Tuesday, August 5, 2014

RBI, Sebi looking at barring wilful defaulters from raising funds from the capital market

RBI and the government have already started cracking the whip on some high-profile promoters whose companies have defaulted. 


The Securities and Exchange Board, or Sebi, is talking to India's banking regulator on possible new rules to prevent wilful defaulters from raising funds from the capital market.

"We are in consultation with the Reserve Bank of India for finalising the wilful defaulter regulations," Sebi chief UK Sinha told reporters on the sidelines of an event organised by the Institute of Company Secretaries of India at the BSE on Monday.

RBI and the government, which controls much of the banking sector through its ownership of state-run banks, have already started cracking the whip on some high-profile promoters whose companies have defaulted. Bad loans in India were estimated to be close to Rs 2 lakh crore at last count and both the RBI and the government are worried that this could drag down many banks.

Further, banks would have to set aside more capital against such bad loans — forcing the government battling a huge fiscal deficit to allocate more funds to banks. According to officials briefed on the latest development, the discussions are in the initial stages as regulators are reviewing existing legal provisions. A lender declares a person a wilful defaulter when the borrower does not pay despite having the ability to do so. A wilful defaulter would then lose directorships in companies and the right to borrow from banks.

RBI governor, Raghuram Rajan has taken a hard line on this and the central bank is reportedly not in favour of allowing wilful defaulters from raising money or accessing the capital markets. The central bank is also considering ways to share details on defaulters with its securities market counterpart on a real-time basis.

"The system has to be tolerant of genuine difficulty while coming down hard on mismanagement or fraud," Rajan had said. Indeed, Rajan had referred to the issue of wilful defaults and the apparent lack of any consequences for promoters of such companies after he took charge in early September last year. Rajan had said that promoters don't have a divine right to stay in charge regardless of how badly they mismanage an enterprise.

"Nor do they have the right to use the banking system to recapitalise their failed ventures." "It's extremely important for all the regulators to act in coordination to ensure that defaulters cannot misuse the banking and financial system," said M Narendra, who has recently retired as chairman and managing director of Indian Overseas Bank.

Details about wilful defaulters of bank loans are shared with regulators including Sebi and credit information agencies such as Credit Information Bureau on a quarterly basis. At the end of March 2014, the non-performing assets ratio for the entire banking sector was 4.4%, a relatively high level.

The public sector banking group was alone sitting on Rs 1.23 lakh crore of NPAs on March 2013. According to All India Bank Employees' Association (AIBEA), the top 50 defaulters in the country accounted for about Rs 40,500 crore of these NPAs. Some banks are considering declaring Kingfisher Airlines promoter Vijay Mallya, whose airline is one of the biggest non-performing assets, as a 'wilful defaulter'.

A recent Supreme Court verdict allowing banks to name and shame defaulters freely has strengthened banks' recovery process. While, banks have used this strategy by publishing photographs and other details in newspapers to good use in most states, they faced legal restrictions in West Bengal and Kerala. The Supreme Court verdict has now removed all obstacles and banks are free to publish details of defaulters anywhere in the country, bankers said

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