Editorial: Curbing wilful defaulters

By: | Published: January 8, 2015 12:33 AM

Sebi adds to pressure being put by RBI

It is a pity the Calcutta High Hourt rejected United Bank of India’s (UBI) plea to declare Vijay Mallya and a couple of other directors of Kingfisher Airlines (KFA) wilful defaulters on a mere technical ground. Hopefully, UBI will win the appeal in the division bench—which is what the management has said it proposes to to—since the HC didn’t really find any flaws with the evidence put forward. Once UBI gets a verdict in its favour, and a precedence is set for such cases, it should make it easier for other banks to pursue other errant borrowers. Although banks have woken up a little late in the day, and while the legal process can be challenging, banks ought not to give up.

They already have RBI backing them to the hilt—the RBI governor had recently described such defaulters as freeloaders—and now they have support from the capital markets regulator too. Sebi has proposed, in a discussion paper, that wilful defaulters be allowed to tap the stock and bond markets only to a limited extent. The idea is not to completely choke off the sources of funds, which could hurt the interests of minority shareholders, but ensure the company is able to recapitalise itself and to improve the debt-equity ratio; so a wilful defaulter, Sebi says, should be permitted to raise equity via a rights issue or a qualified institutional placement (QIP). That seems fair because large investors are perfectly capable of looking out for themselves and small shareholders should not be dabbling in stocks if they are not able to understand the risks involved. What is important is that bankers are able to keep track of the funds raised to see that it is not siphoned off; perhaps the money could be kept in an escrow account so banks are able to monitor it. The point made by

Sebi with regard to a hostile bid for a listed company that is controlled by a person categorised as a wilful defaulter is interesting. Sebi believes that restricting the defaulter from making a counter offer may not be legally tenable. Even otherwise, marauders should be kept at bay because it is possible the assets of the company may be serving as collateral for the banks and cannot be put in jeopardy. One has learnt, from the Kingfisher case, how important the assets of a United Spirits and United Breweries have proved to be. The question that arises, however, is that if the promoter has the money to make a counter-offer to keep predators away, why can’t he pay the banks?

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