Directors of over 1,000 listed companies have links to wilful defaulters

Mumbai: At least 1,219 directors on the boards of listed companies have links with companies that are so-called wilful defaulters.

Why is this number significant?

Last month, capital markets regulator Securities and Exchange Board of India (Sebi) said that it was looking to place capital-raising restrictions on companies with links to wilful defaulters. “No issuer shall make a public issue (of securities) if the issuer company or its promoter or its director is in the list of the wilful defaulters,” said the market regulator’s press note released on 12 March.

A wilful defaulter is a company or individual that does not plan to repay a loan, diverts funds to a purpose different than the one for which it was borrowed , or sells the asset acquired with the borrowed capital without the lender’s knowledge.

As of June 2015, the latest period for which data has been collated by Prime Database, at least 1,219 directors who served on the boards of companies which were declared wilful defaulters also serve on the boards of other listed companies.

That number is likely to have increased.

The number of wilful defaulters rose to 7,129 as of December 2015, from 6,458 in June that year, according to information available with Credit Information Bureau of India Ltd (Cibil). Prime Database’s numbers include only those firms tracked by Cibil. Three other repositories also hold defaulter information: Experian Credit Information Co. of India Pvt. Ltd, Equifax Credit Information Services Pvt. Ltd and High Mark Credit Information Services Pvt. Ltd. There are 1,000 entities in the other three, including overlaps.

There is a debate if all directors should be painted with the same brush.

A January 2015 Sebi discussion paper said that “even though independent directors/nominee directors are distinguished from other promoter directors of companies that are wilful defaulters, such directors are brought within the purview of the Master Circular for the purpose of declaring them as wilful defaulters”.

The same paper, however, also noted the Gujarat high court’s observation that extending this to all directors is not appropriate. Experts point out that lenders and private equity investors also have board representatives in the form of nominee directors. If these entities have advanced capital to a company, they may have taken a board seat. But they would have had limited control if the company decided to default.

Final Sebi regulations are awaited in this regard.

In case companies want to completely dissociate themselves from anyone who has been a director on the board of a company that is a wilful defaulter company, over 1,000 listed firms will need new directors.

As it is, there is a shortage of directors after recently introduced rules limited the number of multiple directorships a person can hold. Individuals can serve on the boards of only seven listed companies at the same time. These tighter rules were announced in February 2014. Whole-time directors cannot be on the boards of more than three listed companies. And independent directors can only serve two consecutive five-year terms.

“There is a demand for good directors, irrespective of the impact these guidelines have on demand,” said Amit Tandon, founder and managing director of proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS).

It’s not just directors who will be affected if Sebi decides to crack down.

The regulator has also said that no fresh registration will be granted to intermediaries who are in the list of wilful defaulters. Tejesh Chitlangi, partner at IC Legal, said that Sebi will have to be cautious in implementing the restrictions since an absolute prohibition on registering any entity having a promoter or key person tagged as a wilful defaulter may inadvertently impact those that have limited control over the company’s actions.

“This can substantially impact their future operations and hence should be dealt by Sebi on a case-to-case basis rather than creating absolute prohibition,” said Chitlangi.

The jury may be out on whether everybody deserves the same treatment, but a hard look at company boards may be overdue.

(With inputs from Ragini Bhuyan)