A week after the Securities and Exchange Board of India (Sebi)’s norms banning wilful defaulters from raising fresh capital came into effect, legal experts have expressed concerns that the norms would inadvertently impact certain genuine players such as independent directors and board members appointed by venture capital and private equity players.
Lawyers who spoke with FE said directors nominated by lending institutions and private equity investors in a company could be classified as wilful defaulters and barred from capital markets just by the virtue of their presence on the board of a company which has wilfully defaulted.
According to the Sebi notification on wilful defaulters, the issuer cannot make a public issue of shares, debt securities or non-convertible redeemable preference shares if the company or its promoters or directors figure on the list of wilful defaulters. Any company or its promoters and directors categorised as wilful defaulters are not allowed to take control over other listed companies.
According to Sudhir Bassi, executive director, Khaitan & Co, these provisions are not appropriate and the prohibition should have been confined to the issuer, its promoters and whole-time directors. “For instance, the norms impact independent directors who don’t take part in day today activities of a company. These directors are a part of boards of various other companies. Hence, if they get tagged as wilful defaulter in a company it would lead to a scenario wherein all other firms where they are directors would be debarred from accessing the public markets,” Bassi said.
Lawyers also said there is no appropriate redressal mechanism in cases of misjudgements from the regulator. “As the penalty is now severe, Sebi or RBI should provide for a redressal mechanism after a bank has declared the borrower as a wilful defaulter. Currently, the defaulting company or promoter can challenge the bank’s decision only through the court process which could be time consuming” said Sapan Gupta, Partner and National Head Banking and Finance, Shardul Amarchand Mangaldas.
The new rules, which came into effect May 25, would apply to every individual and company declared as wilful defaulter as per Reserve Bank of India norms. No fresh registration will be granted to any entity in case the entity itself or its promoters or directors or key managerial personnel are included in the list of wilful defaulters. However, they can be allowed to tap existing shareholders, including promoters, by way of rights issue, private placement or preferential allotment.
As per the earlier regulations, a wilful defaulter could raise money through an initial public offering or offer for sale in equity markets by making sufficient disclosures in the offer documents. These disclosures are part of Sebi Issue of Capital and Disclosure Requirements regulations.