RBI’s Draft Directions on Wilful Defaulters: Implications and Concerns

[Aamir Kapadia and Tejas Venkatesh are penultimate year BBA L.L.B. (Hons.) students at Jindal Global Law School]

On September 21, 2023, the Reserve Bank of India (“RBI”) released the Draft Master Direction on treatment of Wilful Defaulters and Large Defaulters. The purpose behind the draft is to solicit public comments on proposed regulations to tighten the norms applicable to wilful defaulters. While the draft regulations significantly strengthen the wilful defaulter norms, they also raise certain vital concerns.

Applicable Legal Regime

The master circular on wilful defaulters establishes a system to identify and disseminate credit information regarding wilful defaulters to banks and financial institutions, to restrict access to finance. The regime recognises “all banks and financial institutions” to which money is owed by “individuals, juristic persons, other forms of business enterprises” as lenders.

Under the current regime, lenders are obligated to identify and share information about wilful defaulters with an outstanding debt of Rs. 25 Lakhs and above. A “wilful default” is deemed to have occurred if the borrower has failed to meet payment obligations to the lender despite having the ability to repay, diverted such funds for other purposes, siphoned-off such funds, or disposed-off the property which was pledged to lenders for the purpose of securing the loan.

Significantly, lenders have the sole power to declare entities as wilful defaulters. The circular provides for a two-tiered mechanism consisting of an identification committee and a review committee to be constituted for identification of wilful defaulters. In this regard, the identification committee is tasked with issuing a show-cause notice against the defaulter and calling for their submissions. The committee has the discretion to allow a personal hearing to the defaulter if deemed necessary. After receiving submissions, a reasoned order must be passed, which will be considered by the review committee for classification of entities as wilful defaulters.

Where the wilful defaulter is a company, even its promoters and whole-time directors at the relevant time would be classified as wilful defaulters. However, non-whole-time directors are ordinarily exempted from this classification, unless some active participation or knowledge is established. Nevertheless, non-whole time promoter directors cannot claim exemption under the safe-harbour clause.

Upon being listed as a wilful defaulter, no additional facilities should be granted by any lender, and they are barred from institutional finance for floating new ventures for five years after their removal from the list of wilful defaulters. Further, lenders must initiate appropriate criminal proceedings against wilful defaulters and change such a unit’s management. Lenders must also incorporate covenants in loan agreements with borrower companies, prohibiting the induction of wilful defaulters to their board or ensuring expeditious removal therefrom.

Parallelly, SEBI’s (Issue of Capital and Disclosure Requirements) Regulations, 2018 bar listed entities from issuing equity shares and convertible securities to the public where they, or any of their promoters or directors, are wilful defaulters. Nevertheless, the regulations permit the listed entity to raise capital through a rights issue or preferential allotment, subject to certain disclosure requirements. Similarly, the SEBI (Issue and Listing of Non-Convertible Securities) Regulations, 2021 bar listed entities from issuing non-convertible securities such as debt instruments where they, or any of their promoters or directors, are wilful defaulters.

Proposed Changes

The draft directions seek to provide a non-discriminatory and transparent procedure for classifying a depositor as a wilful defaulter. This is sought to be done by incorporating principles of natural justice into the mechanism for identifying wilful defaulters. In addition to the written submissions made to the identification committee, defaulters may now also make written representations before the review committee within a reasonable time, which is proposed to be set at fifteen days. Additionally, the review committee shall provide to the defaulter an opportunity for a personal hearing, after which it shall take a decision on the matter. These changes come in light of the Supreme Court decision in SBI v Jah Developers, wherein principles of natural justice were read into RBI’s Master Circular on Wilful Defaulters, considering the grave consequences that ensued therefrom. It was held that defaulters must have the right of representation before the review committee, before it takes a decision.

Furthermore, non-banking financial companies (“NBFC’s”) are proposed to be included within the definition of a “lender”, allowing such entities also to classify borrowers as wilful defaulters. Additionally, the definition of “wilful default” is proposed to be expanded to include a failure to infuse equity that the borrower committed to do, based on which loans/concessions were provided, despite having the ability to do so.

The draft directions, for the first time, define “wilful defaulters”. Where the defaulter is a company, its promoters and directors associated at the relevant time will also be considered wilful defaulters. Where such individuals are wilful defaulters, all entities in which such person is a promoter or director or is responsible for its management, shall be deemed to be associated with it. Where the wilful defaulter is a company, its subsidiaries, joint ventures, and associate companies will be deemed to be associated with it.

