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SEBI Imposes Restrictions on Wilful Defaulters: Discussion Paper

Finsec Law Advisors

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SEBI recently released a discussion paper on “Proposed Amendments to Regulations framed under SEBI Act, 1992 for Imposing Restrictions on Wilful Defaulters,” to review its policy regarding imposing restrictions on “wilful defaulters” from accessing capital markets.

Under the existing framework, an issuer who is declared as “wilful defaulter” by the RBI is restricted from making a public issue or rights issue of convertible debt instruments. SEBI has proposed to extend the restriction to public issue of equity securities, debt securities and non-convertible redeemable preference shares where the issuer, its promoter, group company or director of the issuer who is declared as “wilful defaulter” by the RBI.

However, the discussion paper allows “wilful defaulters” to raise capital by way of rights issue or private placement to QIBs, with full disclosure in the offer document. The rationale behind this dispensation is to permit such defaulting companies to raise funds from its own shareholders and from sophisticated investors such as QIBs, who do not require as much protection as retail investors. SEBI has also proposed to impose restriction on “wilful defaulters” from taking control of another listed entity. But, in case of a hostile takeover a “wilful defaulter” is allowed to make counter offer to protect itself.

RBI’s tag of “wilful defaulter” restricts an entity from receiving any financial aid from the banks. Therefore, the proposal to restrict an issuer from making a public issue of equity securities will considerably stifle the “wilful defaulter” from raising funds. This blanket restriction will make it difficult for the banks to recover their dues and the “wilful defaulter” to repay its debts. It will be in the interest of the “wilful defaulter” and its creditors if it is allowed to raise money by way of issuing equity securities as it would assist the defaulting company in making their overdue payments to the lenders. Therefore, so long as a “wilful defaulter” makes full and adequate disclosure, SEBI should permit such an issuer to raise capital through issuance of equity securities.