(iStock)
(iStock)

Opinion | Default penalty

Issuers will now have to pay a penalty of 2% additional interest if they default on repayment of either the principal or interest on the scheduled date

The Securities and Exchange Board of India’s move to enhance disclosure rules for listed debt issuers is a step in the right direction. Issuers will now have to pay a penalty of 2% additional interest if they default on repayment, and a 1% fine if they delay allotment of bonds beyond 20 days. Moreover, debenture trustees (DTs) will also have to disclose their compensation details.

These changes will help restore the confidence of investors that was shaken up by some recent marquee defaults. Quite often, the terms of debt are skewed in favour of issuers, allowing them to get away with defaults, while leaving little space for recourse to investors. The new penalty should balance the interests of debtors and creditors by encouraging timely repayments. Besides, the disclosure norms for DTs should increase transparency. DTs have a fiduciary duty towards investors. However, being paid by issuers sets up a conflict of interest. In general, a trust deficit in the Indian bond market badly needed to be bridged, and the regulator has done well to respond to that problem. This market needs to thrive for Indian businesses to widen their access to capital.

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