Sebi bans wilful defaulters from mkts, company boards

Cracking a whip on ‘ wilful defaulters ’, market regulator Securities and Exchange Board of India (Sebi) has decided to bar them from raising public funds through stocks and bonds, and also from taking board positions at listed companies — a move that would disqualify Vijay Mallya from various posts he holds at the moment.

Sebi has also decided to bar such 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 move assumes significance in the wake of a controversy over UB Group Chairman Vijay Mallya, who has gone abroad amid efforts by public sector banks to recover Rs 9,000-crore unpaid loans and interest.

Read more from our special coverage on “SEBI, WILFUL DEFAULTERS”
Sebi might leash wilful defaulters in markets

The decision was cleared by the Sebi board at a meeting in New Delhi on Saturday. An entity is declared wilful defaulter on non-payment of dues despite having adequate cash flow and net worth. “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 the wilful defaulters,” Sebi stated in a press release. This will help the Reserve Bank of India (RBI) in its drive against wilful defaulters.

“There are some restrictions on bond issuances by wilful defaulters. This is being extended to securities market which is a good step,” said R S Loona, managing partner at Alliance Corporate Law.

Under the existing framework, a wilful defaulter was allowed to come out with an initial public offering (IPO) merely by making adequate disclosures in the offer document. “Offer documents, normally contain all information including promoters’ financial record and pending litigations. However, investors don’t tend to read the fine print. With the latest move, defaulters would not be able to approach investors. It is also a signal to promoters who have been declared wilful defaulters to exit from company board with an immediate effect,” Loona added.

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

Sebi Chairman U K Sinha said the new regulations on wilful defaulters will come into effect within four to six weeks after a formal notification.

Sebi has also proposed to widen the definition of ‘control’ under the Takeover Regulations to remove any ambiguity like seen in the Jet-Etihad deal. Sebi said it proposed to issue protective rights on what would not amount to acquisition of control in a company. The grant of such rights, however, will have to be approved by the majority of minority shareholders. Such rights will give the minority shareholders a say in the decision making process undertaken by the board of a company. If an entity acquiring less than 25 per cent stake but enjoys at least 25 per cent of the voting rights and the right to appoint majority of non-independent directors, it would result in change of control.

Following the Jet-Etihad deal, Sebi had received feedback from legal experts to provide more clarity on the concept of control. In 2014, Etihad Airways had acquired 24 per cent stake in Jet Airways. Although, the transaction was below the 25 per cent threshold, which leads to change in control and triggers an open offer, many experts had felt the transaction led to change in control.

“The question of what constitutes control is a vexed one. This is because an entity can acquire less than 25 per cent and still be in control of the company in an inclusive and subjective manner. As a result, a bright line test on numeric threshold clearly identifying protective rights that will lead to control will help in removing ambiguity,” said Lalit Kumar, partner, J Sagar Associates.

Sebi said it will seek public comments on a discussion paper on the subject before tweaking the definition of ‘control’.

Deliberate non-payment of dues despite adequate cash flow and net worth

Siphoning of funds to the detriment of the defaulting unit

Assets financed either not bought; or sold and proceeds wrongly utilised

Fraudulent transactions by the borrower

Disposal/removal of securities without bank’s knowledge

Misrepresentation/falsification of records

In-principle approval for listing of Bombay Stock Exchange

Consultation paper for providing clarity on definition of control

Steps to ensure take off in new trading instruments like REITs and municipal bonds

Pushing listed companies to have dividend distribution policy

Making it easy for suspended companies to delist

New guidelines for credit rating agencies

Sebi bans wilful defaulters from mkts, company boards

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