MUMBAI: The capital market regulator has revived a plan to make it mandatory for listed companies to disclose loan defaults as soon as they occur to stock exchanges. The Securities and Exchange Board of India (Sebi) had put the rule on hold a day before it was supposed to be implemented on October 1, following protests from banks.
The proposal will be presented to the board on December 28, said a person with knowledge of the development.
"Sebi is very keen to implement this proposal," he said. "The proposal was kept in abeyance because of resistance from banks. It is now being taken to the board for its consideration." Banks are concerned about adding to their nonperforming asset (NPA) burden, which would mean increased provisions that would erode earnings.
Apart from the chairman and wholetime members, the Sebi board consists of representatives from the Reserve Bank of India and the ministries of finance and corporate affairs.
Rating agencies told Sebi at a meeting with the regulator recently that companies don't share information with them and that they too are behind the curve.
Move to Benefit All Stakeholders
But they suggested that the notice period be extended to one month rather than one day as stipulated in the proposed rule since loans are of various types.
For instance, banks classify loans as NPAs after a grace period of 90 days. However, under the Insolvency and Bankruptcy Code, a lender can trigger insolvency proceedings against a debtor on the very next day after the due date.
The Reserve Bank has told credit rating agencies previously that defaults need to be recognised as soon as they happen. Loans include term loans, working capital loans, bonds, certificates of deposit and commercial paper.
Sebi's move is aimed at ensuring that information is shared with all stakeholders at the same time.
"This is a preventive measure which will bring in behavioural change," said another person familiar with the development.
The regulator's initiative had been cheered by the broader markets as it was considered material information affecting stock prices in an environment where lenders are battling a mounting pile of bad debts. 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.
"This will convert what is today a breach of contractual duty between a company and a credit rating agency into a legal violation," said Sandeep Parekh, founder of Finsec Law Advisors. "Till now, all the interests were aligned in favour of suppressing information of default because lender and borrower were both happy not to make this disclosure… Even the rating agencies were left in the dark as companies would stop sharing information and even blatantly lying to them knowing there would be no consequences."
Sebi withdrew the rule on September 29 by issuing a brief public statement that said the circular mandating disclosures on loan defaults within a day was being deferred "until further notice."
"In the last two years, we have given several exemptions to commercial banks who took on stressed assets," S Raman, former whole-time member of Sebi had told ET in an interview. "But, when we gave one exemption after another, we wondered whether that was the end of it. How about doing something to help the banking industry arrest reasonable accounts from turning bad?"
Such disclosures would mean that other banks were aware of a company's situation and wouldn't advance more loans, he said, adding that investors would also be armed with this knowledge. It would also change "borrower behaviour, which would be the real upshot of this measure," he said.
"We also discussed extensively on disclosing defaults within 24 hours. In case of default in corporate bonds, you get to know the next day. Finally, we decided to have a common rule," Raman said.