Indian banks, particularly public sector banks, have been saddled with a lot of bad loans. The major cause has been the policy paralysis during the tenure of the previous government which along with slowdown led to higher defaults by corporate India. This is being tackled by speedy reform measuresin infrastructure by the present NDA government. In addition to this Reserve Bank of India (RBI) feels that banks need to be given additional powers to deal with large defaulters in a more stringent manner. Therefore in a move to crack the whip on wilful defaulters and protect shareholder's interest, stock market regulator SEBI, has proposed a host of punitive measures against them.
Among the proposals suggested by SEBI is that the wilful defaulters should not be allowed to raise funds by selling shares, debt securities and other non-convertible preference redeemable shares to the public. However, wilful defaulters can access capital from existing shareholders through a rights issue or a qualified institutional placement to institutional investors but with full disclosures. Additionally, SEBI has suggested that wilful defaulters be barred from taking over another listed entity but may be allowed to take part in counter offers to thwart hostile takeover bids.
SEBI's proposals aim at tightening the noose around companies that fail to repay debt despite having the wherewithal to do so. By curbing freedom of wilful defaulters from accessing capital markets, SEBI wants to clip their wings and prevent new investors from falling in their trap. The implementation of these measures will go a long way in strengthening the banking system by acting as a deterrent against defaults by huge borrowers.