Introduction

On 4 August 2017, the Securities and Exchange Board of India (SEBI) had issued a circular effective from 1 October 2017 (Circular), mandating certain disclosures by listed entities of default on payment of interest or repayment of principal amounts on loans from banks and/or financial institutions and debt securities. The SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 as amended (Regulations) presently stipulates disclosure by listed entities of material events or information, specifically including certain matters in relation to delay or default in payment of interest or principal on certain debt securities including non-convertible debentures. However, similar disclosures have not been mandated in case of loans granted by banks and financial institutions.

Banks have been the major provider of debt capital to Indian corporations and on account of large loans remaining unpaid and turning into stressed or non-performing assets (NPA), the banks have been under considerable stress. This Circular comes in the time of imminent NPA crisis and in line with the recent efforts of the Government towards improving the bad loans situation, giving the Reserve Bank of India (RBI) more teeth in commercial decisions taken by the banks.

Key features of the Circular

  • Applicable to all listed entities: The Circular shall be applicable to all listed entities that have issued and listed equity and convertible securities, non-convertible debt securities and non-convertible and redeemable preference shares.
  • Types of default covered: In case of default in the payment of interest or instalment obligations on debt securities (including commercial paper), medium term notes, foreign currency convertible bonds, loans from banks and financial institutions and external commercial borrowings (ECBs), disclosures shall be made to the stock exchange where the entity has been listed.
  • Definition of ‘Default’: ‘Default’ has been defined to mean the ‘non-payment of interest or principal amount in full as per the pre-agreed date’. The definition of ‘default’ for the purpose of the Circular is currently restricted to payment defaults on the scheduled dates and does not cover breach of covenants (financial or otherwise) under the loan or bond documents.
  • Timeline: The disclosures must be made within one working day from the date of default at the first instance.
  • Extent of disclosures: Information in relation to defaults must also be communicated to the relevant credit rating agencies in a timely manner and in the manner mandated by the SEBI from time to time. Further, the Circular lists out the type of disclosures such as name of the listed entity, date of making the disclosure, nature of the obligation and type of instrument, name of the lenders or number of investors as on the date of default, date of default, details of the obligation, current default amount, gross principal amount on which default has occurred and total amount of securities that have been issued or total amount of borrowings owed to banks and financial institutions.
  • Quarterly Disclosures: In addition to the above, the listed entity shall also make ongoing disclosures of outstanding amount, which includes both the total amount outstanding as well as the total cumulative amount under default as on the last date of any quarter, within 7 days from the end of the relevant quarter.

Comment

The disclosure requirements brought in the Circular address two-fold purpose- firstly, to better regulate defaults with respect to term loans to reduce the number of NPAs and secondly, better regulation of the debt market. Currently, investors and the public are not aware about defaults by companies in a timely manner due to lack of a mechanism for disclosures of default. By recognising and addressing information gaps early on, the Circular is an attempt to eliminate any critical gap in information available to lenders in the Indian debt market. While the Circular addresses the stressed asset scenario and would strengthen the position of lenders and investors, it may lead to a ripple effect where due to such rating downgrade, banks would be hesitant and even unwilling to extend loans to such corporate borrowers. Given the number of insolvency cases in the country and tight liquidity in the market, this additional disclosure will help in recognising the early signs of stress in a company and bridge information gaps which will encourage accurate credit evaluation by investors and lenders.