SEBI’s notification on default

What is the issue?

SEBI earlier notified listed companies to disclose their default information to stock exchanges, but now this circular has been deferred.

What are the shortfalls in SEBI’s notification?

• SEBI notified the listed companies to treat any default in bank loans, commercial paper, foreign currency convertible bonds or External Commercial Borrowings (ECB) as material information.
• It required the companies to disclose this information to stock exchanges within 1 working day.
• At present, banks consider a borrower as a defaulter only if either interest or principal repayments remain unpaid for more than 90 days beyond the due date.

• SEBI’s notification would eliminate the 90 days period used to differentiate between a temporary liquidity crisis and Insolvency problems.

What are the concerns for the companies?

• Financially sound companies may suffer delays of a few days in servicing loans due to temporary cash flow mismatches.
• Requiring them to disclose information of default to the exchange within 1 working day is seen as a stringent rule.
• Disclosing such minor delays as defaults may lead to excessive volatility in the stock-prices.

What are the concerns for the banks?

• Defaulting on a bank loan does not become open information instantly, and takes 90 days before being available to the public.
• The banks believe that the decision of SEBI will further aggravate the NPA situation.

• As the rating agencies will downgrade a loan to default grade once the company has declared itself as a defaulter.
• This would increase the minimum capital required, which is difficult to be matched due to increased NPAs, reduced profits and government’s inability to recapitalise banks.

Way forward

• SEBI’s notification would raise transparency in the system and help the investor to access the risk and rewards involved.
• However, the decision of SEBI to withhold its new rules is appreciated, as the companies are facing increased capital stress.

• It would be healthier for SEBI to reconsider its definition of default on the lines of RBI.

Source: Business Line, Business Standard