Disclosure of Loan Defaults by Listed Entities

Readers may recall the controversy surrounding a circular that the Securities and Exchange Board of India (SEBI) issued in August 2017 to all listed companies requiring them to make a public disclosure to the stock exchanges within one working day of defaulting on loans and other financial facilities. In a blog post then, I had discussed the rationale for SEBI’s move. However, the circular came under considerable scrutiny, including because it appeared to be contrary to Reserve Bank of India’s stance of maintaining confidentiality relating to defaulters on loans in the broader interest of the economy through prohibition on disclosure of credit information. In an apparent turf battle, SEBI withdrew the circular prior to the date on which it was to become effective.

More than two years following that episode, SEBI yesterday issued a new circular reinstated its regime surrounding disclosure of loan defaults by listed companies, albeit in a less severe form. Under this circular, listed company borrowers are required to make disclosures to the stock exchanges when they have defaulted in “payment of interest / instalment obligations on loans, including revolving facilities like cash credit, from banks / financial institutions and unlisted debt securities”. Unlike SEBI’s 2017 mandate, the new circular provides for a grace period for disclosure, in that the disclosure obligation is triggered only when the default continues beyond 30 days, in which case the disclosure must be made within 24 hours of the lapse of the 30-day period. Continuing defaults are to be disclosed on a quarterly basis. The SEBI circular also contains the format for the disclosure, which requires listed companies to come forth with key terms of the debt obligation and its default. Disclosures are to be made commencing 1 January 2020.

Given the growing incidences of defaults, such transparency is advantageous to the stock markets, as it enables shareholders to be well-informed about default situations. Ultimately, there is a strong connection between the debt obligations of companies and their defaults, and their impact shareholders, in particular on the stock price. Such an approach may have incidental effects too. Listed company borrowers may be incentivized to prevent defaults, at least beyond the 30-day grace period, if not by the due date. It might be that creditors may derive some incidental benefits from such transparency as much as shareholders would directly.