Banks will have to make provisions for the amounts recovered because the funds have to be returned, said bankers Business Standard spoke to.
According to lawyers handling the Insolvency and Bankruptcy Code (IBC), financial creditors typically provide an undertaking to the resolution professional of the corporate debtor, agreeing to return the recoveries made through resolution if discrepancies in the resolution plan arise later.
“If this is the final order, banks have to start making new provisions starting from this quarter because the money has to be returned. This will reflect on the banks’ profit and loss statement. We are waiting for clarity from the court,” said a senior executive with a state-owned bank that had an exposure to Bhushan Power and Steel and recovered money from the resolution.
He added at this stage it was difficult to assess the impact of this.
JSW Steel completed the acquisition of Bhushan Power and Steel in March 2021, making it the largest steelmaker in the country.
The Sajjan Jindal-led company paid ₹19,350 crore to the financial creditors of Bhushan Power and Steel, which owed over ₹47,204.51 crore to the lenders.
State Bank of India, Punjab National Bank, Bank of Baroda, Indian Bank, Canara Bank, and Indian Overseas Bank were among the major lenders to Bhushan Power and Steel, which was one of the “dirty dozen” companies referred to in the corporate insolvency resolution process, under the IBC, in 2017 by the Reserve Bank of India (RBI).
Others on the list are Electrosteel Steels, JP Infra, Era Infra, Amtek Auto, ABG Shipyard, Jyoti Structures, Monnet Ispat, Lanco Infratech, Alok Industries, Bhushan Steel, and Essar Steel.
According to another senior executive at a state-owned bank, JSW Steel has the option to appeal the verdict, and if it does that, the lenders can perhaps become party to the proceedings.
At this stage, the lenders are awaiting the detailed order. After they get it, they will assess the implications and decide on the next step.
“The purpose of IBC proceedings is resolution. This is an operating company. Liquidation may be the choice only after the resolution option has been fully exhausted. So there could have been punishment through fines but the company could have been allowed to run,” said another banker, hinting at the liquidation order of Bhushan Power and Steel.
The setback to state-owned banks comes at a time when their margins are under pressure. They are offering higher interest rates to get deposits and meet rising credit demand. Additionally, the RBI’s monetary easing policy, with two rate cuts already done and more expected in FY26, is likely to further strain their margins.
“In view of the plan being rejected and liquidation ordered, the banks may have to reverse the transactions and the financial statements will be revised accordingly. The committee of creditors (on the liquidation stakeholders committee) may ask the liquidator to sell the corporate debtor as a going concern as well,” said Ashish Pyasi, partner, Aendri Legal.
This is the second instance of the apex court ordering the liquidation of a corporate debtor after the National Company Law Tribunal (NCLT) approved a resolution plan for it.
In November last year, the court ordered the liquidation of Jet Airways after the Jalan-Kalrock Consortium (JKC), the successful bidder for the airline, failed to implement the resolution plan five years after its approval.
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