Sebi Cracks Whip on Wilful Defaulters

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New Delhi: Cracking its whip on ‘wilful loan defaulters’, the Securities and Exchange Board of India (Sebi) on Saturday decided to bar them from raising public funds through stocks and bonds as also from taking board positions at listed companies – a move that would disqualify beleaguered Vijay Mallya from various posts.

Besides, the market regulator has also decided to bar such defaulters from setting up market intermediaries such as mutual funds and brokerage firms.

These defaulters would also be not allowed to take 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.

Mr Mallya recently resigned as chairman and director of United Spirits Ltd 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 board of various other companies including those from his UB Group as also a few others including Indian subsidiaries of some multinational companies.

Addressing reporters after an important board meeting of Sebi, which was also addressed by Finance Minister Arun Jaitley, the regulator’s Chairman, U K Sinha, said the new rules on restraining wilful defaulters would come into effect after they get notified.

“After the notification, all the persons would stand disqualified from all positions at listed companies,” Mr Sinha said, but refused to comment on any individual. These restrictions would apply to every individual and company declared as wilful defaulter as per the Reserve Bank norms.

Sebi said the Reserve Bank of India norms lay down safeguards to be exercised by banks to contain financial activities of a wilful defaults, but it was felt that the regulator should restrict the access to capital markets for raising funds from public by such defaulters.

The proposals approved by the Sebi board in this regard included that no issuer can 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.

“Any company or its promoters and directors categorised as wilful defaulters would not be allowed to take control over other listed company.

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

The regulator further said the criteria for determining a ‘fit and proper person’ in Sebi Regulations would be amended to include that no fresh registration shall be granted to any entity if the entity or its promoters or its 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 their existing 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 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, Sebi decided on putting curbs on IPOs and 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.

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