White Collar Journal- February 2015
SEBI proposes to debar wilful defaulters from dealing in capital markets
The Securities and Exchange Board of India (“SEBI”) has proposed to debar ‘wilful defaulters’ of loans taken from
a financial institution from dealing in the capital market. The Reserve Bank of India (“RBI”), which regulates financial institutions, has through its ‘Master Circular on Wilful Defaulters’ (“RBI Master Circular”) prohibited financial
institutions from dealing with ‘wilful defaulters’. The SEBI’s move proposes that a wilful defaulter which is otherwise prohibited from raising funds from financial institutions should not be allowed to raise money from the public
though the capital market route.
The RBI Master Circular defines the term ‘wilful defaulter’ and provides for consequences of wilful default of a debt
by an entity, including consequences on its promoters and management. An entity is a ‘wilful defaulter’ if it has (a)
defaulted on repayment of a debt even when it has the capacity to honour the said obligations; (b) defaulted on
repayment of a debt and not utilised the funds from the lender for the purpose it was given and has diverted the
funds for other purposes; (c) siphoned off the funds for operations unrelated to the entity to the detriment of its financial health; and (d) defaulted in meeting its repayment obligations to the lender and has also disposed of or
removed movable fixed assets or immovable property given by it for the purpose of securing a term loan, without
the knowledge of the lender.
The RBI presently prohibits financial institutions from offering any credit to entities which are in the list of the wilful
defaulters published by the RBI. In addition to the entities listed as wilful defaulters, the promoters of such entities
involved in diversion of funds, misrepresentation, falsification of accounts and fraudulent transactions are debarred
from institutional finance for floating new ventures for a period of 5 years from the day the name of the wilful defaulter is published by the RBI. Also, financial institutions are prohibited to provide finance to an entity which has
on its board a person who is also a promoter or director of a wilful defaulter entity. The list of wilful defaulters will
also include the guarantors who have failed to repay the debt on the behalf of the principal debtor. However, only
debts exceeding INR 2.5 million (approx. USD 0.041 million) which are not repaid, shall be considered for preparing the list of wilful defaulters.
SEBI has so far only debarred the entities listed by RBI as wilful defaulters from raising finances through the issue
of convertible securities. As per the existing legal regime, wilful defaulter entities are not prevented from accessing
the capital markets through the issue of equity shares or non-convertible debt securities. To further tighten its rein
on wilful defaulters, SEBI has proposed the followings:

an entity shall not make any public offer for issue of equity shares if such entity or its group company
or promoter or director is in the RBI’s list of wilful defaulters;

an entity shall not make any public offer for issue of (a) debt securities, and (b) non-convertible redeemable preferential shares if such entity or its group companies or promoters or directors are in the
RBI’s list of wilful defaulters or if the entity is in default of payment of interest or repayment of principal
amount in respect of debt instruments issued by it to the public, if any;

existing listed companies, and its promoters, group companies and directors categorised as 'wilful defaulter' shall not be allowed to take control over other listed entity;

existing listed companies, and its promoters, group companies and directors categorised as 'wilful defaulter' should be allowed to make counter offer in case of a hostile bid;

