Sebi may issue new version of loan default disclosure circular

Sebi’s decision to withdraw the circular of loan default disclosure came on the back of industry feedback. Photo: Abhijit Bhatlekar/Mint

Sebi’s decision to withdraw the circular of loan default disclosure came on the back of industry feedback. Photo: Abhijit Bhatlekar/Mint

Mumbai: The markets regulator withdrew the loan default disclosure circular without assigning a reason late on Friday night. The sudden withdrawal, a day before listed companies would need to disclose all their defaults, sparked speculation about the fate of the circular.

According to three people with knowledge of the matter, including a official at the Securities and Exchange Board of India (Sebi), the regulator will issue a new circular on the disclosure norms that will address some concerns raised by banks and companies.

“The circular has been deferred for technical reasons, not withdrawn completely. A more thought-out version would be released soon,” said the Sebi official. An email sent to Sebi went unanswered.

According to one of the two other people cited above, Sebi’s decision to withdraw the circular came on the back of industry feedback.

“Industry (officials) had raised concerns that disclosure does not define what is a default as per Sebi norms. Broadly, Sebi was also considering default as defined under the Insolvency and Bankruptcy Code (IBC). Under that, even a Rs1 lakh of non-payment and technical defaults would need to be disclosed. This could have led to a run on the company. The new circular would address these concerns,” said the second person.

Bankers were seeking clarity on disclosures related to the delayed repayment and realign it with practices followed by bankers in categorising the loan as non-performing.

“In case of term loans or working capital loans, there is monthly repayment. Due to cash flow issues, many a time, borrowers are unable to repay on the due date. However, payments are done with delay by paying penalty. It becomes a non-performing asset or NPA only when the repayment is not done for 90 days. Sebi’s proposed circular was not in sync because one day default also has to be reported,”  a general manager with a state-run bank, one of the three people cited earlier, said on condition of anonymity.

“Though this (disclosure of loan default) calls for a better credit discipline among borrowers, disclosures may impact the overall rating of the borrower and subsequently force banks to make higher provisioning,” he added.

There is a case for Sebi to consider some grace period from the due date for making such disclosure, said a banker with a Kolkata-based bank. “Instead of disclosure in missing payment by one day, Sebi could keep a grace period, say of 15 days. In case, the payment is not done in 15 days, then borrower must be asked to disclose. This grace can be brought down gradually as the system gets used to the new norms,” the banker added.

“Every law which is good intentioned must be able to meet the purpose for which it is drafted. The current disclosure requirement had the possibility of relaying imperfect information. The regulator can consider a threshold on the materiality of information (default),” said Ashwin Bishnoi, Partner Khaitan and Co.

“In other developed economies, once a company goes into bankruptcy trading, its shares are suspended, the regulators can consider doing this in India too. This would address the concerns for shareholders and will impact on stock price,” he added.

On 4 August, the market regulator had issued a circular stating that listed companies would need to disclose loan defaults within a day, starting 1 October.

Currently, Sebi norms mandate disclosures on delay or default in payment of interest or principal on debt securities, including listed non-convertible debentures, listed non-convertible redeemable preference shares and foreign currency convertible bonds.  Similar disclosures are not stipulated with regard to loans from banks and financial institutions. In order to bridge this gap in the availability of information to investors, Sebi had asked listed entities to inform exchanges in case they defaulted on payment of interest, instalment obligations on debt securities and loans from banks and financial institutions and external commercial borrowings.

The move assumes significance considering the Rs10 trillion of stressed assets in the banking system. The disclosures of loan defaults would have helped investors make informed decisions about the listed companies.

An official with a rating agency said that they had been asking the regulators to mandate disclosure of loan defaults to help them assign better ratings.

“Sebi has done it keeping in mind that business sentiment is not very upbeat and it would have been onerous for the companies to make these disclosures. From banks’ standpoint, this would have led to higher provisioning as rating agencies would have considered deferment of Small and Medium Enterprises or SME accounts more actively,” said the rating agency official on condition of anonymity.

Shriram Subramanian, founder and managing director, InGovern Research Services Pvt. Ltd, a proxy advisory firm, said the regulator could have tweaked the circular instead of withdrawing it. “Shareholders have the right to know about defaults as it is a material information. Right now, there is information asymmetry where the debt holders, bankers, intermediaries have a clearer picture of default as compared to ordinary shareholders,” said Subramanian.