NewsClick Impact: Raids on Bhushan Power & Steel and Khandelwal

Gurugram: On August 18, NewsClick published an article pointing out how a clutch of former employees of JSW Steel Limited (JSW), headed by Sajjan Jindal, had been hired at senior levels in various offices of the sick and debt-ridden Bhushan Power and Steel Limited (BPSL). These employees had been hired despite the fact that JSW has not released the bid value of Rs 19,350 crore to the creditors of the corporate debtor (that is, BPSL) that comprise over two dozen Indian banks (mainly public sector) as well as foreign banks, financial institutions and private entities in the country and abroad.

Soon after the NewsClick article was published, the Enforcement Directorate (ED) in the Union Ministry of Finance conducted search-and-seizure raids at various offices and premises of the company, a director of BPSL as well as the company’s erstwhile resolution professional, chartered accountant Mahender Kumar Khandewal. The ED alleged that those connected with the company had violated particular provisions of the Prevention of Money Laundering Act (PMLA) of 2002 and had removed 59 consignments of goods valued at around Rs 700 crore in a “clandestine” manner without paying taxes and without issuing invoices.

In a series of Tweets, the ED claimed that the goods had been illegally removed “both prior and during proceedings before (the National Company Law Tribunal) NCLT with due involvement of M.K. Khandelwal, Resolution Professional and former Director of BPSL in a bank fraud case…”

On Wednesday, searches were carried out at four locations, including the residential and official premises of Khandelwal in Gurugram and Delhi. Searches were also conducted at the residence of a former unnamed director of BPSL in Delhi.

A press release by the ED stated: “During these searches various incriminating documents, laptops, mobile phones, extracts and other valuables such as jewellery worth Rs 86 lakh were seized. Incriminating documents indicating receipt of cash by Khandelwal while discharging duties of Resolution Professional/Interim Resolution Professional have also been seized…Huge cash payments to various individuals outside the books of accounts indicate siphoning & generation of cash from various concerns undergoing process of CIRP (corporate insolvency resolution process) under (the) NCLT.”

BPSL is a highly indebted sick company. It has more than 19,000 employees in its three plants and sub-plants in Jharsuguda in Odisha, Kolkata and Chandigarh, its offices in Delhi and Kolkata and its branch offices located in 32 different locations across the country.

A case is pending before the Supreme Court on grant of immunity from investigations by the ED into allegations of financial fraud purportedly committed by the former promoters of BPSL, including Sanjay Singal (who was the company’s chairman and managing director) and his wife Aarti Singal. The ED filed a case against the Singals and other former directors of the company under the PMLA for allegedly siphoning off Rs 2,348 crore from various banks. In November 2019, Sanjay Singal was arrested by the ED.

Nearly three years ago, in 2017, India’s second-largest public sector bank, the Punjab National Bank (PNB) had launched insolvency proceedings against BPSL under the Insolvency and Bankruptcy Code (IBC) of 2016. PNB officials had at that time alleged that the bank had been defrauded of Rs 3,800 crore and claimed that 85% of its exposure to BSPL had been siphoned off. It also alleged that BPSL had not just misappropriated the bank’s funds but also manipulated its books of account. On July 26 that year, the NCLT admitted the insolvency petition and the debt-ridden firm’s resolution process formally started.

On September 5, 2019, the tribunal approved the resolution plan in JSW’s favour that was also formally accepted by the committee of creditors (CoC) led by representatives of PNB and the State Bank of India (SBI). JSW then appealed the resolution plan before the National Company Law Appellate Tribunal (NCLAT), New Delhi. On February 17, 2020, the appellate tribunal upheld the order passed by the NCLT, subject to certain modifications. The NCLAT directed that the resolution plan be given effect to immediately, in the manner ordered by the NCLT and as modified by it.

In principle, JSW was under an obligation to release the bid value to the CoC by March 17, that is, within a month of the NCLAT order.  However, JSW has not released the amount of Rs 19,350 crore more than five months after the deadline for making the payment.

Retrospective Effect?

