The SEBI board has approved curbs on ‘wilful defaulters’, which entails ban on public issue of securities. Any entity declared wilful defaulters will also not able to take control in any other listed entities. The SEBI board accepted most of the broad recommendations made in the discussion paper on wilful defaulters it floated last year. The move by Sebi will help other regulators, particularly the Reserve Bank of India (RBI) in its drive against cracking down on wilful defaulters.

QUALIFICATIONS OF A ‘WILFUL DEFAULTER’

•  Deliberate non-payment of dues despite adequate cash flow and good net worth.
•  Siphoning of funds to the detriment of the defaulting unit.
• Assets financed either not having been bought or having been sold and proceeds misutilised.
•  Misrepresentation/falsification of records
•  Disposal/removal of securities without bank’s knowledge
•  Fraudulent transactions by the borrower

As per the definition, an entity is declared wilful defaulter on non-payment of dues despite having adequate cash flow and net worth.

Under the current framework, wilful defaulters were allowed to issue equity by way of initial public offering (IPO) or follow-on offering (FPO) by merely making adequate disclosures in the offer document. The market regulator has also proposed to widen the definition of control under the Takeover Regulations to provide more transparency in mergers and acquisitions (M&As).

Sebi said it proposed to issue protective rights which 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.

Sebi also proposed to amend the definition of control to incorporate two new criteria, which includes right to exercise at least 25 per cent of voting rights and right to appoint majority of non-independent directors.