SEBI debars wilful defaulters from accessing capital markets

SEBI, in its Board Meeting held on March 12, 2016, approved of certain new initiatives which include imposing restrictions on wilful defaulters, proposing brightline tests for acquisition of ‘control’ under the SEBI Takeover Regulations, 2011, reviewing the manner of dealing with Audit Reports containing qualifications and approving the Budget for 2016-17. The decisions taken by the SEBI Board will have an impact on the overall market, market participants and also on the market intermediaries. The key decisions taken by the SEBI board are discussed as hereunder:

I. Certain restrictions imposed on wilful defaulters: With an intention of restricting wilful defaulters from accessing capital markets for raising funds from public, SEBI Board has approved of the following proposals:

a) Wilful defaulter to be debarred from raising funds : SEBI has proposed to prohibit the issuer company from making public issue of equity securities or debt securities or nonconvertible redeemable preference shares if such issuer company or its promoter or its directors are in the list of wilful defaulters.

b) Wilful defaulter to be restricted from taking control over other entity : If any company or its promoter or its director is categorized as ‘wilful defaulter’, then such person may not be allowed to take control over other listed entity.

However, if listed company or its promoter or its director is categorized as ‘willful defaulter’, and there is a take-over Code, 2011.

c) Criteria for determining ‘fit and proper person re-defined’ : SEBI also proposes to amend the criteria for determining a ‘fit and proper person’ in the SEBI Regulations to include that no fresh registration shall be granted to any entity if the entity or its promoters or its directors or key managerial personnel, as defined under the SEBI (ICDR) Regulations, 2009, are included in the list of ‘wilful defaulters’.

II. Brightline tests for acquisition of ‘control’ under Takeover Code : SEBI Board has considered and approved of the proposal for initiation of public consultation process regarding the introduction of brightline tests for acquisition of ‘control’ under the SEBI (SAST) Regulations, 2011 (‘Takeover Code’). The Board noted that multiple regulators apply the test of control from different perspectives and arive at differing results which may lead to ambiguity.  With an objective of identifying the bright lines for ‘control’ in the Takeover Code, SEBI suggested the following proposals for consideration:

a) Framework for protective rights : The Board proposes introducing illustrative list of protective rights which would not amount to acquisition of control. Grant of such rights to an investor may be subject to obtaining public shareholders’ approval (majority of minority), 

b) Adopting numerical threshold : The Board proposes amending the definition of control such that control is defined as: (a) right or entitlement to exercise at least 25% of voting rights of a company, irrespective of whether such holding gives de facto control and/or (b) the right to appoint majority of the non-independent directors of a company.

III. Review of manner of dealing with Audit Reports containing Qualifications: SEBI noted that it has put in place a mechanism for reviewing the audit qualifications contained in the audit reports, which has been incorporated in the SEBI (Listing and Other Disclosure Requirements) Regulations, 2015 (‘Listing Regulations’). With an objective that the impact of audit qualification is disseminated without any delay, SEBI Board approved of the following revised procedure to deal with such matters:

a) Listed entities shall be required to disclose cumulative impact of all audit qualifications on relevant financial items in separate form called “Statement on Impact of Audit Qualifications” instead of present Form B. Such disclosure would be in a tabular form along with Annual Audited Financial results filed in terms of Listing Regulations,

b) Where there are no audit qualifications, the existing requirement of filing Form A signed by top officials/directors of the company and auditors shall not be necessary.

c) The company’s management shall have the right to give its views on the audit qualifications in new form,

d) The existing requirement of adjustment in the books of account of the subsequent year shall not be necessary.

IV. SEBI budget for the year 2016-17 : The SEBI budget for the year 2016-17 was considered and approved by the Board. The Board discussed the plan of action for F. Y. 2016-

17. Some of the important proposed activities are:—a) Significant increase in investor’s education and awareness efforts along with a target of having at least one Resource Person (RP) in each district of the country for providing such programmes on a regular basis in their areas. b)Providing more clarity on the definition of the term 'control' under different regulations of SEBI. C) Energizing the Institutional Trading Platform (ITP), REITs, InvIts and Municipal Bond Markets.