The government's whip on 'wilful defaulters' gained strength on Monday when markets regulator Securities and Exchange Board of India (Sebi) suggested a set of restrictions that would bar erring entities to access capital and debt markets.
Under law 'wilful defaulters' are classified as companies or individuals who deliberately thwart repayment of dues to lenders.Sebi's discussion paper comes close on the heels of a series of statements by Reserve Bank of India governor Raghuram Rajan cracking down on such defaulters and the finance ministry advocating a tough stance for errant promoters.
In the recommendations put on the regulator's website, Sebi proposed that the companies where a promoter, or director, or a subsidiary, has been declared a 'wilful defaulter', should not be allowed to issue equity or debt instruments.
Besides, the existing listed companies, or their promoters, group companies or directors of an entity declared as 'wilful defaulter' would not be allowed to take control over any other listed company, Sebi said in its draft norms, which would be finalised after taking into account comments from all stakeholders submitted till January 23.
These recommendations also suggest that such defaulters may not make any acquisitions but can come with counter offers to protect themselves in the event of a hostile takeover.
Last month, the RBI tightened measures against non-cooperative borrowers, by raising the costs of such borrowing through increased provisioning that could go up to 25% of the loan value to deter defaults by companies.
According to Vidya Rajarao, partner (forensic services) at Grant Thornton, Sebi's move strikes a balance. "Sebi had the option to cut off access to finances for existing 'wilful defaulters'. But considering that we don't have proper bankruptcy and liquidation laws, it has given some access to the capital market, but not bank finance. By accessing secondary markets via a rights issue or a private placement with a qualified institutional buyer (QIB), a company could get funds for near-term survival, pay employees, continue day-to-day operations till broader issues are sorted out," she said.
"Many of the loss-making companies today have to go through the BIFR (Board for Industrial and Financial Reconstruction), which is a long-drawn process. We also need to have a proper debt-restructuring process in place along with strong regulations," Rajarao added.