Sebi may bar wilful defaulters from raising capital market funds
6 Jan 2015 11:22 PM GMT
The proposed debarment from raising funds through equity or debt markets, including by way of IPOs or FPOs, would apply to all individuals or companies declared as 'wilful defaulter' by RBI.
Besides, the existing listed companies, or their promoters, group companies or directors of an entity declared as 'wilful defaulter' would not be allowed to take control over any other listed company, Sebi said in its draft norms.
The final norms would be framed after taking into account comments from all stakeholders submitted till January 23, the Securities and Exchange Board of India (Sebi) said.
However, existing listed companies, their promoters, group companies and directors of an entity, categorised as 'wilful defaulter', may be allowed to make a rights issue or private placement to qualified institutional buyers, with full disclosures in the offer documents about their 'defaulter' status, Sebi said.
Also, such companies or individuals can be allowed to make a counter offer in case of a hostile bid from another entity, as such capital market dealings would involve outgo of funds, rather than raising of capital by a 'wilful defaulter'.
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 declared as 'wilful defaulters' in the recent past include those associated with Vijay Mallya-led UB group after collapse of its aviation venture Kingfisher Airlines.
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 misutilized, while 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. At present, Sebi norms bar wilful defaulters from issuing convertible debt instruments. However, there is no restriction on such entities from raising funds from the capital market by way of public or rights issues, among others.
To tighten the regulatory noose around wilful defaulters, the Reserve Bank had previously suggested to Sebi that such entities should be prevented from raising funds through capital markets.
Meanwhile, the government is also planning to come out with a separate Bill in Parliament to deal with instances of wilful defaults in payment of bank loans.
Stringent action against the wilful defaulters in terms of attachment of properties under Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), change in management and other legal action against the promoters, among others, are under consideration.
In its discussion paper, Sebi said that restraining of 'wilful defaulters' from accessing the capital market has both positive as well as negative effects.
The regulator said that restraining of 'wilful defaulters' from accessing the capital market will help in protecting more listed companies as well as financial institutions.
"The wilful defaulters do not have access to bank finance which means that the exposure of banks to such wilful defaulters is restricted. The wilful defaulters may be restricted from taking control in another listed companies thereby protecting more listed companies from the promoter/s / management of the wilful defaulter," Sebi said.
Such measures are expected to further enhance the protection of investors in the securities market.
Besides, Sebi said once a listed company will be declared as wilful defaulter, it it cannot access bank finance. In that case, such firm may resort to raising fresh funds from its existing shareholders by way of rights issue.
"Restriction of access to capital market by way of rights issue may negatively impact the operations of the listed company thereby negatively impacting its share price. Such a measure may not be in interest of the shareholders of the listed company," it added.
Besides, the existing listed companies, or their promoters, group companies or directors of an entity declared as 'wilful defaulter' would not be allowed to take control over any other listed company, Sebi said in its draft norms.
The final norms would be framed after taking into account comments from all stakeholders submitted till January 23, the Securities and Exchange Board of India (Sebi) said.
However, existing listed companies, their promoters, group companies and directors of an entity, categorised as 'wilful defaulter', may be allowed to make a rights issue or private placement to qualified institutional buyers, with full disclosures in the offer documents about their 'defaulter' status, Sebi said.
Also, such companies or individuals can be allowed to make a counter offer in case of a hostile bid from another entity, as such capital market dealings would involve outgo of funds, rather than raising of capital by a 'wilful defaulter'.
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 declared as 'wilful defaulters' in the recent past include those associated with Vijay Mallya-led UB group after collapse of its aviation venture Kingfisher Airlines.
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 misutilized, while 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. At present, Sebi norms bar wilful defaulters from issuing convertible debt instruments. However, there is no restriction on such entities from raising funds from the capital market by way of public or rights issues, among others.
To tighten the regulatory noose around wilful defaulters, the Reserve Bank had previously suggested to Sebi that such entities should be prevented from raising funds through capital markets.
Meanwhile, the government is also planning to come out with a separate Bill in Parliament to deal with instances of wilful defaults in payment of bank loans.
Stringent action against the wilful defaulters in terms of attachment of properties under Sarfaesi Act (Securitisation and Reconstruction of Financial Assets and Enforcement of Security Interest Act), change in management and other legal action against the promoters, among others, are under consideration.
In its discussion paper, Sebi said that restraining of 'wilful defaulters' from accessing the capital market has both positive as well as negative effects.
The regulator said that restraining of 'wilful defaulters' from accessing the capital market will help in protecting more listed companies as well as financial institutions.
"The wilful defaulters do not have access to bank finance which means that the exposure of banks to such wilful defaulters is restricted. The wilful defaulters may be restricted from taking control in another listed companies thereby protecting more listed companies from the promoter/s / management of the wilful defaulter," Sebi said.
Such measures are expected to further enhance the protection of investors in the securities market.
Besides, Sebi said once a listed company will be declared as wilful defaulter, it it cannot access bank finance. In that case, such firm may resort to raising fresh funds from its existing shareholders by way of rights issue.
"Restriction of access to capital market by way of rights issue may negatively impact the operations of the listed company thereby negatively impacting its share price. Such a measure may not be in interest of the shareholders of the listed company," it added.
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