In­dia's Sebi set to get tougher with wil­ful de­fault­ers

The Pak Banker - - 6BUSINESS -

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."

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