Sebi to soften stance on default disclosure requirement

Easing the blow for corporate India, the Securities and Exchange Board of India (Sebi) is looking to re-issue a more relaxed loan default disclosure framework.

According to sources, the market regulator plans to give up to a month’s time to companies for disclosing loan defaults and also make provision to explain the nature of the default.

Under the previous proposal (according to a circular dated August 4) — the implementation of which has been deferred — Sebi had mandated companies to make public any loan defaults within 24 hours of missing the repayment obligation.

Sources said Sebi is re-looking at some of the contentious issues in the proposed circular, which have been brought to its notice by market players, including industry bodies, banks and rating agencies.

Under the revised directives, Sebi may increase the “delta D” or date of default to 30 days and may give some additional time to companies to make disclosures. Besides, it could also make some provisions to state if the default was technical in nature and provide some exemptions on that part.

Sebi and the finance ministry are said to have received a slew of representations in the past one month which say Sebi's directives were not practical in nature and need detailed analysis.

“There are two major issues with Sebi’s earlier circular. One, it was not practically possible for companies to make disclosure of default in one working day. Second, there was no consideration on the nature of loan default,” said a person with knowledge of the development.

“Threshold cannot be absolute and has to be relative to the total liability of the company. Besides there should be proper demarcation on the nature of default,” said a senior official of an industry body.

Also, the circular was issued without floating a discussion paper inviting public feedback. Typically, Sebi issues a discussion paper before announcing any such policy changes.

Banks, too, have expressed concerns over the impact of the circular on their core capital in case rating agencies decide to downgrade corporates making default disclosures.

“Disclosure of default on loans within 24 hours could put banks in a Catch-22 situation. Once a company makes such disclosure, credit rating agencies would have to step in and downgrade the company’s rating to default. Once credit rating agencies attribute the default rating, the risk attached to the loan goes up and it impacts the capital adequacy ratio of the bank. In other words, banks will be forced to arrange more capital for day-to-day business,” said a bank expert on the condition of anonymity.

Ashvin Parekh, managing partner, Ashvin Parekh Advisory Services, said the purpose of the circular was to benefit banks, but it could have ended up increasing their burden as they would have been required to make provisions in case of downgrades by rating agencies.

According to Reserve Bank of India norms, even though non-payment on the due date is deemed a default, banks classify the loan as a non-performing asset only after 90 days. 

The default disclosure norm was hailed by many as a game-changing move that would have helped banks, which are saddled with bad loans of more than Rs 10 lakh crore.
 
S Raman, former Sebi whole-time member, in an interview to Business Standard last month before retiring from his post, had said the rule would “infuse discipline” and if introduced earlier would have helped prevent bad loans piling up.
 
“It is a game changer and the most effective measure taken by the regulator ever. So far it was 90 days and within the timeline. During this period, investors did not know what was happening in the company,” he had said.
 
“This could impact investment decisions. We have also provided several exemptions to banks while acquiring stressed assets, including exemption from takeover rules... the accumulation of NPAs is due to asymmetry in information. The investor should have real-time information,” he had said.

STEP-BY-STEP

August 4

• Sebi mandated listed firms to make disclosure of debt default

• Disclosure had to be made within one working day from October 1

September 29

• Sebi deferred the directive without any explanation
• It is likely to revise the guidelines for debt disclosure
• Exemption would be made on nature of default
• May provide proper demarcation of loan default 
• Threshold would depend on total liability of the company