Mumbai: In a first-of-its-kind move to increase debt disclosures by corporate entities, the market regulator on Friday tightened the norms for listed companies that end up defaulting on loan repayments.
The move by the Securities and Exchange Board of India (Sebi) comes against the backdrop of Rs10 trillion of stressed assets piling up in the banking system.
“Corporates in India are even today primarily reliant on loans from the banking sector. Many banks are presently under considerable stress on account of large loans to the corporate sector turning into stressed assets and non-performing assets (NPAs)," Sebi said in a circular released on Friday.
Currently, the Sebi Listing Obligations and Disclosure Requirements Regulations require specific 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 respect to loans from banks and financial institutions.
Sebi has directed that, starting 1 October, listed companies will need to disclose defaults on loan repayments within one working day. Listed companies would need to inform exchanges in case they have defaulted in payment of interest, instalment obligations on debt securities, loans from banks and financial institutions and external commercial borrowings.
Companies would need to disclose date of default, name of the bank/financial institution that lent the money, default amount and gross principal amount on which the default occurred.
“The entities shall make disclosures within one working day from the date of default at the first instance of default in a specified format," Sebi said.
Listed entities would also need to separately provide information pertaining to defaults to the concerned credit rating agencies.
“This is an excellent step. So far shareholders were getting material information of loan default quite late. Since this information will be disclosed to the public at large it will also help lenders identify defaulters and taken prudent decisions. This will bring in much needed discipline," said J.N. Gupta, managing director of proxy advisory firm Stakeholder Empowerment Services.
On 18 July, Sebi issued a circular directing listed banks to disclose divergences in bad-loan estimates to stock exchanges as soon as they receive a communication from the Reserve Bank of India (RBI).
In an 18 April directive, RBI had asked banks to make such disclosures if the bad loan assessment by the central bank exceeded by that by the lenders by a margin of more than 15%. The disclosures were mandated to be made as part of their financial statements.
ICICI Bank Ltd, Axis Bank Ltd, Yes Bank Ltd, RBL Bank Ltd and IDBI Bank Ltd have reported such divergences.