The fear of losing control of their own companies and being barred from overtaking other bankrupt companies have made steel manufacturing giant ArcelorMittal and 2,100 other companies pay up their dues. Over 2,100 companies have cleared their dues of Rs 83,000 crore before action was initiated against them under the Insolvency and Bankruptcy Code (IBC), TOI reported. Meanwhile, Lakshmi Mittal’s ArcelorMittal has paid up its dues of a company it held minority shareholding to become an eligible bidder in the insolvency case of Essar Steel.
What’s making companies pay up their dues is Arun Jaitley’s masterstroke clause — changes to which were brought in immediately through an Ordinance last year to not only bar wilful defaulters but defaulting promoters and related parties too from the bidding process of the IBC law. The Cabinet moved swiftly to bring in the changes after the Finance Ministry was informed that some promoters were trying to bid for their own companies at a discounted price during the insolvency process. The Ordinance later got the nod of the Parliament in the Winter Session 2017-18.
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The Section 29 A of the IBC initially received mixed reactions from experts. Some said it would mean higher haircuts for banks as too many people or companies would deem ineligible under the clause, others hailed it as a smart move needed to curb the moral hazard of defaulting and yet gaining back the control of companies. Former SBI chief Arundhati Bhattacharya had said that nowhere in the world such clause existed but it was required in India to bring back trust in the banking system. So far, evidence suggest that the Section 29 A has worked.
In case of Essar Steel, ArcelorMittal was declared ineligible as it was a minority shareholding in another defaulter company namely Uttam Galva Steels. Another bidder VTB Capital-backed Numetal Mauritius was declared ineligible too. After both the companies given a chance to “cure” their eligibility issues, ArcelorMittal parked about Rs 7,000 crore in an escrow account of State Bank of India to clear dues for Uttam Galva Steels to become eligible for Essar Steel.
ArcelorMittal did not confirm the news of parking Rs 7,000 but it did confirm “its intent to settle dues at companies in which it held a passive, minority shareholding”. Numetal Mauritius’ bid came under questioning as 25% of its stake was owned by Aurora Trust of Ruia family the promoters of Essar Steel
NuMetal’s bid had also come in for questioning as it was 25% owned by Aurora Trust of Ruia family – the promoters of Essar Steel. However, later VTB Bank sought to sever ties with Ruia family by proposing to buy out Aurora Trust’s stake in NuMetal.
“We have seen several instances where the corporate debtors have paid the default amount after trigger application is filed before the adjudicating authority but before its admission. Some of them pay up as soon as they receive a notice from an operational creditor,” Bankruptcy Board chief MS Sahoo told news agency PTI. He said that the whole idea of the IBC law is to deter companies and management from making defaults.