India's Sebi set to get tougher with wilful defaulters

The Securities and Exchange Board of India (Sebi) will make it difficult for so-called wilful defaulters from raising fresh equity or debt from the public, according to two people familiar with the agenda of the regulator's next board meeting.

The move will mark yet another effort by the Indian government, the Reserve Bank of India (RBI) and now Sebi to crack down on the problem of bad loans.

A wilful defaulter is a company or individual who borrowed money and has no intention of paying it back, has diverted the money to some other purpose than the one for which it was borrowed, or has sold the asset acquired or developed with the money without the lender's knowledge.

Sebi will, however, allow such entities to raise funds through rights issues or share sales to institutional investors, said one of the two per- sons, asking not to be identified.

The entity will need to disclose itself as a wilful defaulter in the offer document if it chooses to go in for a rights issue (sale of shares to existing shareholders), or a qualified institutional placement, added this person

Sebi's board meeting is scheduled for 12 March. A Sebi spokesperson did not respond to an email seeking comment.

In January 2015, Sebi issued a draft paper proposing that wilful defaulters would not be allowed to sell shares, debt securities and nonconvertible preference redeemable shares to the public.

The paper suggested that wilful defaulters be barred from taking control of another listed entity, but that they be allowed to participate in counter offers to deal with hostile takeover bids.

Each of these restrictions would be applicable if the issuer, its promoter, group company or director of the issuer of such securities were in the list of wilful defaulters published by RBI, the stock market regulator said.

"The final regulations will be based on the discussion paper that dealt with the wilful defaulters," said the second person, who too asked not to be identified.

In addition to restrictions to fund raising, such entities and persons will be ineligible to serve as market intermediaries or run mutual funds or alternative investment funds, added the second person. Bankers said such restrictions would help.

RBI has been asking banks to get tough on wilful defaulters and has a tough set of rules in place which say that anyone tagged a wilful defaulter cannot raise fresh funds from the banking system.

The banking regulator, however, has been of the view that such defaulters also need to have their access to capital markets restricted. "If someone has knowingly stopped repaying banks, then why should he be allowed to access the capital mar- kets? Any such limitation on the borrower would definitely be a power for the banks since they can squeeze these wilful defaulters better," said Ashwani Kumar, chairman and managing director of Dena Bank and chairman of the Indian Banks' Association.

While RBI has not disclosed the quantum of loans that fall under the wilful default category, data has emerged from some large public sector banks.

Loans worth Rs.11,700 crore given by State Bank of India have been locked up as non-performing assets as nearly 1,160 defaulters have wilfully decided not to repay, PTI reported on 24 February.

Another state-owned lender, Punjab National Bank (PNB), declared 904 borrowers who owed it a combined Rs.10,869.71 crore as of December-end as wilful defaulters. PNB added 140 companies to the list of wilful defaulters in the December quarter alone.

While banks believe that banning wilful defaulters helps their cause, corporate lawyers caution against a sledgehammer approach.

"Wilful defaulters should be restricted from raising funds from public because there is no accountability to return funds to shareholders. However, Sebi should steer clear of a blanket restriction on fund-raising by defaulters as this would potentially limit the chances of a revival of the company and the existing shareholders would end up paying the price," said Tejesh Chitlangi, a partner at IC Legal.

Parag Bhide, senior associate at Advaya Legal, said Sebi should approach the issue on a case-by-case basis. "A complete ban on wilful defaulters may not be good for existing shareholders, including retail investors. Further, such a lifetime exile from financial markets may not be constitutional. Ideally, there should be some time limit (three-five years) for such a ban."