Sebi to dry fund-raising taps for wilful loan defaulters

Regulator aims to cut off access to capital markets, protecting small investor who may not know of default status

Putting its weight behind the RBI and the government in their fight against bad loans, regulator Sebi plans to make it tougher for 'wilful defaulters' and their companies to raise funds from the capital markets.

The proposed move, likely to be discussed by the board of Sebi in its next meeting, aims to dry the fund-raising taps for the wilful defaulters of bank loans and also safeguard the interest of small investors.

Some entities tend to tap equity and debt markets for funds after banks stop giving credit for willfully defaulting on their existing loans, but small investors get trapped due to lack of information about their 'defaulter' status.

However, there is a counter-view that a complete fund- raising ban on 'wilful defaulters' could come in way of the promoters of a listed company seeking to infuse fresh funds, which may hurt the interest of minority shareholders.

Seeking to strike a balance, the Securities and Exchange Board of India (Sebi) is mulling putting curbs on IPOs and FPOs by such entities where funds are raised from the public.

However, they can be allowed to tap existing shareholders including promoters by way of rights issue, private placement or preferential allotment, a senior official said.

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 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 deals.

RBI had initially approached Sebi to put curbs on fund-raising activities of wilful defaulters, after which the capital markets regulator had started a process of seeking inputs from all the stakeholders for such a move.

Another proposal seeks to bar a wilful defaulter from taking control of any other listed company.

However, 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'.

Sebi has already relaxed its norms for banks to take control of the companies that have failed to clear their dues despite going through a corporate debt restructuring process.

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 that have been declared 'wilful defaulters' in the recent past include those associated with Vijay Mallya-led UB Group after collapse of its aviation venture Kingfisher Airlines.