Clarity, discretion sought on wilful defaulter norms

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Mumbai: The wilful defaulter norms issued by the Securities and Exchange Bureau of India (Sebi) on Saturday have encouraged bankers trying to hold errant borrowers accountable and reduce fraud.

“There is a clear message that no matter what, banks will not be extending any credit facilities to a company which continues to have anyone who is termed as a wilful defaulter on its board. Now, these companies won’t be able to access other markets for funding either. This means that the companies will have to ensure that such directors step down from their board positions. We have been aggressively pushing for this,” said Sunil Srivastava, deputy managing director, State Bank of India.

Lenders say these norms are essential for the banking system in times of high bad loans and when promoters divert funds.

“These are all important steps in creating a stable lending environment in the longer run. If there are proper incentives and disincentives in the system to ensure that the banking system thrives, then it will help the economy,” said Jairam Sridharan, chief financial officer, Axis Bank.

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.

However, it appears only the banking system is appreciative of the stringent nature of the new norms.

“A defaulter, whether willful or not, requires restructuring, and imposing prohibitions on the business entity could, in fact, hurt lenders for whose benefit the policy on wilful defaulters has been developed. Expanding the scope to directors would also mean that turning around a company that is accused of being a wilful defaulter would become impossible since no one would join the board even after throwing out the old promoters,” said Somasekhar Sundaresan, partner, J Sagar Associates.

“Detailed provisions on when a borrowing entity ceases to be a wilful defaulter would be needed—it cannot be after the board is replaced since, so long as it is a wilful defaulter, no one would be able to join the board,” Sundaresan added.

While the steps by the regulators are in the right direction, they expect lenders to use their powers judiciously. Especially in cases where funds are diverted, RBI has been unclear on how to identify a diversion, said Abizer Diwanji, partner and national leader, financial services at EY.

“Given that our bad debt problem has been built over years of successive CDRs (corporate debt restructuring) and other restructurings where additional debt raised for growth was used for interest payments to protect NPAs, pricing (in) diversion is not easy, realising that some of these may be conscious,” Diwanji said.

Also, it can never be proven whether such diversions were known at the time of sanctioning credit, Diwanji warned.

“It may be more prudent for RBI to clarify that diversion should relate to funds taken out of the business and not those consumed within the business but for different purposes,” he added.

While the legal fraternity is by and large against a blanket ban on fund-raising, they agree restrictions on raising funds is a prudent measure.

“Raising money in the form of equity does not create an obligation to repay unlike a loan and hence, wilful defaulters should rightly be barred from accessing such money via public offers. Second, leaving some room to raise money via rights issue without risking the general public at large, still provides some opportunity to a wilful defaulter to survive and restructure its operations,” said Tejesh Chitlangi, partner, IC Legal.

“An absolute prohibition on registering any entity having a promoter, key person tagged as a wilful defaulter may inadvertently impact certain genuine players including the private equity, venture capital (VC) funds and non-banking financial companies (NBFCs) since several times their representatives whilst acting as nominee directors on investee companies get classified as such for no fault of theirs,” Chitlangi said.

Listed companies which were declared wilful defaulters have had a tough time on the bourses. Winsome Diamonds and Jewelry Ltd which has been named a wilful defaulter and owes Punjab National Bank Rs.900.37 crore is currently trading at BSE at 44 paisa while it was trading at an all-time high of Rs.40 in the beginning of 2013.

S. Kumars Nationwide, which owes PNB Rs.146.82 crore, was trading at Rs.163.5 on 16 November 2007; it fell to Rs.2.85 before it was suspended by BSE for lack of disclosures. Kingfisher Airlines (KFA) which owes banks close to Rs.9,000 crore got listed in the 2006 with an opening price of Rs.89.65, touched an all-time high ofRs.290.10 on 14 December 2007. The stock was suspended by NSE and BSE in December 2014 for listing agreement violations. At that time, KFA was languishing at Rs.2 with no trading whatsoever.

After its board meeting on Saturday, Sebi announced that wilful defaulters would not be able to access the capital market to raise funds from the general public.

“No issuer shall make a public issue of equity securities/debt securities/non-convertible redeemable preference shares, if the issuer company or its promoter or its director is in the list of the wilful defaulters,” said a press release issued by Sebi.

Such entities will not be allowed to take control of another listed entity, Sebi said. These firms will also not be allowed to set up market entities like mutual funds.

At a press conference in New Delhi, U.K. Sinha, chairman of Sebi said all rules made by the regulator are prospective in nature.

In July 2012, the Reserve Bank of India (RBI) had ensured that borrowers who are part of the wilful defaulters list would not be able to receive bank funding. Moreover, directors identified to have siphoned funds from the credit provided to their companies will not be able to access funds from financial institutions for five years for purposes of floating new ventures.