Fear of losing control over their companies forces promoters of over 2100 firms to pay dues worth Rs 83,000 crore

Over 2100 companies have reportedly paid outstanding dues worth Rs 83,000 crore, a majority of which were paid after the government amended the Insolvency and Bankruptcy Code (IBC) in 2016, showed data compiled by the Ministry of Corporate Affairs (MCA), according to a media report.

Section 29A of the IBC, which was added in November 2016, introduced four layers of ineligibility for potential bidders. In this connection, the Insolvency Law Committee had suggested that those who contributed to the default of a company, or are otherwise undesirable, should be ineligible from bidding for stressed assets.

This triggered a fear among promoters of losing control of their firms, and of being banned from bidding for other distressed assets. “The real success is the pressure on loan defaulters to clear dues. The borrowing and lending culture is changing because of the IBC,” an unnamed source was quoted as saying by The Times of India.

Representational image. Reuters

The example of the world's largest steelmaker, ArcelorMittal, in this case, shows how the amendment has prompted companies to pay up.

ArcelorMittal has reportedly transferred Rs 7,000 crore to the State Bank of India (SBI) to clear the dues of defaulter Uttam Galva Steels, so that it becomes eligible to bid for Essar Steel.

The move to park the roughly Rs 7,000 crore in an escrow account cam after ArcelorMittal's bid for Essar Steel was questioned, because of its past shareholding in Uttam Galva.

Insolvency and bankruptcy rules bar a delinquent promoter from bidding for a company or asset that is being auctioned to recover bank dues. ArcelorMittal is locked in a direct fight with Russia's VTB Capital-backed NuMetal Ltd in the takeover battle for Essar Steel, which is being auctioned for defaulting on payment of Rs 49,000 crore bank loans.

Amendments made to the IBC, which came into force in December 2016, prevent, among others, wilful defaulters and those whose accounts have been classified as non-performing assets (NPAs) from bidding for stressed assets. Lenders classify a loan as an NPA, or a bad loan, if dues are unpaid for 90 days.