Thu. Oct 22nd, 2020

SEBI Requires Disclosure of Loan Defaults

3 min read

Over the last couple of years, there has been a steady regulatory move to create some connections between the banking system and the capital markets in order to address cases of loan defaults by companies, especially those listed on the stock exchanges. Take the case of wilful defaulters, who are effectively now kept out of the capital markets (as discussed hereon this Blog). Another mechanism deployed relates to the use of disclosure norms applicable to listed companies to enhance transparency on corporate defaults in the banking system. Efforts have been made towards this end to use securities regulation to force disclosures by both banks listed on stock exchanges that are the lenders, and various listed companies that are the borrowers.SEBI issued a Circulardated July 18, 2017 by which it required listed banks to disclose to the stock exchanges divergence in the asset classification and provisioning in certain two circumstances, viz. where (i) the additional provisioning requirements assessed by the Reserve Bank of India (RBI) exceed 15 percent of the published net profits after tax for the reference period; or (ii) the additional gross non-performing assets (NPAs) identified by the RBI exceed 15 percent of the published incremental gross NPAs for the reference period. SEBI’s circular also provides for the format in which the above disclosures are to be made.A couple of days ago, SEBI turned its focus on to disclosure requirements by the borrowers. Through another Circulardated August 4, 2017, SEBI requires listed companies that are borrowers to make disclosures to the stock exchanges when they have defaulted on debt securities, foreign currency convertible bonds, loans from banks and financial institutions, external commercial borrowings and the like. This essentially covers all types of defaults in respect of debt obtained either through the banking system (e.g. loans from banks and financial institutions) or the capital markets (e.g. debt securities and convertible bonds). Such disclosures have to be made within one working day from the date of default at the first instance of default. SEBI has also prescribed the format for the disclosure and listed out the details to be disclosed. The disclosure requirements take effect from October 1, 2017.SEBI has been quite forthright about the rationale for introducing this disclosure tool, and it has to do with the NPA situation in the banking sector. SEBI notes: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 / Non performing Assets (NPAs). Some companies have also been taken up for initiation of insolvency and bankruptcy proceedings. Although SEBI does not have direct oversight over the banking system, its disclosure measure may have the effect of increasing overall transparency (when either the borrowers or banks are listed entities). By applying pressure on banks to disclosure their treatment of NPAs and on borrowers to promptly disclose defaults, it increases the level of information available to shareholders of both listed banks and borrowers. Hitherto, shareholders may not have had the benefit of early information regarding the default situation, which has now been rectified. Although these measures are essentially targeted at the availability of information to shareholders, they may have tangential benefits to the banking system as well.

Source: Corporate

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