JSW Steel: In absence of legal certainty, foreign investors may shun stressed assets

Mumbai: In a ruling that could have far-reaching consequences for the country’s insolvency resolution regime, the Supreme Court has struck down JSW Steel‘s acquisition of Bhushan Power & Steel (BPSL), reopening a deal that was closed and paid for three years ago.

The judgment has raised concerns over the sanctity and finality of the Insolvency and Bankruptcy Code (IBC), and that global financial investors may stay out of the distressed asset market due to the lack of legal certainty.

JSW Steel’s ₹19,700 crore acquisition of Bhushan Power under the IBC was closed in 2021 when the Sajjan Jindal-led company paid the resolution amount to financial creditors after several litigations and the attachment of BPSL’s property by the Enforcement Directorate (ED) delayed the process.

ED had attached BPSL’s assets in 2019 where around ₹4,000 crore of bank loans were allegedly diverted by former promoters.

Although the creditors of Bhushan Power & Steel had provided indemnity against the resolution amount to be paid by JSW Steel, unwinding the deal may still be troublesome.

The Sajjan Jindal-led JSW Steel had paid the ₹19,700 crore resolution amount to financial creditors with an indemnity provision to ensure that the settlement fund will be paid back if the Supreme Court rules against them in pending litigations.Several foreign investors such as Ares SSG Capital, Deutsche Bank, and Silver Lake Point Capital had together purchased securities receipts with BPSL as underlining assets from Assets Care & Reconstruction Enterprise (ACRE), Edelweiss ARC and Phoenix ARC, sources said. These funds have given indemnity to JSW during the time of resolution in 2021.The ARCs purchased debt from banks in hope of faster resolution under IBC.

Watershed Ruling

The Supreme Court Friday ruled that the resolution plan of JSW was illegal and that it should not have been accepted by a committee of creditors. The apex court ordered liquidation of the debtor.

“The money paid by JSW to creditors has since been paid to investors of funds like Silver Lake and it may not be easy to get back,” a person privy to details added. “There could be a force majeure clause that may be invoked now. But practically speaking, the money is out.”

Foreign financial investors have been acquiring interest in stressed assets through securities receipts issued by asset reconstruction companies. Already cautious due to the slow-moving legal system, they may see this judgment as a tipping point.

“What is the point of investing if a deal is not truly closed even after three years of implementation?” said a fund manager who had invested in ARC-issued security receipts. “This opens a Pandora’s box of retrospective challenges.”

“Insolvency resolution is built on finality and once a plan is approved and implemented, it must be binding. This judgment cuts right through that principle,” said an insolvency lawyer. “Now, even fully executed deals can be dragged back into court.”

The IBC was introduced to provide a time-bound, efficient resolution mechanism for stressed assets, promising closure within 270 days. In contrast, the 1,119 Corporate Insolvency Resolution Processes (CIRPs) that resulted in resolution plans by the end of December 2024 took an average of 585 days to conclude, excluding the time exempted by the adjudicating authority.