Last week, Sebi made amendments to key regulations that govern capital raising activities to ensure that wilful defaulters do not get access to capital markets
The issue of wilful defaulters has been haunting the banking system for months now. There have been multiple views on disclosing the list of these defaulters.
Some banks have put out the lists in the public domain; while the others have not. Even these lists are not consistent in the details they give.
Some banks give details of all directors of defaulter company in the list, some give only executive director. Even within a single list, different formats are followed for different defaulters. In many cases, the director identification number (DIN) is not given.
All this was fine till now as the matter of wilful default was largely between the lender and the borrower. And, both parties knew what was going on.
Enter Securities and Exchange Board of India (Sebi). Last week, it has made amendments to key regulations that govern capital raising activities of companies to ensure that wilful defaulters do not get access to capital markets.
For this purpose, the term wilful defaulter is defined as follows: "Wilful defaulter" means an issuer who is categorised as a wilful defaulter by any bank or financial institution or consortium thereof, in accordance with the two guidelines on wilful defaulters issued by the Reserve Bank of India and includes an issuer whose director or promoter is categorised as such."
Now, what happens to a third party company, which itself is not a willful defaulter but one of its director is named as a willful defaulter with reference to another company in which he was a promoter/director?
Experts say a grey area has been created, which needs to be plugged urgently. While Sebi regulations put obligations on the company to disclose if any of its directors are willful defaulters, there is no corresponding obligation on the part of the director or the promoter to report this to the company.
The Sebi regulation "If the issuer or any of its promoters or directors is a wilful defaulter, it shall make the following disclosures: (a) Name of the bank declaring the entity as a wilful defaulter; (b) The year in which the entity is declared as a wilful defaulter; (c) Outstanding amount when the entity is declared as a wilful defaulter; (d) Name of the party declared as a wilful defaulter; (e) Steps taken, if any, for the removal from the list of wilful defaulters; (f) Other disclosures, as deemed fit by the issuer in order to enable investors to take informed decisions; (g) Any other disclosure as specified by the Board
How is a third party company going to know all this?
One way out would be if the bank itself takes pain to trace all other companies in which the defaulter is a director and inform them. But, given the mess the banks find themselves in, such public service is the last thing that can be expected of them.
That leaves us with the defaulter himself. Unless, he himself comes forward and declares to the company that he has been named wilful defaulter in relation to a third party company, there is no way an issuer company can take cognizance of this and report to this at the time of raising capital.
Source-based news reports, which are often denied and disputed, are not enough for a third party company to take such developments on record and initiate corporate actions.
Senior company secretary S N Ananthasubramanian says these days there is a culture where people want written word to back every claim.
It would be prudent for Sebi to bring out a framework for reporting of these wilful defaults by directors, he says. Even better would be if Sebi takes upon itself to develop and maintain an updated database of wilful defaulters in the listed space.
Photograph: Stephen Hird/Reuters