Sebi might leash wilful defaulters in markets

Regulator to introduce 'brightline' stance for defining control under Takeover Regulations

Market regulator Securities and Exchange Board of India (Sebi) is likely to approve a proposal to bar wilful defaulters from making public issue of equity, debt, or hybrid securities. However, Sebi plans to allow a company declared wilful defaulter to raise capital through rights issue or qualified institutional placements to ensure minority shareholders are not put in a disadvantageous situation due to the wrongdoing of promoters.

The regulator will also provide more teeth to its takeover regulations by introducing 'bright lines' to define change in control in a merger and acquisition.

"By taking a bright line stance, Sebi will try to send a clear signal that changes in control will not solely be linked to percentage. If an entity acquires only 20 per cent but gets some say in management of listed target company, it may result in control," said a legal expert.

SEBI MEETING AGENDA

Key topics:

• Imposing capital market access restrictions on wilful defaulters
• ‘Bright line’ test to define change in control under the takeover regulations

Other points:

• Leeway to exchanges on transferring 25% of profits to settlement guarantee fund
• Discussing recent Budget announcements on securities market
• Relaxing criteria to absorb 15 FMC employees in Sebi    
• Budget Estimates for new financial year
• Status update on the campus of the Rs 400-crore National Institute of Securities Markets

The decisions are likely to be taken by the Sebi board at its meeting scheduled for Saturday in New Delhi, which will also be attended by Finance Minister Arun Jaitley.

According to sources, the board is likely to accept all recommendations made in a discussion paper on wilful defaulters floated a year ago. Under the current regulatory framework, a wilful defaulter is allowed to raise capital by issuing shares simply by making adequate disclosures. Although no wilful defaulter has raised capital by way of initial public offerings (IPO) or a follow-on public offer (FPO), Sebi plans to plug this loophole, people in the know said. Another important topic of discussion for the Sebi board is introducing 'bright lines' in the takeover regulations. At present, an open offer is triggered when an entity buys minimum 25 per cent shares in a listed target. However, in some cases an entity acquires less than the threshold to avoid open offer obligation, yet gains a say in the management of the target company.

A bright line rule will help Sebi identify and act in such cases.

The move comes in the wake of some cases where the issue of 'control' was hotly debated, including in the Jet-Etihad deal. Sebi has received suggestions from investors on this.

The threshold limit for triggering an open offer is 25 per cent of shares of the target company.

"The concept of control under takeover regulations needs greater clarity as currently several practical issues are being faced by the acquirers," said Tejesh Chitlangi, partner at IC Legal.

Besides these two key issues, the Sebi board will discuss securities-market-related announcements made in the Budget, which includes introducing new derivative products in the commodities' segment.