The resolution plan proposed by AreclorMittal and approved by Indian courts has obliterated the ownership rights of the erstwhile promoters of Essar Steel India. But it has also left a huge number of small shareholders holding worthless bits of papers.

According to Section X, part B of the plan, which has now been implemented, shares of all erstwhile equity holders, will come to naught, a communication from the company said.

The development shows the risks and the perils that any equity shareholder, including a minority holder, faces if he continues to hang on to the shares of a company that is put through the bankruptcy resolution process.

Although Essar Steel was delisted, a fairly large number of minority shareholders had continued to hold on to the stock in either dematerialised or physical form, possibly because they were never given a clear exit option.

A communication sent out on Thursday said those shares have been debited from their demat accounts. Shareholders holding physical shares have been advised that those pieces of paper are now worthless.

“Section X, part B of the resolution plan provides for capital reduction of the entire existing issued, subscribed and paid-up share capital (both equity and preference) of the company held by the existing promoters and public shareholders such that AMIPL (along with its nominee shareholders) will be the sole shareholder of the company.

Accordingly, the entire existing issued, subscribed and paid-up share capital of the company stood cancelled and extinguished with effect from December 16, 2019. Pursuant to such capital reduction and cancellation, the shares of the company held by you will be or have been debited from your demat account,” the communication said.

Restructuring of capital, which often translates into reduction in paid-up capital, is often used to ensure shareholders also take a hit for a business failure just as lenders take a haircut. Vedanta restructured the share capital in Electrosteel, while the Tatas infused capital in Bhushan as part of the resolution plan. In both cases, the capital value of the existing shares had reduced drastically. However, the haircut for an Essar Steel shareholder is 100 per cent compared with secured financial creditors who have recovered 90 per cent of their claims.

The promoters, the Ruia family, held a 97.54 per cent stake in Essar Steel while the public held 2.54 per cent. The percentage of shareholders holding less than Rs 1 lakh worth of shares was 1.81 per cent, indicating that a significant number of small shareholders lost out completely under ArcelorMittal’s resolution plan.

It further adds: “If you are holding shares in physical form, please note the share certificates are no more valid.”