal (NCLAT). The resolution plan is now underway.

How This Impacts Business

Should this ruling worry the businesses and common citizens? Yes. It may have far-reaching implications.

As part of the resolution plan, JSW has already paid more than Rs 19,300 crore to the creditors.

The country’s lenders, primarily the public sector banks, comprising the State Bank of India, Punjab National Bank, Canara Bank, Union Bank of India, and Indian Bank, will bear the maximum hit of about Rs 17,000 crore.

This would mean that the banks will have to significantly increase their provisioning, which will not only dent their bottom lines, but also impact their cost of borrowing, something that may make loans costlier.  

Message For Stakeholders

On May 2, the apex court rejected JSW Steel’s resolution plan after it pointed out that the plan was in gross deviation from the Insolvency and Bankruptcy Code (IBC) and guidelines.

The Parliamentary Standing Committee on Finance has decided to meet the stakeholders, including officials from banks and the IBC, among others, to understand the issue and chalk out a framework. Bankers fear the renewed spotlight on doubtful cases will mean more provisioning by them. Which in turn will load up the stakes in favour of higher interests charged.

“The court ruling has a message — that following the rule book is non-negotiable, and if found to have deviated from the guidelines and legal framework, action could be taken at any given point,” B N Mishra, senior advisor, Indian Banks​ Association, told The Secretariat.   

“Just because the resolution plan was approved 5 years ago, it doesn’t mean that action cannot and should not be taken,” Mishra said.

However, sources said a revised “resolution or restoration” plan may be in the works. However, JSW Steel will, even if such a plan is passed, have to work hard to implement these new, stringent measures within a strict deadline. "And the focus of regulators, lawmakers and oversight personnel would remain on such insolvencies," other bankers said. 

“IBC has many shortcomings and has not been effective. We need to have a proper framework that pushes recovery of bad loans and helps in a timely resolution,” C H Venkatachalam, All India Bank Employees Association (AIBEA) said.

The AIBEA has underlined the need to regularly publish a list of wilful defaulters. “It is essential to make a clear distinction between defaulters. Those who have defaulted due to reasons not in their control must not be clubbed with those who have defaulted due to their misdoings,” Venkatachalam said. 

The Reserve Bank of India, in its report on Trend and Progress of Banking in India, noted that IBC has emerged as the dominant recovery route, accounting for 48 per cent of all recoveries made by banks. The implementation of the much-needed code has also helped banks clean up their non-performing assets (NPA).

Despite the implementation of the IBC, delays in the resolution process have become a challenge, even after multiple amendments. Going ahead, fine-tuning the IBC framework to ensure it delivers better results as far as insolvencies are concerned will be key.