Market ban kicks in for wilful defaulters

Sebi, however, allowed wilful defaulters to make counter-offers to avoid hostile takeovers

The Securities and Exchange Board of India (Sebi) has barred those named as wilful defaulters from raising public funds through stocks and bonds, and also from taking board positions at listed companies.

Sebi notified these norms on Wednesday, disallowing defaulters from setting up market intermediaries such as mutual funds and brokerage firms. These defaulters would also not be allowed to take control of any other listed company.

The decision was cleared by the Sebi board of directors at a meeting in Delhi on March 12.

Amendments have been made in various earlier regulations to give effect to these. The changes apply to all individuals and companies declared wilful defaulters by the Reserve Bank of India (RBI). Also disqualifying Vijay Mallya from various posts he holds at the moment.

According to the Sebi notification, “an issuer cannot make any public issues, debt or non-convertible redeemable preference shares if the company or its promoters or directors figure on the list of wilful defaulters".

Also, no wilful defaulter shall make a public announcement of an open offer for acquiring shares or enter into any transaction that would attract the obligation to make a public announcement of an open offer for acquiring shares under these regulations.

Sebi, however, allowed wilful defaulters to make counter-offers to avoid hostile takeovers. This means a promoter so declared will be allowed to make an open offer to stave off a similar bid by another entity.

“This restricting of a company declared a willful defaulter from raising equity and convertible-led capital would hurt those that it seeks to protect,” objected Sandeep Parekh, founder of law firm Finsec. “A company in default to banks and financial institutions but which still has a chance of survival by raising further capital would now be unable to do so. In other words, banks and financial institutions that could have recovered the money would now be left without the ability to recover any."

Further, the regulator said no fresh registration will be granted to any entity in case the latter or its promoters or directors or key managerial personnel are included in the list of wilful defaulters.

Under the existing framework, a wilful defaulter was allowed to come out with an initial public offering (IPO) of equity merely by making adequate disclosures in the offer document. Offer documents, normally contain all information, including promoters’ financial record and pending litigation. However, investors don’t tend to read the fine print.

"Sebi will have to be cautious in implementing the restrictions, since an absolute prohibition on registering any entity having a promoter or key person tagged as a wilful defaulter by terming the applicant as not fit and proper might inadvertently impact certain genuine players, including private equity, or venture capital funds and non-bank finance companies, since several times their representatives whilst acting as nominee directors on investee companies get classified as such without their being at fault," said Tejesh Chitlangi, partner at IC Legal.

Adding: "The regulator should evaluate such applications on a case to case basis rather than upfront rejecting these, particularly since banks sometimes get overzealous in classifying the independent and non-executive directors of the erring entities also as wilful defaulters."