Puneet Shah.A basic principle of criminal law is that a crime consists of both a mental and a physical state of affair. ‘Mens Rea’ being a mental element refers to a person’s consciousness of the fact that his conduct is criminal, whilst the act of crime itself is the physical element..Last month, the country’s capital market regulator SEBI prohibited ‘wilful defaulters’ from raising money through public issue of equity shares, convertible and non- convertible debt or quasi debt securities. New norms prescribed by SEBI also prohibit a wilful defaulter from acquiring control over a listed company or seeking registration as market intermediary..Under these new SEBI norms, a ‘wilful defaulter’ has been defined to mean any person who is categorized as a ‘wilful defaulter’ by any bank or financial institution or consortium thereof, in accordance with the RBI guidelines on wilful defaulters including any person whose director, promoter or partner is categorized as such..Over the last couple of years, the RBI has strengthened the definition of wilful defaulter to address the mounting losses and increasing non-performing assets in the financial statements of scheduled commercial banks..The RBI guidelines on ‘wilful default’ establishes a borrower entity as a wilful defaulter if.it has defaulted in repayment of loan even if it has sufficient resources to make such repayment;it has not utilised the facility for its intended purpose;it has siphoned off the funds; and/orit has disposed-off the collaterals/security without the knowledge or consent of the banks/lenders..Also, the guidelines has prescribed detailed mechanism to identify any ‘wilful default’ on the part of a borrowing entity and its promoters/directors based on the comprehensive evaluation and examination by senior management of the lender bank..Adopting the principle of natural justice, the RBI guidelines also provides reasonable opportunity of being heard to the management of the borrowing entity before declaring such entity and its management as wilful defaulter..However while examining the role of a non-promoter; non-executive and independent professional director on the board of borrowing entity, the RBI guidelines refers back to the “officer in default” provision of Companies Act, 2013 leaving it to the subjective assessment of lender bank..The guidelines require a lender bank to evaluate if such professional directors are aware of any repayment default or are party to contravention made by the borrowing entity by virtue of the receipt by them of any board proceedings or participation in such board proceedings and if such professional directors have not objected to such contravention recording their dissent vote in the board proceedings or where such contravention had taken place with their consent or connivance..New norms on ‘wilful defaulter’ prescribed by the regulators ignore the fact that independent professional directors get associated with companies for providing their expertise and knowledge on high level strategy and policy issues. They are not expected to involve on day to day business affairs of the company. Apart from receiving director’s remuneration, they do not have any material pecuniary relationship or transactions with the company, its promoters, its management or its subsidiaries, which may affect their independence..Due to their non-executive parenting role at the borrowing entity board, it becomes practically difficult for such directors to acknowledge the covenants of the loan agreements entered by the borrowing entity with the lender bank and register their dissent vote at any board proceedings, where any contravention to the provisions of loan agreement or repayment default, may have been discussed..This may be a matter of serious concern and particularly challenging for SEBI registered intermediaries such as private equity and venture capital funds as new SEBI norm disqualifies a ‘wilful defaulter’ from seeking any fresh intermediary registration..The SEBI norms now provide that if an applicant intermediary or its promoters, directors or key managerial personnel, are included in the list of wilful defaulters and therefore fail to meet the ‘fit and proper person’ test prescribed by SEBI, then SEBI will not be granting fresh registration to them. Domestic private equity and venture capital funds (constituted as alternative investment funds), foreign portfolio investors and foreign venture capital funds are the intermediaries who need to satisfy ‘fit and proper person test’ while seeking SEBI registration..Typically these fund intermediaries invest in the entities (which may have also borrowed from banks and financial institutional lenders) as financial investors and have non-executive professional directors appointed on the board of borrowing entities to safeguard the financial interest fund intermediaries. If due to the default of the borrowing entity and its promoter management, these professional directors are categorised as ‘wilful defaulter’ for the reasons explained above, it may have a cascading effect on the business of the fund intermediaries as they will not be able to seek any fresh registration with SEBI for their other ventures..SEBI will have to be vigilant and extra cautious while implementing these new restrictions on wilful defaulter factoring the ‘mens rea’ principles of criminal law and ‘one size fits all’ approach will not work in the given context..The importance of ‘mens rea’ has also been recognised by two judges bench of Gujarat High Court in Ionic Metalliks which held that directors can no longer be held liable without due regard being paid to their type and control in the company’s decision-making which may have led to the default..The author is a principal associate at Mumbai-based IC Legal. 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