This assumes significance, as the proposed directions bar not only wilful defaulters, but also all its associated entities from availing any credit facility from lenders. This bar will also be effective for one year after the wilful defaulter is de-listed. It is also proposed to expedite the process of identifying wilful defaulters by imposing a six-month deadline for completing the classification process of entities as wilful defaulters after they have been declared as non-performing assets (“NPAs”).

Critical Analysis of the Draft Directions

The proposed directions represent a significant strengthening of the Reserve Bank’s norms on wilful defaulters, in response to India’s significant NPA crisis. They take a crucial step to address this crisis by proposing to classify NBFCs, including asset reconstruction companies (“ARCs”), as lenders, allowing them to be at par with banks vis-à-vis the identification of wilful defaulters and initiating penal action against them. This would incentivise the growth of ARCs in India with a favourable regulatory framework.

Nevertheless, the draft directions also raise certain concerns as regards their scope and implications. Firstly, while the RBI has attempted to satisfy the requirements of natural justice by providing an opportunity to the defaulters to make written representations and a personal hearing before the review committee, it retains the in-house mechanisms of banks to identify wilful defaulters. Apart from concerns regarding this mechanism’s susceptibility to bias, one may question the role of courts in reviewing the decision of the review committee, considering the significant consequences that such classification attracts, implicating Article 19(1)(g) of the Constitution, as held in Jah Developers. However, the Calcutta High Court, in Kejriwal Mining Pvt. Ltd. v Allahabad Bank, ruled that the classification as a “wilful defaulter” may only be overturned by a court under its writ jurisdiction on grounds of patent illegality, arbitrariness, bias, or abuse of process. This narrow jurisdiction effectively permits private commercial entities to make decisions, which consequentially restrict fundamental rights under Article 19(1)(g) without any possibility of a substantive judicial review.

Secondly, by introducing the concept of associated entities (which are also barred from institutional finance) to the regime, the draft regulations make it more difficult for a liquidity-strapped wilfully defaulting company to be re-financed. When the defaulter is a company, the draft deems its promoters and whole-time directors also as wilful defaulters, making any other entity in which they are promoters or directors, associated entities. Currently, the defaulting company, its promoters, and whole-time directors are barred from institutional finance, while the company is further barred from accessing capital market (except by way of a rights issue or preferential allotment under SEBI’s regulation) and debt markets. Therefore, it is difficult for a liquidity-strapped defaulting company that is closely promoter-held to raise funds, as the promoters are barred from institutional finance.

Nevertheless, currently, re-financing is possible through other promoter-controlled entities, which have access to institutional finance. However, since the proposed directions bar associated entities from institutional finance, it would make it harder for such promoter-led entities to re-finance a liquidity strapped defaulting company. This may have the effect of prejudicing the interests of other shareholders in the wilfully defaulting company as it may struggle to raise adequate funds for its operations.

Finally, the proposed regulations give an expansive definition of associated entities. Any entity in which the wilful defaulter is a promoter or director is deemed to be an associated entity, without any distinction drawn between whole-time and non-whole-time directorships. This may have an unnecessarily wide effect on companies wherein the wilful defaulter may not even exercise control, in addition to the extant burden to remove such defaulters from their Board.


The rising NPA scenario poses a significant threat to the Indian economy, necessitating a tightening of regulatory norms to tackle defaulters, including wilful defaulters. The draft directions represent a step towards addressal of this crisis by the Reserve Bank, by bringing NBFCs, especially ARCs, under the ambit of the wilful defaulter regime. Addressing the questions raised in this post would aid in the creation of a robust yet fair mechanism to mitigate the NPA situation.

Aamir Kapadia & Tejas Venkatesh

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  • This Govt forgot that Indian industry reached this stage with many failures. It is making failure a crime. It will help the richer get more rich. Most faulty policy.

  • Is there any way out for the OTS payments made to the Financial Institutions/ Banks by the Promoters with Mutual Understanding to come out of Wilful Defaulters Tag in this proposed Draft Guidelines. So far there is no Sunset Clause in this directions. Promoters/Borrowers who have paid the Dues are still continuing Wlful Defaulters Tag on them despite clearing the Dues. RBI should think about this vital issue and reddress as early as possible.

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