SEBI Requires Disclosure of Loan Defaults

Over the last couple of years,
there has been a steady regulatory move to create some connections between the
banking system and the capital markets in order to address cases of loan
defaults by companies, especially those listed on the stock exchanges. Take the
case of wilful defaulters, who are effectively now kept out of the capital
markets (as discussed here
on this Blog). Another mechanism deployed relates to the use of disclosure
norms applicable to listed companies to enhance transparency on corporate
defaults in the banking system. Efforts have been made towards this end to use
securities regulation to force disclosures by both banks listed on stock
exchanges that are the lenders, and various listed companies that are the
borrowers.
SEBI issued a Circular
dated July 18, 2017 by which it required listed banks to disclose to the stock
exchanges divergence in the asset classification and provisioning in certain two
circumstances, viz. where (i) the additional provisioning requirements assessed
by the Reserve Bank of India (RBI) exceed 15 percent of the published net
profits after tax for the reference period; or (ii) the additional gross non-performing
assets (NPAs) identified by the RBI exceed 15 percent of the published
incremental gross NPAs for the reference period. SEBI’s circular also provides
for the format in which the above disclosures are to be made.
A couple of days ago, SEBI turned
its focus on to disclosure requirements by the borrowers. Through another Circular
dated August 4, 2017, SEBI requires listed companies that are borrowers to make
disclosures to the stock exchanges when they have defaulted on debt securities,
foreign currency convertible bonds, loans from banks and financial
institutions, external commercial borrowings and the like. This essentially
covers all types of defaults in respect of debt obtained either through the
banking system (e.g. loans from banks and financial institutions) or the capital
markets (e.g. debt securities and convertible bonds). Such disclosures have to
be made within one working day from the date of default at the first instance
of default. SEBI has also prescribed the format for the disclosure and listed
out the details to be disclosed. The disclosure requirements take effect from October
1, 2017.
SEBI has been quite forthright
about the rationale for introducing this disclosure tool, and it has to do with
the NPA situation in the banking sector. SEBI notes:
Corporates in
India are even today primarily reliant on loans from the banking sector. Many
banks are presently under considerable stress on account of large loans to the
corporate sector turning into stressed assets / Non performing Assets (NPAs).
Some companies have also been taken up for initiation of insolvency and
bankruptcy proceedings. 
Although SEBI does not have direct
oversight over the banking system, its disclosure measure may have the effect
of increasing overall transparency (when either the borrowers or banks are
listed entities). By applying pressure on banks to disclosure their treatment
of NPAs and on borrowers to promptly disclose defaults, it increases the level
of information available to shareholders of both listed banks and borrowers. Hitherto,
shareholders may not have had the benefit of early information regarding the
default situation, which has now been rectified. Although these measures are
essentially targeted at the availability of information to shareholders, they
may have tangential benefits to the banking system as well.

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

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