The NCLAT order granted JSW Steel immunity from prosecution against any investigation pursued by government investigation agencies against the former promoters of BPSL. An amendment to the Insolvency and Bankruptcy Code (IBC) of 2016 on December 28, 2019, discharges new owners from prior liability of offences committed by a corporate debtor.

BPSL’s CoC moved the apex court for a directive on implementing JSW’s resolution plan. The ED filed an affidavit in the Supreme Court on June 24 opposing the request, arguing that NCLAT had “erred in law” in applying a clause (Section 32A) of the IBC with retrospective effect as the case had been registered in October 2019 before the IBC was amended in December. The ED has further claimed that JSW Steel and BPSL are “associates” in a joint venture called Rohne Coal Company, which disqualifies the resolution applicant from the purview of Section 32A, it being a “related party.”

The ED claimed the tribunal did not have the jurisdiction to direct it to release property attached under the PMLA. The Economic Times quoted the ED affidavit stating: “… the PMLA is a specific/special law governing money laundering in the country and no exceptions can be made to it unless specifically provided for by Parliament…There is no power conferred upon the NCLAT under the IBC to interfere with a provisional attachment order passed under Section 5 of the PMLA.”

According to the ED, the scope of the PMLA was “much wider and comprehensive” than the IBC and “since the assets of the corporate debtor are basically ‘proceeds of crime,’ the special law governing money laundering will hold…If the provisions of the IBC are given primacy over a specialised penal statute like the PMLA, it will be subject to gross abuse to escape the rigours of the criminal law, thereby frustrating the entire object of the PMLA.”

As has been pointed out in different media reports, the ED’s action comes before the Supreme Court decides on the manner of implementation of JSW Steel’s resolution plan which is expected in the first week of September. The ED had in an affidavit to the court objected to granting JSW immunity from liability for offences allegedly committed by BPSL’s former promoters, the Singals.

Assets amounting to Rs 4,229.54 crore have been identified and provisionally attached by the ED and prosecution complaints have been filed against 25 accused persons. It has alleged that funds siphoned off “were used for creation of assets (including equity investment in BPSL and movable/immovable properties in Delhi and London) in the name of companies controlled by Sanjay Singal.”

As mentioned in an earlier article by this writer, in a statement to the television news channel CNBC-TV18, JSW argued why it would not implement the resolution plan: “The matter is sub judice before the Honourable Supreme Court as all the parties in the last hearing were asked to file their submissions to (the) SC within two weeks in response to the application filed by JSW Steel. Pending adjudication of Appeals and CoC Application before (the) SC the plan is incapable of implementation more so when the assets of BPSL are continued to be attached (sic) by (the) ED (Enforcement Directorate).”

JSW’s reasoning behind not implementing the resolution plan can be questioned. First, no Indian court has stayed the operation or implementation of the resolution plan and the NCLAT order is fully operational. While it is true that the NCLAT stayed the resolution plan at the time of admitting the appeal, the stay was vacated at the time of passing the final order on February 17.

Senior advocate Abhishek Manu Singhvi appeared in the Supreme Court on March 6 and made an assurance on behalf of the financial creditors that they will return the amounts received from JSW in the event the case pending in the Supreme Court is decided in favour of the ED.

Calling the Shots?

While JSW seems unwilling to implement the resolution plan or to release the bid value to the financial creditors, it seems to be calling the shots in BPSL through its former employees, among other personnel hired with the help of Khandelwal and with the approval of a steering committee. At present, a team of executives from the international accounting and consultancy bigwig, Ernst & Young, is managing the day-to-day affairs of the company.

On March 19, the CoC wrote to JSW asking it to implement the resolution plan within seven days failing which bank guarantees would be invoked. On June 20, the committee again wrote to JSW granting the company two weeks more to release the payment to avoid penal consequences under Section 74 of the IBC, which penalises those responsible for non-implementation of the resolution plan.

The Reorg website reported in July that the CoC had written a letter to JSW stating that it would add interest charges as  compensation for failure to implement the resolution plan in a timely manner. However, till date, no action has been taken by the creditors against JSW.

The mess in this sick and heavily indebted company has become messier still in the wake of the ED’s raids.

The writer is an independent journalist.