MUMBAI: The Securities and Exchange Board of India (SEBI) on Monday recommended that while wilful defaulters may not be permitted to tap funds from the public, yet they may be granted flexibility to seek funds from their own shareholders and qualified institutions, and make counter offer in case of a take-over.
The decision follows discussions between various regulators and government departments to tighten the regulatory noose on wilful defaulters.
With a view to seeking wider suggestions, SEBI has proposed changes regarding restricting wilful defaulters from accessing capital markets. The move by the market regulator may be seen in conjunction with efforts by the Reserve Bank of India (RBI) to make it tougher for wilful defaulters to cheat the system. To corner these defaulters, details are usually shared between RBI, SEBI and Credit Information Bureau (India) or CIBIL.
SEBI, in its draft norms, has recommended that no issuer shall be permitted to make a public issue of equity, or debt, if its promoter, or group companies or any of its directors are in the category of wilful defaulters as published by RBI, or in the case of debt, have defaulted on payment of principal or interest.
Likewise, SEBI has recommended that no issuer shall be permitted to make a public issue of non-convertible redeemable preference shares, if its promoter, any group company or any director is in default of principal or interest to the public.
Yet, existing listed company, its promoters, any group company and directors may be permitted to make a rights issue or a sale to qualified institutional buyers, but only after making full disclosures in the offer document.
SEBI is enclosing this relaxation so to enable existing and or qualified large investors to be able breathe life into the company with fresh funds. Else, choking off funds completely could kill a company.
“Theoretically, the shareholders should infuse funds if the company is in trouble,” SEBI suggests. “Shutting down finance even from own shareholders appears to be unreasonable.”
In case of a takeover, SEBI doesn't propose to be as lenient. It has proposed that none of those categorised as wilful defaulters be allowed to take control over another listed company. Yet, a wilful defaulter should be permitted to make a counter-offer in case of a hostile bid. Restricting such wilful defaulters from making a counter-bid may not be legally tenable, SEBI said.
The final norms would be framed after taking into account comments from all stakeholders submitted till January 23, Sebi said.
In the eyes of regulators
■ 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
■ Wilful defaulter tag by banks also 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 transactions