Mumbai, January 8, 2018
The Securities and Exchange Board of India (Sebi) proposal requiring listed companies to disclose a loan default within a day of it happening is unlikely to be implemented, with both the government and the Reserve Bank of India (RBI) not keen on such a measure, said two people close to the development.
Sebi had sought to resurrect the plan by taking the proposal to the regulator's board meeting on December 28. After the meeting, it said the proposal had been deferred but ET understands that the plan has likely been scrapped because of concerns that the information so disclosed would mean banks needing more capital.
"This matter was discussed at length but both the government and the Reserve Bank were not in favour of implementing this proposal," said a Sebi board member.
Having first made the proposal in August, Sebi had to withdraw its circular on September 29, just a day before it was to become operational after the government raised a red flag about banks needing another Rs 26,000 crore in capital if the measure was implemented.
This was contained in a note that Sebi prepared and circulated to the board for the December 28 meeting that ET has seen.
The board consists of representatives of the RBI, the finance and corporate affairs ministries, the Sebi chairman and whole-time members. RBI and Sebi didn't respond to queries.
Impact on Finances
"On September 29, 2017, government of India informed Sebi that the Reserve Bank of India had conveyed that the said circular would warrant an additional capital of close to Rs 26,000 cr for the banking industry," said the note.
"It was further stated that the full implications of the circular need to be further studied and, therefore, the implementation of the circular might be deferred for the time being. Accordingly, the said Sebi circular of August 4, 2017, was deferred on September 29, 2017."
This implies that implementation of the plan could have an impact on government finances, already stretched because of lower-thanexpected revenue growth.
Furthermore, the government recently announced a Rs 2.11 lakh crore recapitalisation plan to lift banks burdened by bad loans in order to help revive credit growth.
But going into the December 28 meeting, it appears the regulator was still hopeful about the proposal meeting with acceptance.
"Subsequently, the regulatory provisions of RBI and Sebi pertaining to recognition of default have been reviewed and it is proposed that this circular may be operationalised with some modifications," Sebi had said in the agenda note for the December 28 meeting.
After receiving feedback on the initial proposal from the government, Sebi had reviewed the definition of a default, both its own and that of the RBI.
Sebi took a cue from the RBI's April 2013 direction to credit rating agencies and proposed that the definition of default in the August 2017 circular be substituted: "'Default' for the purpose of this circular shall mean non-payment of interest or principal amount in full on the pre-agreed date," it said in the note for the December 28 meeting.
"Provided that for revolving facilities provided by banks like cash credit, an entity would be considered to be in default beyond 30 days from the date of overdrawal."
But its arguments weren't able to allay the misgivings of the rest of the board.
"It is not just about the financial aspect, it would unnecessarily expose entities," said one of the people cited above. Sebi had been planning to implement its circular with effect from April 1, 2018.
[The Economic Times]