Sebi to restrict wilful defaulters who are promoters or directors from accessing markets

MUMBAI: The Securities and Exchange Board of India ( Sebi) will restrict so-called wilful defaulter be it a promoter, company or director from accessing the capital markets for raising funds from public and from taking board positions at listed companies. The regulator's board also cleared a proposal to tweak the definition of ‘control’ under the takeover code.
The Sebi board which met in New Delhi on Saturday tightened rules for wilful defaulters by barring them from making a public issue of equity,debt or non-convertible redeemable preference shares. A wilful defaulter would also not be allowed to take control over other listed entities.

“It will be a deterrent to promoters who try to game the banking system. This strengthens the banking system's position in dealing with such cases,” said Ananth Venkat, head coporate &institutional banking, Standard Chartered Bank India.

The regulator said it would amend rules on’ fit and proper person’ to include that no fresh registration would be granted to any entity if that company or its promoters or its directors or key managerial personnel, are included in the list of wilful defaulters.

Legal experts said although the rules are well-intentioned it would have far-reaching implications.

“While this is well-intentioned – particularly in the current environment – I do worry about the perverse incentives this would create in the long term. The foundation of how a certain borrower is declared to be a wilful defaulter is still outside the hands of a state-sponsored regulator who is subject to constitutional checks and balances. The might of the State that can be brought upon a person alleged to be wilful defaulter has just been multiplied exponentially,” said Somasekhar Sundaresan, partner, J.Sagar Associates.

The Reserve Bank of India does not declare any borrowing unit as wilful defaulter , the same is done by banks as per the RBI guidelines. As per current rules, banks are required to submit to the Reserve Bank the details of all the wilful defaulters.

“Keeping the company that is the borrower within the range of severe prohibitions can endanger restructuring of a defaulter. Also expanding the scope to all directors would mean that it would become impossible to attract quality talent to the board of a company declared to be a willful defaulter, until it ceases being treated as a willful defaulter. Now, it is time to focus on when a company declared to be a willful defaulter would cease to be one,” Sundaresan said.

Lawyers said the regulator would also have to be cautious in implementing the restriction as an absolute prohibition on registering any entity having a promoter or key person tagged as a willful defaulter may inadvertently sometimes impact genuine players such as private equity funds and non-banking finance companies.

“Several times their representatives whilst acting as nominee directors on investee companies get classified as such for no fault of the investor entity. This will negatively impact their future operations and hence should be dealt by Sebi on a case to case basis rather than creating absolute prohibition,” said Tejesh Chitlangi, partner, IC Legal.

Separately, Sebi has also proposed to amend the definition of control under the takeover code,a move that could boost M&A activity. It would seek public views before coming out with an illustrative list of protective rights which would not tantamount to acquisition of control. However, protective rights would be granted to an investor after it obtains majority of public shareholders approval for the same.

The regulator said in line with international practices the definition of control could be amended such that control is defined as the right or entitlement to exercise at least 25% of voting rights of a company irrespective of whether such holding gives de facto control and the right to appoint majority of the non-independent directors of a company.

“The reform on ascertaining how to reckon control over a listed company for purposes of takeover regulations is a good measure. Shareholders are sovereign and empowered the public shareholders who are the beneficiaries of an open offer to approve grant of investor protection rights to any other shareholder is a mature and positive measure of reform. The investing community as well as industry will keenly look forward to the illustrative types of affirmative rights that Sebi would not deem to constitute control,”Sundaresan said.