existing listed companies, and its promoters, group companies and directors categorised as 'wilful defaulter' may make a rights issue or private placement only to qualified institutional buyers, with full disclosures in the offer document.
The proposal has now been published by SEBI inviting comments and suggestions from the various stakeholders,
which SEBI will consider before notifying the binding circular.
Maharashtra Government to guarantee time bound delivery of public services
With the objective to provide time based, transparent and efficient public services, the new Government of Maharashtra has proposed the Maharashtra Guarantee of Public Services Bill, 2015 (“Public Service Bill”). The
Public Service Bill, if passed by the state legislature, will guarantee that state agencies will provide services that
may be notified under the Act (“Notified Services”) within the stipulated timeframe. The Public Service Bill also
envisages the use of technology for the delivery of the Notified Services by state service providers, and to help the
applicants of the Notified Services check the status of their application online. To redress the grievances of the
applicants of the Notified Services, the Bill proposes for setting up of two tier appellate systems, where the appellate authorities will hear and settle complaints within 90 days of making an appeal. The appellate authorities will
have power to impose penalties on a state service provider if it finds that the service provider has failed to provide
a Notified Service to an applicant within the stipulated time without reasonable cause. Similarly, the second appellate authority will have the power to impose fines on a state service provider and also a first appellate authority if it
finds that the first appellate authority has failed to decide the appeal within the stipulated time without any sufficient and reasonable cause. The Public Service Bill also proposes for a departmental enquiry against officers of a
public service provider who may be found to be habitual defaulters of the provisions of the proposed Act.
The Public Service Bill reflects the determination of the new government to fight corruption. Constant delays in
providing public services not only causes inconvenience to public but leads to greater menace of corruption as it
pushes the public to offer bribes to government officials to have their application approved or expedited. Having
said that, it is important to mention here that the provisions of the proposed Public Service Bill are not absolute
and the guarantee to provide time bound services is subject to availability of infrastructure and resources, which
may likely be the escape route for public servants failing to provide the Notified Services within the stipulated timelines.
SEBI to curb rise in sophisticated fraud through technology
Corporate fraud in India is on the rise at an unprecedented pace. A 2014 study by The Associated Chambers of
Commerce and Industry of India reveals that corporate fraud, such as bribery, money laundering, tax evasion etc.
has increased over 45% in the last two years, and is expected to rise further in the coming 5 years. The study
shows that companies in the real estate and the financial sectors are most vulnerable to fraudulent activities.
The Indian capital market regulator Securities Exchange Board of India (“SEBI”) has been witnessing an increasing number of complaints related to market and price manipulation, insider trading, etc. As on December 31, 2014,
SEBI has received 1745 complaints related to manipulative market practices, 672 cases of insider trading and
3161 cases on corporate governance. In order to monitor and control fraudulent and manipulative practices, SEBI
has identified ‘enhancement of market surveillance capabilities’ as its prime focus area, and has allocated a special budget in the current financial year 2014-15 specifically for procurement and upgrade of software for investigation work and fraud intelligence. SEBI also plans to use technology to monitor information in the public domain,
social media, and other internet platforms.
SEBI recently called for bids from IT companies to upgrade its Data Warehousing and Business Intelligence System, which is used for speedy analysis of data and identification of possible violations like insider trading.
Banks fined for violating ‘know your customer’ and ‘anti money laundering’ norms
The Reserve Bank of India (“RBI”) has levied penalties on two leading banks of India - ICICI Bank and the Bank of
Baroda for violating Know Your Customer (“KYC”) and anti-money laundering norms. ICICI Bank has been fined
INR 5 million (approx. USD 50000 thousand), while Bank of Baroda has been levied a fine of INR2.5 million
approx. USD41667 thousand).
The RBI found the said banks were not adhering to (a) customer identification and acceptance procedures, and
(b) the instructions on monitoring of transactions in customer accounts that have been issued by the RBI.
RBI’s investigation revealed that the banks failed to detect various fictitious accounts that were opened by fraudsters the name of statutory organisations to encash negotiable instruments and securities not belonging to them.
Earlier in July 2014, the RBI had penalised 22 banks for violations of KYC norms and imposed penalties between
INR 5 million (approx. USD 0.083 million) to INR 30 million (approx. USD 5 million).
In India, banks are required to follow certain customer identification procedures (known as KYC norms) before
opening bank accounts, and monitor all transactions of a suspicious nature and report such transactions to the
appropriate authority.
Enforcement Directorate probes Tamilnad Mercantile Bank and Standard Chartered Bank
for alleged foreign exchange law violations
The Enforcement Directorate (“ED”) is probing alleged foreign exchange violations by Tamilnad Mercantile Bank
(“TMB”) and Standard Chartered Bank (“SCB”) in a transaction related to the transfer of TMB’s stake to certain
foreign entities. The total value of contravention by TMB and SCB together is estimated to INR 6.08 billion
(approx. 101.4 million USD).
It has been alleged that the shares of TMB was transferred from Indian residents to non-residents without seeking
the prior approval of the Reserve Bank of India (“RBI”). It is also alleged that the chairman of TMB facilitated the
share transfer from Indian investors of TMB to non-resident investors and accordingly received a consideration to
the tune of USD 6.85 million in his overseas account in Singapore. The investigations are ongoing to determine
whether during 2011- 2012, shares of TMB were transferred without the prior approval of the Reserve Bank of India. SCB is alleged to have opened an escrow account for the aforesaid transfer of TMB in violation of Foreign Exchange Management Act, 1999 and taking custody of immovable properties in India for providing collateral/
guarantee to a loan availed by the foreign investors in the Mauritius branch of SCB.
Alstom and its executive to be tried by Serious Fraud Office for bribing Delhi Metro Rail
Corporation Limited to secure contracts
The Serious Fraud Office of UK is set to commence a trial against Alstom Network UK, the UK subsidiary of
Alstom SA and its two executives Robert Hallett and Graham Hill on charges of corruption for securing transport
contracts in certain countries, including India from 2001 to 2006.
It is alleged that Alstom and its two executives paid INR 19.89 million (approx. USD 0.33 million) to Indo European Ventures Pte Ltd in the guise of consultancy payments for the sole purpose of bribing officials of Delhi Metro
Rail Corporation Limited to secure a contract in favour of Alstom. Further, it is alleged that a sum of INR 219.21
million (approx. USD 3.65 million) was disguised as a payment by Alstom in respect of a Consultancy Agreement
with Global King Technology Limited for inducing officials of Delhi Metro to show favour to the Alstom Group in
relation to the award or performance of a contract for a Train Control, Signalling and Telecommunications System.
CBI arrests former Union Minister in connection with multi-million Saradha chit fund
scam
The Central Bureau of Investigation (“CBI”) has arrested a former Union Minister of India in connection with INR
300 billion (approx. 6 billion USD) Saradha chit fund scam. The Saradha Group allegedly lured thousands of not
so informed and financially illiterate investors to deposit money in its ponzi investment scheme by promising abnormally high returns on their investment. The scam surfaced in the year 2012, which is presently being investigated by the CBI.
The CBI alleges that some companies owned by the former Union Minister had received INR 28 crore (approx.
USD 4.66 million) from the Saradha Group to acquire a Bengali television channel. It is also believed that several
executives of Saradha Group had, during interrogations, revealed the role of the former union minister in the
scam. The minister was not co-operating with the CBI in the investigation and was on the run. He is alleged to
have committed the offence of criminal conspiracy, cheating and misappropriation of funds.
CONTACT: For additional information, please contact: Srijoy Das, Partner at sdas@archerangel.com and
Anup Kumar, Associate at akumar@archerangel.com
DISCLAIMER: This bulletin is intended as a general overview and discussion of the subjects dealt with. It is not intended, and
should not be used, as a substitute for taking legal advice in any specific situation. Archer & Angel will accept no responsibility
for any actions taken or not taken on the basis of this publication.
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