Noose tightens: RBI gets a helping hand from Sebi in pinning down wilful defaulters

The new Sebi rules tell the guilty promoter not to dream of fresh money from the capital market risking new investors.

Dinesh Unnikrishnan January 06, 2015 16:25:48 IST
Noose tightens: RBI gets a helping hand from Sebi in pinning down wilful defaulters

The Securities and Exchange Board of India (Sebi) has proposed to tighten the grip on the wilful defaulter in continuation of a series of steps taken by the Reserve Bank of India (RBI) to take on the wrongdoers among corporate borrowers.

In a discussion paper released on Monday, the market-regulator has proposed to bar wilful defaulters — promoters, directors or companies — from accessing capital markets to raise funds through a public issue or to take control of another listed company.

Noose tightens RBI gets a helping hand from Sebi in pinning down wilful defaulters

The Sebi logo. Image courtesy Sebi

A wilful defaulter is someone who does not pay back money to banks even if he has the capacity to do so. The money is either siphoned off or diverted for unstated purposes.

Under Sebi’s proposed rules, the wilful defaulter cannot raise debt or equity through a public issue but can raise money from existing shareholders through a rights issue or private placement to qualified institutional investors.

Also, the wilful defaulter will not be allowed to take over a new listed firm, the proposed rules allow him to make a counter offer in case of a hostile bid on his own firm. That is fine since a counter offer will result in only the outgo of money from him, which will be tough for a wilful defaulter.

Even though they can still try convincing the existing investors or an informed institutional investor to seek funds, that plan is unlikely to work.

Any promoter who has been classified as a wilful defaulter will be extremely lucky if he manages to do so since such investors will assume significant risk. No one in the right mind would prefer to bail out a wilful defaulter given the risks involved.

Thus, the seeming leeway given to the cornered wilful defaulter is of no use in the real world.

In short, the new rules tell the guilty promoter not to dream of fresh money from the capital market risking new investors.

Already, the existing RBI rules prohibit such a company or promoter from accessing any fresh funding from any financial institutions or have a controlling role in any other companies once he is tagged as wilful defaulter.

The party, thus, gets ostracised from the financial system.

Given this backdrop, blocking the wilful defaulter promoter to transact in the stock market through public issuances will make sure that all options are closed for him to attempt an escape - except seeking legal recourse. He can still challenge the banker and drag him to the court room and delay the process.

That is no good move for the banker, who is already facing immense stress from bad loan pile-up. Due to this, Indian banks have been increasingly acting tough on wilful defaulters in the recent years by classifying more companies as wilful defaulters than they have done ever before.

Banks witnessed dramatic rise in bad assets on their books on account of multiple reasons that include economic slowdown, banks’ own wrong credit decisions and misuse of the banking system by corporate-political nexus. About 13-14 percent of the loans given by banks are under the stressed category.

Also, as bankers have highlighted in the past that many companies have misused the banking system by misusing the loan amount, diverting from the stated purposes and seeking asylum at the loan recast facility even in cases where the reasons of stress were not genuine.

Cronies have played a key role in executing such recasts. But with RBI pushing banks to clean up their books, banks are now actively using the wilful defaulter rule to take on non-co-operative borrowers.

With the RBI and Sebi practically leaving no option to the corporate wrongdoers to access the financial system, the only remaining option for the wilful defaulter will, thus, be to drag the banker to the court rooms, challenging the decision, like in the case of Vijay Mallya-promoted Kingfisher Airlines.

This will make recovery of money a lot more difficult for the banker, since in most cases such firms seek legal recourse to fight the banks.

The more the resolution on the underlying asset gets delayed, the quality of the asset deteriorates leaving very little value to the lender to get back his money.

Take the case of the now-grounded Kingfisher Airlines. The airline, which has dues of about Rs7,000 crore to a clutch of banks, was classified as a wilful defaulter by Kolkata-based United Bank of India in September last year.

But in late December, the Calcutta High Court dismissed United Bank’s action of the bank citing technical grounds, observing that the grievance redressal committee of the bank had four members instead of three as required under the norms. United Bank is now planning a counter action.

According to bankers, the court’s ruling might encourage other borrowers facing similar fate too to look for legal loopholes to take on the banker.

But banks are unlikely to give in easily since this is now or never battle for them to stay in the business. State-run lenders, in particular, are neck-deep in bad debts, which questions their very survival.

That will set the stage for many more such legal battles.

Updated Date:

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