Sebi to crack whip on wilful defaulters, relax start-up norms

Amid a huge controversy over loan defaults by Vijay Mallya-led UB Group firms, regulator Sebi plans to choke fund-raising taps for 'wilful defaulters' while fund-raising norms are set to be made easier for start-ups as part of wide-ranging reforms in capital markets.

The proposed moves, likely to be discussed by the Sebi board on Saturday, are aimed at safe-guarding the interest of small investors while deepening the capital marketplace to provide new products and avenues for institutions, a senior official said.

Besides, Sebi will discuss and take forward various steps announced last month in the Union Budget by Finance Minister Arun Jaitley, who will also address on Saturday the board members and top officials of the regulatory body.

The Securities and Exchange Board of India is also likely to tighten its takeover regulations by introducing 'bright lines' to define change in control in a merger and acquisition.

It is set to announce a new set of norms for index providers that would regulate changes in constituents of the key stock market indices, including the Sensex and the Nifty.

Besides, the board will discuss a plethora of proposals regarding distribution of various cash benefits through depositories.

Other proposals on the agenda include a favourable tax regime for alternative investment funds and easier access to capital for start-ups and new avenues like crowd-funding, a senior official said.

As for wilful defaulters, Sebi will join Reserve Bank of India and the government in their fight against bad loans as it plans to make it tougher for such entities and their companies to raise funds from the capital markets.

This comes at a time when a huge controversy has broken out with flamboyant businessman Mallya leaving the country amid attempts being made by various lenders to recover their dues totalling over Rs 9,000 crore (Rs 90 billion).

Some entities tend to tap equity and debt markets for funds after banks stop giving credit for wilfully defaulting on their existing loans, but small investors get trapped because of lack of information about their 'defaulter' status.

However, there is a counter-view that a complete fund-raising ban on wilful defaulters could come in the way of promoters of a listed company seeking to infuse fresh funds, which may hurt interest of minority shareholders.

Seeking to strike a balance, the regulator mulls putting curbs on initial public offers and follow-on public offers by such entities where funds are raised from the public.

However, they can be allowed to tap existing shareholders, including promoters by way of rights issue, private placement or preferential allotment, a senior official said.

An individual or a company is declared a wilful defaulter for deliberate non-payment of the dues despite adequate cash flow and good net worth and for siphoning off funds to the detriment of the defaulting unit.

Another proposal seeks to bar a wilful defaulter from taking control of any other listed company.

Issues relating to algo trades and co-location services as also new products and new investor classes in commodities market are also on the agenda.

This will also be the first board meeting of Sebi after the government last month extended by another year the tenure of Chairman U K Sinha, who assumed charge on February 18, 2011.

Sebi is also keen on steps to tackle cross jurisdictional market manipulation for which it plans to pitch for greater co-operation between regulators.

Other steps high on Sebi's agenda include greater penetration of various financial products, including corporate bonds, mutual funds and equity products while safeguarding the interest of small investors.

Sinha would also give a clear message that the regulator will keep a hawk's eye on all kinds of manipulative activities, including those aimed at defrauding investors.

The regulator is also likely to discuss its Budget estimates and planned policy measures for the next fiscal as also the status of the proposals that were planned for the current financial year ending this month.

Some of the proposals that could not be implemented so far would be looked into afresh.

One such proposal includes greater regulatory clarity for M&A deals, under which Sebi plans to put in place new guidelines to define bright lines identifying the change of control in such transactions.

Under Sebi's Takeover Regulations, the definition of 'control' is based on certain defined principles rather than on rules and there have been cases when a multitude of opinion have given rise to different assessments of 'control' over a listed company, a senior official said.

To deal with such cases, the regulator has decided to define certain bright lines for identifying the control, he added.

A bright-line rule or a bright-line test generally refers to a simple and basic standard that can be applied to remove ambiguity and resolve contentious issues.

In cases of mergers and acquisitions, an acquirer or any other entity would be considered to be gaining control of the target company if it fulfils the bright line tests with regard to acquisition of voting rights, control over operations and influence in board decisions.

There have been many cases, including the much-talked about Jet-Etihad deal, when the issue of control was debated a lot and it was felt that Sebi needs to put in place specific guidelines defining bright lines to determine the control.