Mumbai, July 26, 2017

The Securities and Exchange Board of India (Sebi) is planning to make it mandatory for listed companies to inform stock exchanges if they fail to make interest and loan installment payments on time in order to ensure greater fiscal discipline and keep shareholders better informed.

The regulator is considering the timeframe within which the information has to be declared to the stock exchanges, said people with knowledge of the plan. Companies and banks currently aren’t required to make disclosures to the bourses about defaults.

“It’s an important information if a company can’t pay the bank — investors should know about it,” said a chartered accountant who has served on several regulatory committees.

“The company’s valuation changes. If a company is not able to pay on time, it implies that it has cash flow issues.”

Under the new Insolvency and Bankruptcy Code (IBC), if a borrower is unable to pay on the due date, creditors can initiate the insolvency resolution process on the next day. However, as per Reserve Bank of India (RBI) norms, even though non-payment on the due date is deemed a default, banks classify the loan as a non-performing asset (NPA) only after 90 days.

Bankers said the Sebi proposal is significant in the context of the fact that many borrowers pay dues just a few days before the 90-day deadline to retain standard asset classification on their loans. An NPA classification limits a borrower’s ability to raise further capital and is also seen as a reputation risk.

“Any delay in interest and/or principal repayment is market information as it enables investors in equities and bonds to judge the financial health of the company,” said Shriram Subramanian, MD of InGovern, a proxy advisory firm.

“Additionally, making such disclosures mandatory ensures that the asymmetry of information is avoided. It also helps market participants to correctly price bonds and bond derivatives on the company.”

The measure comes as the government and RBI have taken a series of measures aimed at resolving banks’ bad debts, which are seen as a threat to India’s economic health. Sebi too has taken several steps in this regard.

Sebi last week asked listed banks to make disclosures if provisioning and NPAs assessed by RBI exceeded 15% of published financials. Recently, Sebi asked credit rating agencies to seek information from companies on the servicing of debt obligations and disclose this immediately.

“Disclosures are always welcome in a disclosure-based regime,” said Sudhir Bassi, executive director, capital markets, Khaitan & Co, a leading law firm. “However, while framing a regulation due consideration should be given that any temporary delay should not be a reporting event. Hence, if a debt payment is (delayed) for say two or three months, then it should be a disclosure requirement.”

The banking sector is saddled with more than Rs 12 lakh crore of stressed loans. This includes restructured debt, of which NPAs account for more than Rs 7 lakh crore.

Some experts urged caution when making judgement calls on such information. “All demands for disclosure must be tempered with the value that they may deliver and also by the factor that wrong interpretation can be made by not fully understood disclosures,” said Shailesh Haribhakti, founder, Baker Tilly DHC, an advisory firm.

ET View: A matter of right
 Sebi has every right to ask a listed company to disclose to the stock exchange its inability to service a loan. Typically, a bank declares an account as a non-performing asset 90 days after the default. That’s a long time in the financial market. Companies can be given a grace period of, say, 30 days, after the default to make the disclosure to stock exchanges. This will enhance transparency and, in turn, help investors take a call on the stock.

[The Economic Times]