Bhushan Steel Case

Bhushan represented one of the largest of the ‘Dirty Dozen’ distressed companies put into
bankruptcy under India’s new Code last year at the request of the country’s central bank. The
Resolution Professional appointed under the IBC to supervise the restructuring was Vijay
kumaar V Lyer, of Deloitte. Bhushan Steel’s lead bank was State Bank of India. Bhushan, a mid-
sized Indian steelmaker with annual revenue of around US$2 billion, was put into proceedings
after proving unable to service its debt of more than US$6.2 billion. Bhushan was one of several
steelmakers last year forced into bankruptcy proceedings under India’s new Code. From western
Gujarat state to tribal areas of Odisha in India’s east, the country’s steel companies were at the
vanguard of a huge wave of debt-fueled corporate investment over the past decade, betting on
rising demand in a fast-growing economy. Indian steelmakers invested about US$40 billion in
new capacity between 2007 and 2016, according to Kotak Institutional Equities, only to be hit by
falling prices as Chinese rivals ramped up exports. Small wonder they are in the first rank of
companies to be dealt with by the IBC. The stakes are high. The Indian Government wants to
triple steel production by 2030. Bhushan is seen as an attractive asset by rival steelmakers,
according to analysts, highlighting the company’s large plant in eastern India, which supplies
steel to automotive companies. The largest of these, Essar Steel, is demonstrating the challenges
that come with such a far-reaching reform as the IBC
Bhushan was one of several steelmakers last year forced into bankruptcy proceedings under
India’s new Code. From western Gujarat state to tribal areas of Odisha in India’s east, the
country’s steel companies were at the vanguard of a huge wave of debt-fueled corporate
investment over the past decade, betting on rising demand in a fast-growing economy. Indian
steelmakers invested about US$40 billion in new capacity between 2007 and 2016, according to
Kotak Institutional Equities, only to be hit by falling prices as Chinese rivals ramped up exports.
Tata Steel acquired 73% stake in the bankrupt firm Bhushan Steel for about 35,000 crore rupees
last week. Bhushan Steel was one among the 12 major accounts referred to the “National
Company Law Tribunal” (NCLT) at the behest of the RBI last year. These accounts were the
biggest the Non-Performing Assets (NPA’s) that was plaguing various banks.
Tata Steel recently acquired 73% stake in the bankrupt firm Bhushan Steel for about Rs. 35,000
crore. This was through a bankruptcy case under IBC, and hence this becomes the 1stmajor
resolution under the act. The proceeds from the acquisition will be used to settle about two-third
of the Rs. 56,000 crores that Bhushan Steel owes banks. While the Bhushan resolution is just 1
case that managed more than about 67% recovery, it is nevertheless an encouraging sign for
banks. Notably, before the launch of IBC, if assets get stressed, banks were typically able to
recover just about 25% of their dues. More significantly between 2014-2017 bad loan recovery
rate of public sector banks was just 11%, and about 2.4 lakh crores were simply written off.
More than 1 lakh crore is expected to be recovered in the near future through other cases referred
by the RBI to the NCLT.If the banks do indeed recover funds of this scale, it would reduce the
burden on the government, as pressures for bank recapitalization will ease. Additionally, speedy
resolution would also free valuable assets that can be employed for economic production.
In 2007, Tata Steel acquired Corus and Tata-Corus become the fifth largest steel producer in the
World, and second largest in Europe. This made headlines across the world, because for the first
Time, an Indian company had acquired a European giant in a multi-billion dollar deal. But the
Outcome of that acquisition has been drawing a lot of criticism in the past few years as Tata-
Corus, post-acquisition, ran into continuous losses. The acquisition came to be known as "not an
Intentional one but an aspirational mistake". In 2018, Tata Steel took another plunge by
Acquiring a debt-ridden steel company, Bhushan Steel. This time, the offer made by the former
is a whooping INR 35,000 crore (US$ 5 billion). While the company was still trying to make the
Best of its European business, it acquired a debt laden Bhushan Steel in its home country, which
Had sparked speculation. The steel industry in India is divided into primary and secondary
sectors. The primary sector basically produces raw materials, such as pallets, coils, plates, billets,
rounds, for the secondary sector, which makes rods, coils, and sheets, for downstream industries
like automobiles, fabrication, machines, barrels, electronics, furniture etc. Bhushan Steel Limited
has been primarily into secondary sector, with some presence in the primary sector with a plant
in Orissa. In the Annual Report of 2016-17, the Board announced that the company had to be
taken into the “National Company Law Tribunal (NCLT) under the Insolvency and Bankruptcy
Code due to the default made by the Company in repayment of borrowings and interest thereon”
(Bhushan Steel Annual Report, 2017).
Though the company had been having a more or less steady revenue, one can see rising
expenses, with major spikes in financial costs of the company. The Reserve Bank of India had
announced that Bhushan Steel had accumulated debts of around INR 50,000 Cr (US$ 7.3
million).

In February 2018, Assets Care and Reconstruction Enterprise (ACRE), had announced their
interest to buy bad loans of Bhushan Steel worth INR 2,500 Cr (US$ 364 million) (“Bhushan
Steel loans worth Rs 2,500 crore from two banks to be bought over by ACRE,” 2018).The
company had been having increase in expenses, with significant increase in finance costs and
excise duty on sale of goods

One of the major markets where Bhushan Steel had been supplying was the construction and
infrastructure development market, which had been a fluctuating market. The net worth of the
company had been steadily going down, with liabilities exceeding assets (negative shareholder
equity), and its short term assets had been insufficient for covering an increasing debt (“Bhushan
Steel Limited operates as a secondary steel producing company in India. The last earnings update
was 165 days ago,” 2018).

The company had four potential bidders: Luxemburg based Arcelor Mittal, UK based Liberty
House, and India based Tata Steel and JSW Steel. Arcelor Mittal intended to sell its 29 per cent
stake in Uttam Galva Steel, which had also gone bankrupt. Billionaire Lakshmi Mittal, owner of
Arcelor Mittal, wanted to sell the stake at a loss to generate cash and assets for the acquisition of
Bhushan Steel bidding (“Bid opening for Bhushan Steel deferred,” 2018).

Liberty House had interest in bidding for both Bhushan Power and Bhushan Steel, with the offer
of upfront payment of INR 18,500 Cr (US$ 2.6 billion) ( “Liberty House trumps Tata Steel bid
for Bhushan Power,” 2018).

Tata Steel had offered INR 17,000 Cr (US$ 2.4 billion) and JSW Steel had offered INR 11,000
Cr (US$ 1.6 Billion) as an upfront amount to the lenders of Bhushan Steel. For operations of the
bankrupt company, Tata Steel had offered INR 7,200 Cr (US$ 1.04 billion), and JSW made an
offer of INR 2,000 Cr (US$ 291 million) (“Bhushan Steel bid: Liberty House plans to move
NCLT this week,” 2018).

While these were the initial bids, Tata Steel eventually emerged as top bidder, and a very
aggressive one, with INR 35,000 crore for Bhushan Steel and INR 24,500 crore for Bhushan
Power (“Tatas’ Bhushan gains may also bring debt pain, worries Street,” 2018).
However, in the war to bid, Tata Steel had the edge over JSW Steel; Tata Steel emerged as the
winner. Bhushan Steel’s Committee of Creditors (CoC) had decided to accept the bid by Tata
Steel, which was the “highest evaluated compliant resolution.”