SEBI Mandates Quick Disclosure For Bond Defaults But Not Yet For Bank Loans

A decision by the Securities and Exchange Board of India to push for quicker disclosure of default on debt securities will help bring greater transparency to the markets, said mutual fund managers a day after the new rules were disclosed. The regulator, however, stopped short of mandating such disclosures for default of banks loans, which it had proposed in the past.

In a notice issued last evening, SEBI said that debenture trustees—the holders of a debenture stock for another party—will now be required to update the status of interest and redemption payments not later than one day from the due date. In case the payment is made with a delay by the issuer, the trustee will have to specify it with the date and a “delayed payment” remark.

This comes after recent incidents where debt securities issued by promoters faced a delay in redemption and interest payment on account of high debt at the promoter level.

The decision will add to transparency in the market and allow debt fund managers to get an early signal of emerging trouble, said Mahendra Kumar Jajoo, head of fixed income at Mirae Asset Mutual Fund. He added that debenture trustees must make this information easily available to all investors.

A fixed income fund manager, who spoke on condition of anonymity, said that SEBI’s new rules will cut down the delay in transmitting information of a default.

Until now, the debenture trustee was required to inform the rating agencies, which often took a few days. They would also inform only those who were invested in a specific security. The new rules will ensure that information is more widely available, this person said.

Default Penalty

SEBI has also specified that in the case of default, an additional interest of 2 percent per annum over the coupon rate shall by payable for the defaulting period.

According to Jajoo, clauses regarding penal interest are typically built in to most debt agreements. As such, SEBI’s new rule will not make a material difference but will set the floor for penal interest to be paid for the period of default.

“This is not a retrospective in nature, only term sheets or debt issuances after May 7, 2019 will have to include this clause of a penalty, therefore it is positive as it enhances the return for investors, in the case of a default,” said Vikram Raghani, partner at JSA. “But the question is how this pans out in practice because if someone has defaulted would they even have the ability to pay the additional interest, is another question.”

Together, the increased disclosures and monetary penalty will force companies to act more responsibly, added Dwijendra Srivastava, chief investment officer - debt at Sundaram Asset Management Company.

Bank Loan Defaults

In September 2017, SEBI had asked all listed firms to disclose even a one-day delay in servicing on bank loans to stock exchanges. It later withdrew that circular and said it would revisit the rules.

No headway has been made since then on mandating such disclosures. An account is tagged as a non-performing asset when it is overdue by 90-days but even then banks do not disclose information for specific accounts.

The decision to disclose defaults on bank loans was withdrawn but we hope the disclosure of default on debt securities would be immediately implemented, said Jajoo.