Sebi to release guidelines on wilful defaulters soon

Regulator might impose three-year ban on entities with wilful defaulter tag

The Securities and Exchange Board of India (Sebi) might soon announce guidelines for those labelled wilful defaulters by banks. According to people in the know, such entities might be barred from accessing the securities market for about three years.

The regulator might also release the framework for dealing with entities defaulting on bank loans soon, sources said.

“Sebi might 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 person privy to the matter.

An entity is declared a wilful defaulter by a lender if it defaults on loan repayments despite having the capacity to repay.

Also, entities that use the loan amount for purposes other than specified ones could be declared wilful defaulters.

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.

Sebi and the Reserve Bank of India (RBI) are also planning increased coordination to ensure wilful defaulters are kept away from financial markets. Currently, RBI shares data on wilful defaulters with Sebi, credit rating agencies and Credit Information Bureau of India Ltd on a quarterly basis.

“Work is underway on this front…we will like to go the RBI way on this... We can say ‘you (the wilful defaulter) cannot raise money from markets’,” Sebi Chairman U K Sinha said at a recent event. “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,” he had added.

Sebi acts against those towards whom adverse orders are passed by other regulatory authorities. Experts, however, say such action is limited to entities seeking to be market intermediaries; it doesn’t apply to promoters. They add the market regulator should make changes to the Securities Contracts and Regulations Act to act against promoter entities declared defaulters by authorities such as RBI.

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.

If Sebi expedited the implementation of the new framework, it could impact transactions awaiting regulatory clearances, experts said.