SEBI bars wilful defaulters from raising fresh funds, acquisitions

The new norms are based on the regulations framed by the Reserve Bank of India. he country’s stock market regulator, Securities and Exchange Board of India (SEBI), on Saturday barred ‘wilful defaulters’ of bank loans from accessing the capital market or to acquire another listed entity as part of its attempts to tighten the regulatory framework. The regulator has decided that if a listed entity or its promoter has been declared a wilful defaulter then such an entity will not be allowed to make a public issue of equity shares, debt or any other convertible securities. The decision was taken by the SEBI board that met in New Delhi. The new norms are based on the regulations framed by the Reserve Bank of India (RBI) that lays down safeguards to be exercised by banks to contain the financial activities of a wilful defaulter. The RBI defines a ‘wilful defaulter’ as an entity that defaults on its payment obligations even if it has the financial capacity to pay back the debts. The SEBI move has come at a time when banks have moved the Supreme Court against Vijay Mallya, who has been declared a wilful defaulter. Meanwhile, SEBI has also decided that a wilful defaulter will not be allowed to acquire any other listed company and the guidelines for determining ‘fit and proper person’ will also be amended to keep such wilful defaulters out of its ambit. “Any company or its promoter or its director categorized as wilful defaulter may not be allowed to take control over other listed entity. However, if a listed company or its promoter or its director is categorized as wilful defaulter, and there is a take-over offer in respect of the listed company, they may be allowed to make competing offer,” said a statement issued by SEBI. Abizer Diwanji, partner and national leader – financial services, EY, a consulting firm, said that SEBI’s strictures on wilful defaulters, though conceptually correct, have serious limitations as it pre-requisites banks to be judicious. “RBI guidelines state that diversion of funds by a defaulter classifies as wilful. Given that our bad debt problem has been built over years of successive CDRs (corporate debt restructuring) and restructurings where additional debt raised for growth was used for interest payments to protect NPAs (non performing assets), pricing diversion is easy not realising that some of these may be conscious. Also, one bank can declare a defaulter wilful when the fact that such diversion was known or not at the time of fund sanction can never be proven,” Mr. Diwanji said. The SEBI has also decided to increase significantly its activities related to investor education and awareness and plans to appoint at least one ‘Resource Person’ in each district of the country for providing such programmes on a regular basis in all areas. In the financial year 2016-17, SEBI plans to encourage delisting of suspended companies, strengthen its surveillance mechanism, enhance the functioning of credit rating agencies and encourage the use of technology to streamline ‘know your customer’ procedure In another move that would help investors take a better informed decision, the capital market watchdog has said that companies will have to disclose the impact of all remarks – qualifications in accounting parlance – in a separate statement along with the annual financial statments. While the new mechanism will be applicable from the financial year ended 31 March 2016, the management of a company will have the right to give its views on the qualifications along with the impact.