The Supreme Court’s decision to reject JSW's 2021 takeover of Bhushan Steel Private Limited (BSPL) on procedural grounds and order the latter’s liquidation should set alarm bells. BSPL’s resolution was one of the biggest under the Insolvency and Bankruptcy Code (IBC), one of India’s most important economic reforms under the first Narendra Modi government.

The court, while rejecting the acquisition, has accused both JSW and the Committee of Creditors of violating IBC’s guidelines. The fact that this judgment has come after years of JSW’s acquisition — the company has invested money in the project and got it running — sets a bad precedent for the credibility of the IBC itself. Some of the dispute or delay which led to the annulment of the resolution, it would appear, was the result of the Enforcement Directorate claiming a part of the assets. The claim was withdrawn only last year.

The Supreme Court’s decision to reject JSW's 2021 takeover of Bhushan Steel Private Limited (BSPL) on procedural grounds and order the latter’s liquidation should set alarm bells. BSPL’s resolution was one of the biggest under the Insolvency and Bankruptcy Code (IBC), one of India’s most important economic reforms under the first Narendra Modi government.

The court, while rejecting the acquisition, has accused both JSW and the Committee of Creditors of violating IBC’s guidelines. The fact that this judgment has come after years of JSW’s acquisition — the company has invested money in the project and got it running — sets a bad precedent for the credibility of the IBC itself. Some of the dispute or delay which led to the annulment of the resolution, it would appear, was the result of the Enforcement Directorate claiming a part of the assets. The claim was withdrawn only last year.

The court’s order, unless it is reversed by a larger bench, threatens to jeopardise not just JSW’s investments but also the recoveries made by BSPL’s creditors, most of which are public sector banks. This can have a chilling effect on any ongoing and future IBC resolution processes. To be sure, if there were indeed serious violations, as the court order says, then it raises an even bigger question. Is the IBC plagued with the same problems of poor judgment, bad faith or just plain malfeasance by both corporates and banks that played a big role in the making of the bad loan crisis in the last decade? Or is the ruling the result of a dogmatic adherence to statutes which can force banks to take even bigger haircuts via liquidation route than what a seemingly sub-par IBC resolution can offer? Should the government also have restrained its investigative agencies whose misplaced zeal to punish criminality has ended up derailing one of the biggest success stories in India’s IBC framework?

These questions might seem esoteric, but they are central to the future of the IBC framework in India. A modern economy, sans a functional and credible bankruptcy framework, is like a patient who will always have to opt for amputation (liquidation) when a surgery (bankruptcy resolution) could have helped. Irrespective of whether or not the judgment is overturned, all stakeholders should ensure that such setbacks do not happen again. While transparency and consistency in the IBC’s functioning are a must to ensure this, the elephant in the room is whether government banks are still truly autonomous in their decision-making.