Sebi to amend guidelines for willful defaulters on November 19

As a part of board agenda, Sebi may bar wilful defaulters from accessing capital markets for 3 years

Taking the war on rising non-performing assets (NPAs) and wilful defaulters a step further the markets regulator, Securities and Exchange Board of India (Sebi), is likely to amend its regulations on restrictions on wilful defaulters.

Sources said by way of an amendment to the Sebi Act, 1992, borrowers with a wilful defaulter tag will be barred from raising funds from the market for three years. The changes will be announced in the Sebi board meeting on November 19.  

The regulator is also going to release the framework for dealing with entities defaulting on bank loans soon. “Sebi, in the final guidelines, will deem wilful defaulters not ‘fit and proper’ from the perspective of accessing capital markets. The ban could be for a period of more than three years,” said a source.

TIGHTENING THE GRIP

• Sebi to amend guidelines on restrictions on wilful defaulters in the coming board meeting
• Sebi could bar defaulters from fund raising
• The ban could be for a period of 3 years
• Currently, Sebi provisions for different forms of fund raising vary

The new framework will be applicable to those approaching the capital market for raising funds for the first time, as well as the listed companies and entities associated with it. Currently, the Reserve Bank of India (RBI) and CIBIL communicate the list of wilful defaulters to Sebi.

However, Sebi different regulations differ in their approach whilst dealing with defaulters. For instance, Sebi Issue of Capital and Disclosure Requirements prohibit any issuance of convertible debt instruments by a wilful defaulter. Similarly, a Small and Medium Enterprise (SME) cannot list its securities if such SME or any of its promoters, group companies or directors has appeared in RBI’s wilful defaulter list.

Sebi regulations on issuance of Non-Convertible-Debentures (NCDs) and non-convertible redeemable preference shares do not prescribe such prohibition and only mandate the financial defaults to be disclosed in offering documents.

“If wilful defaulters are debarred from raising money across instruments and markets, then it would be a sound measure to deal with the problem and bring consistency in Sebi’s approach,” said Tejesh Chitlangi, partner, IC Legal.

“There is a difference between a non-performing asset and a wilful defaulter... the bank has already come to a finding and the process has gone to a certain level before someone is called a wilful defaulter. We can say the wilful defaulter cannot raise money from markets,” Sebi chairman U K Sinha had said at an event.

Earlier this year, the central bank had proposed to Sebi that wilful defaulters be barred from raising funds through issuance of any securities in the capital market.

Recently, the central bank had modified its policies regarding wilful defaulters stating that any borrower where evidence indicates that he has used the funds for any other purposes other than the specified one.  

Currently, work is in progress to make wilful default a crime under the Indian Penal Code (IPC) for which the ministry is working on amending the Sarfaesi Act to make adequate provisions for tackling defaulters. Another section of market believes that any penalty on wilful defaulters should be dealt with sensitively.

"The provision of barring a listed entity can act as deterrent and could hurt the interest of public shareholders. In such cases the promoter should be penalised not the public shareholders. For a listed company there is need for a judicious approach like the promoter could be barred from raising funds for its future ventures," said Vivek Mehra, executive director, PwC India.