SEBI’s Mandate To Disclose Bank Defaults Within 30 Days To Improve Credit Discipline
SEBI asks companies to disclose any failure of loan repayment lasting more than 30 days.
The Securities and Exchange Board of India has asked companies to disclose any default in repayment of loans from banks or other financial institutions, should the payment delay extend beyond 30 days.
In doing so, the regulator has brought back a less stringent version of a proposal announced last year, which required listed companies to disclose any delay in payment of bank dues within a day. That proposal had been put on hold. At present, while defaults on debt securities are disclosed, delays in bank repayments are not.
“In order to address the gaps in availability of information with respect to defaults, the Board has, inter-alia, decided that in case of any default in repayment of principal or interest on loans from banks or financial institutions which continues beyond 30 days from the pre-agreed payment date, listed entities shall, promptly, but not later than 24 hours from the 30th day, disclose the fact of such default,” SEBI said after a meeting of its board on Wednesday.
In a separate notification on Thursday, the market regulator said that in case of default in repayment of unlisted non-convertible debentures and non-convertible redeemable preference shares, the companies would need to inform stock exchanges within 24 hours, similar to what they do what listed securities.
The new norms would be applicable from Jan. 1.
The 30-day time grace period allowed is in line with rules prescribed by the Reserve Bank of India as part of its June 7 circular. Banks have argued that defaulting borrowers should be allowed a 30-day period in which to cure any default that may have occurred due to technical reasons or a short term liquidity crunch.
Following the respective regulations issued by regulators, a listed borrower, who is in default of bank loans for more than 30-days, will now have to disclose this to investors and also face the initiation of resolution process by banks.
The move by SEBI is expected to bring in more transparency for investors.
According to VG Kannan, chief executive at Indian Banks’ Association, SEBI’s decision will help improve credit discipline.
“This would surely bring in some credit discipline among borrowers. Earlier, we would see borrowers repay 89 days after the due date, which would help them avoid the non-performing asset tag. But now they would want to ensure a healthy repayment record,” Kannan told Bloombergquint.
Since companies are already required to disclose default on their listed debt instruments within two days from default, additional reporting of continuing default on bank loans is positive from a transparency perspective, said Jitin Makkar, head of credit policy at ICRA.
“As a rating agency, we have been seeking debt servicing status from all our rated entities on a monthly basis. In cases where the rated entity does not share the status, it naturally creates uncertainty. A regulatory stipulation to mandatorily disclose instance of delays on even bank loans etc., at least for listed entities, indeed would be useful, notwithstanding a 30-day lag,” Makkar said.
JN Gupta, co-founder and managing director at SES Governance, said that the 30-day grace period before disclosure makes sense as it would help determine whether the default was due to temporary factors or reflects deeper concerns at a company.
“The cases where there are genuinely temporary reasons for a default would get resolved within this 30-day period. It is only in cases where the default has lasted longer than that, where the investors need to be informed. Else, you will end up creating a panic situation,” Gupta said.
Along with mandating direct disclosures by defaulting companies, SEBI has also enabled credit rating agencies to get information from firms in a timely fashion.
In September, the markets regulator introduced norms, where companies were expected to give explicit consent to credit rating agencies, so they may approach banks or other financial institutions to access information regarding any future borrowing, or delays and defaults in repayments.