According to RBI’s ‘Master Circular on Wilful Defaulters’, dated 1 July, 2014, an entity is termed as a wilful defaulter if it does not meet its payment/ repayment obligations despite having the capacity to repay or when it uses the loan amount for purposes other than specified ones. Further, the minimum outstanding amount should be Rs. 25 lakhs and the actions should be shown as intentional, deliberate and calculated. The wilful defaulter tag is not a mere naming and shaming exercise but entails severe implications for entities so labeled.

The RBI has proposed to SEBI to bar wilful defaulters from raising funds through issuance of any securities. Currently there are no restrictions on such entities raising money from the capital market. To prevent access to capital markets, SEBI receives a list of wilful defaulters (suit-filed accounts) and wilful defaulters (where no suit has been filed) from the RBI and Credit Information Bureau (India) Limited (CIBIL) respectively, on a quarterly basis. However, in the absence of specific norms, it is difficult to actually debar such entities.

Under the existing norms, where guarantees furnished by companies within the group on behalf of the willfully defaulting entity are not honoured, such group companies could also be classified as wilful defaulters. However, on 9 September, 2014 the RBI issued clarifications to the Circular that the existing provision is applicable to individuals and non-group corporates. It was stated that the liability of the guarantor is co-terminus with that of the principal debtor and thus banks could proceed against the guarantors simultaneously. Such an expansion will have significant implications, given the harsh consequences of being declared as wilful defaulter. There will be no access to institutional finance and no access to capital markets. It may spread to individuals and non-group companies, thereby having an unreasonable cascading effect.

The issue has come to the forefront again after Kingfisher Airlines and its chairman Vijay Mallya were tagged as wilful defaulters by United Bank of India. The Circular and Companies Act, 2013 may indicate that a wilful defaulter tag will not mean automatic disqualification in the absence of criminal conviction. Nevertheless, shareholders can demand such removal on the basis of its negative ramifications such as the entities becoming ineligible for bank finance. Therefore, given that if a person on a company’s board is declared as a ‘wilful defaulter’, its funding avenues will be narrowed, companies facing growth challenges and in need of greater resources may suffer.

SEBI is in the process of finalizing guidelines in relation to wilful defaulters. SEBI may consider the entity classified as wilful defaulter as not being ‘fit and proper’ for accessing the capital market. The release of the new framework could affect transactions that are awaiting regulatory clearances. It will trigger a list that may blacklist many companies from issuing securities in the market and raising funds.

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Date:September 29, 2015