Sebi cracks whip: Wilful defaulters cannot raise capital from market

They can’t take positions in listed companies, says Sinha; new rules to hit Mallya, among others.

By: ENS Economic Bureau | New Delhi | Published:March 13, 2016 2:42 am
SEBI Chairman U K Sinha. (Source: Express) SEBI Chairman U K Sinha. (Source: Express)

Taking note of market developments where retail investors have lost out because of bad practices of some promoters, the board of directors of the Securities and Exchange Board of India (Sebi) Saturday decided to restrain ‘wilful defaulters’ from accessing capital markets for raising funds from the public. It also said companies who have defaulted on payments on their debt instruments will not be permitted to issue debt to the public.

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“No issuer shall make a public issue of equity securities/debt securities/non-convertible redeemable preference shares, if the issuer company or its promoter or its director is in the list of wilful defaulters,” Sebi said in a statement after its board meeting in New Delhi.

It said such persons will not be allowed to take board positions in listed companies. The Indian Express had reported that Vijay Mallya, UB Group chairman, who has been declared a wilful defaulter by SBI and other banks, held the position of chairman on boards of Bayer CropScience Ltd and Sanofi India.

“If someone is proven by RBI or its orders that he is a wilful defaulter, then it is very risky to allow that person to raise money from retail investors. And so, Sebi board has decided that they will not be allowed to raise capital from the market. They will also be debarred from taking positions in any listed company, for example, on the board etc,” U K Sinha, Sebi chairman, said.

The board decided to amend its criteria for determining ‘fit and proper’ to include that no fresh registration is granted to any entity if the entity or its promoter is in the list of wilful defaulters.

This will come into effect from the day Sebi board decisions are notified (in 4-6 weeks) and from that day, all wilful defaulters will stand disqualified from the board positions they hold.

Sebi has, however, allowed the wilful defaulter to make a counter-offer in case there is a takeover bid for that listed company.

Justifying the decision, Sinha said, “Regulations should not lead to distress sale of that company as it will harm other investors. The basic idea is to debar them from raising fresh money.”

Taking note of the default on payments by companies on their debt instruments, while Sebi has advised mutual funds to be very careful on the quality of the paper they buy, it has also decided to debar defaulting companies from issuing papers to retail investors.

“Those who have defaulted on debt, they will also not be able to issue debt to the public,” Prashant Saran, whole-time member, Sebi, said.

Finance Minister Arun Jaitley, addressing the board, appreciated the emergence of Indian mutual funds as a counter balance to the foreign portfolio investors. He also highlighted the need for new products in the commodity derivatives market and the need for encouraging actual hedgers to take benefits of the commodity derivatives market.

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