SEBI proposes to tighten equity fundraising by ’wilful defaulters’

Capital markets regulator Securities and Exchange Board of India (SEBI) has sought to plug the loophole in existing norms to bar 'wilful defaulters' from raising funds through equity or debt markets, including by way of IPOs or FPOs.

SEBI has come out with a set of six draft recommendations which seeks to restrict such defaulters from taking advantage of current rules which allow them a window in raising money from the capital market through equity or non-convertible debt instruments.

Under the draft proposals, no issuer shall make a public issue of debt, equity or non-convertible redeemable preference shares, if the issuer, its promoter, group company or director of the issuer of such securities, is in the list of the 'wilful defaulters', published by the Reserve Bank of India (RBI).

It has added that firms who are in default of payment of interest or repayment of principal amount in respect of debt instruments issued by it to the public, if any, would also be barred from issuing debt securities or non-convertible redeemable preference shares.

But these companies may be permitted to make a rights issue or private placement to qualified institutional buyers, with full disclosures in the offer documents about their 'defaulter' status.

SEBI has recommended that such companies or individuals will not be allowed to make an offer to take over another listed company in the country. However, they can be allowed to make a counter-offer in case there is an hostile bid from another entity.

The draft norms come after discussions between various regulators and government departments to tighten the regulatory noose around wilful defaulters, especially in the wake of many such cases coming to fore in recent past including those of Vijay Mallya-led UB group which failed to pay its dues.

Even though existing regulations debar wilful defaulters from accessing capital market by way of public issue or rights issue, the same is currently limited only to the issuer of convertible debt instruments.

This means that under the current regulatory framework if the issuer company is intending to issue equity shares/debt security/non-convertible redeemable preference shares (i.e., any instrument except convertible debt instrument), and is included in the list of wilful defaulters published by the RBI, such issuer company can still access the capital market by way of public issue or rights issue.

RBI's norms are much more stricter and restrict bank funding of such defaulters, in contrast.

The proposed draft norms are to make it tighter for defaulters when it comes to accessing capital markets.

The capital markets watchdog has invited public comments on the draft norms by January 23, 2014.

(Edited by Joby Puthuparampil Johnson)

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