India’s capital markets regulator Securities and Exchange Board of India (Sebi) on Monday toughened its stance on wilful defaulters by introducing several restrictions which include cutting access to public issue of equity, debt or any non-convertible preferential shares.
However, Sebi has allowed the use of rights issue or institutional placements such as such as qualified institutional placements (QIP) or institutional placement programme (IPP) to raise funds.
The regulator also restricts a wilful defaulter from making an offer to acquire a listed company, but an entity can make a counter-offer to protect itself from being targetted in a hostile bid, Sebi said in its discussion paper.
Experts on capital markets and corporate law expressed disappointment on Sebi’s discussion paper to block wilful defaulters and said the move is against the interest of banks.
Restricting wilful defaulters from public securities markets, but allowing use of institutional placement and rights issue also draws division between a sophisticated investor and a retail investor, who has inferior knowledge, funds, and decision power as compared to the sophisticated ones, they said.
Experts highlighted repeated bankruptcy of Donald J Trump, who has never been barred and still managed to raise money from the public.
“The decision to block wilful defaulters is actually against the interest of banks,” said Sandeep Parekh, former Sebi ED and founder of law firm Finsec Law Advisors. “If some individual wants to give money to a defaulter, allow him to do so. So long as somebody is not openly crooked and subject to full disclosures, they (willful defaulters) should not be barred. Specially because the kind of regulatory practice followed in India is of full disclosure,” Parekh added.
Sebi’s recommendations are part of a tougher approach against those who fail to pay back bank loans. The securities market regulator has set January 23, 2015 as the last date for public comments on the recommendations.
The Sebi board, in its meeting on November 19, 2014, had approved a proposal to review the policy that restricts persons or entities, categorised as wilful defaulters from raising capital after going through the public consultation process.
As per the Indian law, a “wilful defaulter” is classified as an entity or person who defaults on payment or repayment obligations to the lender despite the ability to repay. RBI’s definition also extends to an entity which has the capacity to repay but diverts funds towards other purposes against the terms of loan agreement, or siphoned off funds.