IPO window likely to shut for wilful defaulters

Access to secondary market could, however, continue; Sebi discusses issue, likely to soon propose new policy guidelines

The Securities and Exchange Board of India (Sebi) is likely to bar wilful defaulters from launching Initial Public Offers (IPOs), while their access to the secondary market is likely to continue.

An entity is tagged a wilful defaulter if he or it defaults despite having the ability to pay or uses the loan for purposes other than specified. The market regulator might only restrict such entities from accessing the primary market but not issue any major curbs on their secondary market activities, said three people in the know.

Sebi is also expected to issue a policy dealing with entities classified as wilful defaulters. The government and the Reserve Bank of India (RBI) have already started tightening the screws on such defaulters, as non-performing assets (NPAs) in the system are on the rise.

DEFAULT SETTING

• Entities declared wilful defaulters might not be allowed to come out with public issue
• Listed companies declared wilful defaulters, however, might be allowed rights issue
• Promoters declared wilful defaulters could be allowed to make open offer to prevent hostile takeovers
• A borrower defaulting on loans despite having repayment ability is termed wilful defaulter
• RBI, government have been tightening the noose around defaulters, as NPAs have reached alarming levels
• Sebi, too, is expected to issue policy to deal with wilful defaulters in capital markets

Currently, entities listed as wilful defaulters by RBI aren’t allowed to come out with a public issue of debt securities. However, there is no restriction on them from launching IPOs.

Sebi is in favour of restricting such entities from the primary market. It is likely to expand the conditions laid down in the Issue of Capital and Disclosure Requirements regulations, to restrict wilful defaulters from raising fresh equity from the public, said a Sebi source. Adding, it isn't keen on a total capital market ban. It means a company, if declared a wilful defaulter, may still be able to come out with a rights offering. Or a promoter entity categorised as a wilful defaulter will be allowed to make an open offer to fend off hostile takeovers.

The issue of imposing restrictions on such defaulters was discussed at Sebi’s board meeting last month. It was again taken up at the Primary Market Advisory Committee meet, earlier this month.

Market experts are divided. “There should be a complete ban on wilful defaulters. Entities are so tagged for a reason. They default on loans despite having the capacity to repay. There should be no place for such entities in the capital market,” said Prithvi Haldea, chairman, Prime Database.

Some however, believe banning already listed companies might not be in the interest of public shareholders. “A listed company declared a wilful defaulter doesn’t get proper access to bank finance. If it is also barred from raising equity capital through a rights issue or private placement, it could prove a death knell. Sebi should allow an existing company to tap the capital market on a case by case basis,” said B Madhuprasad, chairman, Keynote Corporate Services, and head of the sectoral body for investment bankers.

The curbs on wilful defaulters could hit companies which solely come out with IPOs to repay loans, said some bankers.

Identifying such defaulters could also be contentious, said the Sebi source. The financial institutions give details in this regard to RBI. The list is made available to Sebi by the RBI and the Credit Information Bureau of India. Technically, a borrower is declared a wilful defaulter by RBI’s intermediary, not by the central bank itself. The regulator is said to be debating whether it would be appropriate for it to take action based only on a list prepared by RBI’s intermediary.