Mumbai: The capital market regulator has tightened disclosure norms for reporting loan defaults, a move that will help investors draw an informed conclusion about a firm’s financial health and prevent a sudden erosion of their wealth when such an event is discovered—as was the case in recent instances.
Any default in repayment of principal or interest to lenders by listed companies which continues beyond 30 days from the pre-agreed payment date will have to be disclosed to shareholders within 24 hours of such an event, the Securities and Exchange Board of India (Sebi) said in a statement after a board meeting on Wednesday. The rule will take effect on 1 January.
“Sebi’s move will address the information asymmetry currently existing in the public markets to a fair extent. It will be less drastic than the previous attempt which triggered disclosure of default of one rupee for one day to the present one of 30 days," said Sandeep Parekh, managing partner, Finsec Law Advisors. “This will also minimize a false alarm where a technical default occurs because of some minor payment problem."
Over the past year, several listed entities have defaulted on their loan repayments but failed to disclose these to investors.
The revelations, whenever they happened, resulted in a sharp decline in prices of securities issued by them. Currently, there is no Sebi norm that requires any listed entity or its promoters to disclose repayment defaults to the market.
Instances of loan defaults have increased since financier Infrastructure Leasing and Financial Services Ltd defaulted on its payment obligations last year.
More recently, Dewan Housing Finance Corp. Ltd, among listed companies, has defaulted on repayments to lenders. Others who have defaulted on repayments over the past year are Jet Airways, Reliance Capital and Reliance Communications .
Sebi’s new mandate on default disclosure norms comes after two years of back and forth with companies, banks and the Reserve Bank of India (RBI). In an earlier version, borrowers were required to disclose even a one-day default. The change to 30 days addresses criticism that a one-day default could be on technical grounds and may not be material.
Mint had first reported on 28 February 2018 that Sebi was considering 30 days as the threshold.
The market watchdog also said that it is working on ways to make listed firms more serious about whistleblower complaints and disclose such complaints on exchanges if the allegations or its implications are material.
“If the whistleblower complaint is based on serious allegations and is proved with concrete evidences, Sebi will take it very seriously, investigate into the matter and ensure that the company’s board discloses about such a complaint to investors," said Sebi chairman Ajay Tyagi.
Recently, a whistleblower complaint was filed against the CEO of Infosys Ltd and some of its top officials. The whistleblower alleged the board of Infosys did not disclose the whistleblower complaint while announcing the company’s earnings; when a news report revealed it, the Infosys stock tanked.
On Wednesday, Sebi also reduced the timeline for completion of rights issues by listed companies. At present, a firm is required to complete its rights issue within 55 days from the date of the opening of the issue. Sebi has reduced this to 31 days.
The market watchdog has also changed norms on portfolio management.
The capital market regulator increased a portfolio manager’s net worth requirement from ₹2 crore to ₹5 crore. Existing portfolio managers need to meet the enhanced requirement within three years, it said.
Sebi also doubled the minimum investment requirement in portfolio management service funds to ₹50 lakh.