What if JSW had paid Rs 19,700 crore?

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Published: October 21, 2019 4:27:18 AM

If there is a crime, the authorities are empowered to attach property. But, this was always known, and since many IBC cases involve allegations of funds-siphoning, why were these even sold via the IBC? This is how governments cause investor distrust

JSW, JSW steel, IBC law, IBC, Insolvency and Bankruptcy Code, Prevention of Money Laundering Act, PMLARight now, the ED, along with other agencies, was investigating various charges, including siphoning off of funds by the promoters of Bhushan Power.

It is certainly possible, as the Delhi High Court has held, that the Prevention of Money Laundering Act (PMLA) overrides other Acts like Sarfaesi and the Insolvency and Bankruptcy Code (IBC); in which case, the Enforcement Directorate (ED) is well within its rights to attach Bhushan Power & Steel’s properties since, according to its investigations, they were part of a criminal act. You could argue that, even if this is true, the ED should take action against Bhushan’s promoters, and not the company; indeed, if the company’s assets are frozen, they could well become worthless in the one to two decades, or more, that it will take for the case to be finally settled in the country’s various courts. The ED, on the other hand, will argue that, if it doesn’t attach the proceeds of the crime, substantive justice will not have been served.

Right now, the ED, along with other agencies, was investigating various charges, including siphoning off of funds by the promoters of Bhushan Power. While it concluded that the charges were correct and attached some of Bhushan Power’s assets, the problem is that, at the same time, Bhushan Power was also being sold by the banks it owed money to, using the IBC law. The case now revolves around whether the company can be sold when the ED is taking action against it since it is clear the prospective new owner (JSW Steel) cannot be asked to pay good money—in this case, Rs 19,700 crore—without having a cast-iron guarantee that neither will any assets be seized nor action taken against the company (Bhushan Power) that it is now taking over.

As luck would have it, the sale process got inordinately delayed. Even though JSW had emerged as the likely winner a long time ago, as in the case of Essar Steel, Bhushan’s promoters tried to regain control by offering to pay the banks all the money that was owed to them; this was to be done by converting the debt to cumulative redeemable preference shares. By September, however, all of these challenges had been dealt with, and JSW was declared the winner of the auction process; its bid gave bankers around 40% of their outstanding loans to Bhushan.

The question that now arises is what would have happened if JSW had made the payments for Bhushan Power and, after that, the ED attached the latter’s assets. Would the government have ensured JSW got its money back from the banks, or would it tell the firm to approach the courts for justice; and possibly that, since JSW knew Bhushan’s promoters were being probed, it should have factored this in its calculations.

It is obviously true that, at the time the IBC was being formulated, it wasn’t possible for the government to anticipate each legal challenge that would arise, the interpretation various courts of law would give, or the various ways in which defaulter-promoters would try and retain control of their companies even though the law was quite explicit in not allowing this. But, surely, when a challenge of the sort that has come up in the JSW-Bhushan case arises, the government needs to respond by changing the law, and issuing necessary clarifications?

It is always possible that JSW may eventually win the case and, when it approaches the Supreme Court on the issue, the SC may agree that once a company has been sold, its assets can’t be attached, and that certain types of prosecution will have to be halted. But, when such a big challenge arises, this is not something the government should leave to the vagaries of the court. Indeed, given that it is investigating siphoning off of funds and other promoter misdemeanors in so many of the firms being sold in the insolvency courts, you’d think the government would be working overtime trying to fix this. Alternately, it should have ruled that wherever there is an investigation taking place, the company will not be sold, either through IBC or any other process.

The immediate consequence of this incident is likely to be that bidders are going to be more cautious when it comes to bidding for IBC firms, at least till such time as there is more clarity on whether or not assets can be attached and criminal/other proceedings can go on after a firm is bought. This is ironic since, at a time when investment levels in the country continue to plunge, the IBC process was seen as a sure-shot way to get investments back. For one, fairly good quality assets were available at 50-60% discount levels; two, since the concerns being sold had already set up large capacities, a buyer wouldn’t have to waste years trying to get all manner of permissions, including environmental ones, to set up similar capacities.

Several people will cite the JSW-Bhushan case to argue that, as in the case of 2G and various mining licences that were cancelled, the courts are derailing the growth process. Nothing could be farther from the truth. For one, when there is a corruption case, what else were the courts to do but cancel the licences? Nor is it true that this affected investment in the sector since, as it happens, the bulk of telecom investment, in 3G and 4G networks, took place after the licences were cancelled. Two, once the 2G licences were cancelled, they were quickly reauctioned and, in some cases, bought back by the companies themselves—companies like Telenor had, by then, disassociated themselves from the 2G accused like Sanjay Chandra of Unitech; meanwhile, the criminal cases continued against people like Chandra, and no action was taken against the companies. In the case of the coal and iron ore mines, similarly, there would have been no problem if, after the illegal mines were cancelled, the government quickly auctioned them and gave all clearances. It can’t be that difficult for the government to apply the same principle: the criminal cases against individuals will continue, but no case can be initiated against new promoters or the firms themselves.

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