Sebi bans wilful defaulters from markets, holding board positions

Wilful defaulters will no longer be able to tap the securities markets to raise funds and hold board positions at listed companies with Sebi notifying the amended norms in this regard.

While putting in place a stringent framework to choke the funding sources for wilful defaulters, Sebi has also restrained such entities from setting up market intermediaries like mutual funds and brokerage firms.

Also, these defaulters have been barred from taking control of any other listed company.

The move assumes significance in the wake of a raging controversy over UB Group Chairman Vijay Mallya, who has exited the country amid continuing efforts by the banks to recover dues totalling over Rs 9,000 crore of unpaid loans and interest.

Mallya recently resigned as Chairman and Director of United Spirits as part of a sweetheart deal with the company's new owner Diageo, a deal which itself is under Sebi's scanner. He, however, remains on the board of some other companies.

The new rules, which has become effective from Wednesday, would apply to every individual and company declared as wilful defaulter as per the Reserve Bank of India (RBI) norms.

The issuer can not make a public issue of shares, debt securities or non-convertible redeemable preference shares if the company or its promoters or directors figure on the list of wilful defaulters, Securities and Exchange Board of India (Sebi) said in a notification dated May 25.

Besides, any company or its promoters and directors categorised as wilful defaulters are not allowed to take control over other listed company.

However, if a listed company or its promoters or directors are categorised as wilful defaulter, and there is a takeover offer in respect of that listed company, they may be allowed to make a competing offer.

The regulator said no fresh registration will be granted to any entity in case the entity itself or its promoters or directors or key managerial personnel are included in the list of wilful defaulters.

Some entities tend to tap equity and debt markets for funds after banks stop giving credit for willfully defaulting on loans, but small investors get trapped due to lack of information about their 'defaulter' status.

However, there was a counter-view that a complete fund-raising ban on 'wilful defaulters' could come in a way of the promoters of a listed company seeking to infuse fresh funds, which may hurt the interest of minority shareholders.

Seeking to strike a balance, the Securities and Exchange Board of India (Sebi) has put a curb on initial public offerings (IPOs) and follow on public offerings (FPOs) by such entities where funds are raised from the public.

However, they can be allowed to tap existing shareholders including promoters by way of rights issue, private placement or preferential allotment.

In case defaulters take these routes for fund mop-up, they need to disclose the name of the bank which declared them wilful defaulters along with the outstanding amount.

Besides, they need to declare the year in which the entities were declared wilful defaulters and steps taken by them for the removal from such list among others.

An individual or a company is declared 'wilful defaulter' for deliberate non-payment of the dues despite adequate cash flow and good net worth, and for siphoning off funds to the detriment of the defaulting unit.

Other factors leading to such declaration by banks include assets not being purchased as per the financing conditions or proceedings being misutilised.

An entity can also be declared wilful defaulter for misrepresentation or falsification of records, for disposal or removal of securities without bank's knowledge and for fraudulent deals.

RBI had initially approached Sebi to put curbs on fund-raising activities of wilful defaulters, after which the capital markets regulator had started a process of seeking inputs from all the stakeholders for such a move.

The decision follows discussions between various regulators and government departments to tighten the regulatory noose on wilful defaulters, especially in the wake of many such cases coming to fore in recent months. After that, the board of Sebi approved the norms in this regard in March.

Some of the entities that have been declared 'wilful defaulters' in the recent past include those associated with Vijay Mallya-led UB Group after the collapse of its aviation venture Kingfisher Airlines.