The Reserve Bank of India instituted the regulations on wilful defaulters which
came into force from 01.04.1999.
Who is a Wilful Defaulter?
The RBI has defined ï¿½wilful defaultï¿½ as ï¿½unit.ï¿½ As per the RBI guidelines, a
ï¿½wilful defaultï¿½ would occur if any of the following events occur:
- Capacity to pay: The unit evaded its financial obligations despite
having the capacity to honor the obligation.
- Diversion of funds: The unit evaded its financial obligations & has
diverted the funds for purposes other than what was sanctioned for.
- Siphoning of funds: The unit evaded its financial obligations & has
siphoned off the funds for any illegal purpose and the availability of the
funds with the unit is uncertain.
- Security: The unit evaded its financial obligations & has sold the
security granted for procuring a loan devoid of the knowledge of the bank.
The amount of wilful default must be of at least Rs. 25 lakhs as per the Central
Vigilance Commission. The wilful default must be based on the track record of
the borrower and not on the secluded transaction. The wilful default must be
premeditated, purposeful, and assessed.
To avert the bad debts in the market, the banks are proclaiming the evading
promoters and entities as wilful defaulters. Under RBI guidelines, restriction
on wilful defaulters was limited to financial markets. After the Vijay Mallya
scandal, as a preventive measure, SEBI in its 5 regulations has levied
constraints on wilful defaulter from the capital markets which came into force
from 25.05.2016 to curb the loophole. SEBI has widened the scope of ï¿½wilful
Now even raising funds by public issue of equity, debt, and
preference shares are also restricted & the extension has included promoter or
director as a wilful defaulter of a company. SEBI has not included a listed
company. However, it keeps on levying arduous disclosures to protect the
interest of the investors.
Restrictions on Wilful Defaulter
A wilful defaulter is restricted from the following:
- Barred from participating in the capital market.
- Barred from availing of banking facilities for 5 years to start a new
- Lenders are free to initiate the process of recovery with full ferocity
and ay initiate criminal proceedings.
- Lending institutions do not allow any wilful defaulter to become a board
member of any company.
- Barred from making an open offer.
In the case of Ionic Metallils vs. Union of India,
it was held that Master
circular made by RBI is violative of A.19(1)(g) of the Constitution and is ultra
vires as it applied to all the directors of the company and smashes the concept
of Separate Legal Entity. To which, the RBI modified its stance and sliced out
non-whole-time directors from the purview of ï¿½Wilful Defaulters.ï¿½
Statutes that deal with Wilful Defaulters
Following are the statutes that deal with wilful defaulters:
- Insolvency and Bankruptcy Code, 2016.
- The SARFAESI Act, 2002.
- The Companies Act, 2013. (S. 447 and 448)
- The Indian Penal Code, 1860. (S. 415 and 403)
- The Fugitive Economic Offenders Act, 2018.
- The Passport Act, 1967. (S. 10) and numerous additional precautions.
- Unit includes individual, juristic person, and business entities.
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