Rating agencies seek real-time disclosure of defaults

Rating agencies want listed companies to disclose on a real-time basis any defaults in the settlement of obligations.

Absence of such a critical information in public domain is a disservice to the investor community at large, they feel.

The rating agencies have held discussion with the capital market watchdog, the Securities and Exchange Board of India (Sebi).

Sources said that Sebi may take time to push for mandatory disclosure of defaults on a real-time basis, as it first wants to assure itself that such disclosures will not cause panic and intensify the difficulties of defaulting companies.

The material information of a company defaulting on its obligation of payment of interest or principal on a due date needs to be conveyed to stock exchanges, officials with rating firms said.

In most global markets, corporates are required to disclose any default in payment of interest or principal within 24 hours of the due date. In India, companies inform the bourses when they receive bulk orders from their clients but feel shy of making public the incidents of defaults.

ICRA joint managing director, Naresh Thakker, said immediate disclosure of defaults will infuse greater transparency.

A real-time disclosure of a default will resolve the problem of smaller investors remaining in the dark on such a critical happening. Institutional investors get to know of such a development during their routine interactions in the market.

Disclosure of defaults will ensure investors make informed investment decisions and not necessarily cause any kind of destruction of the market, Crisil managing director and CEO, R Ravimohan, told Business Standard.

Ravimohan said Lupin Laboratories was a defaulter for several years and still got support from the lenders during the entire period as lenders found the fundamentals of the company to be strong.

The company's financial position has since improved and is now in the non-default category.

A regulation was introduced about two years ago requiring a corporate defaulting on payments to disclose the information to its auditors.

This requirement does not meet the right of investors to be informed of any material development in a corporate on a real-time basis.

The information provided to auditors finds mention in the annual report which comes into the public domain much later.

There is no system in place for the immediate detection of companies defaulting in redeeming listed debt instruments, and of reporting such incidents.

In case of a companies defaulting to clear bank dues, the Credit Information Bureau (India) circulates the defaulters' list within the banking community for appropriate action.

The default of corporations in redeeming public deposits falls under the ambit of Company Law Board. But these agencies do not have the mandate of circulating such information to all and sundry.

The problem with auditors carrying their comments on a default in the annual report is that it can happen only once a year and if a default has happened at the beginning of a financial year, the information would be in public domain only after over a year, Thakkar said.

An official with a global rating agency, not willing to be quoted, said absence of information destroys the market and any attempt at opaqueness can only be harmful.