Sebi tightens disclosure regulations for companies
COMPLIANCE BURDEN Regulator amends rules for loan defaults, rights issues
MUMBAI: The markets regulator has tightened disclosure norms for reporting loan defaults, a move that will help investors draw an informed conclusion about a firm’s financial health and prevent a sudden erosion of their wealth when such an event is discovered—as was the case in recent instances.
Any default in repayment of principal or interest to lenders by listed companies which continues beyond 30 days from the preagreed payment date will have to be disclosed to shareholders within 24 hours of such an event, Securities and Exchange Board of India (Sebi) said in a statement after a board meeting on Wednesday. The rule will take effect on January 1.
“Sebi’s move will address the information asymmetry currently existing in the public markets to a fair extent. It will be less drastic than the previous attempt which triggered disclosure of default of one rupee for one day to the present one of 30 days,” said Sandeep Parekh, managing partner, Finsec Law Advisors. “This will also minimise a false alarm where a technical default occurs because of some minor payment problem.”
Over the past year, several listed entities have defaulted on their loan repayments but failed to disclose these to investors.
The revelations, whenever they happened, resulted in a sharp decline in prices of securities issued by them. Currently, t here i s no Sebi norm t hat requires any listed entity or its promoters to disclose repayment defaults to the market.
Instances of loan defaults have increased since financier Infrastructure Leasing & Financial Services Ltd (IL&FS) defaulted on its payment obligations last year. Sebi’s new mandate on default disclosures norms comes after two years of back and forth with companies, banks and Reserve Bank of India. In an earlier version, borrowers were required to disclose even a oneday default. The change to 30 days addresses criticism that a oneday default could be on technical grounds and may not be material.
Mint had first reported on February 28, 2018 that Sebi was considering 30 days as the threshold.
The earlier version of the norms were first proposed on August 4, 2017 by way of a circular to be effective starting October 1 of the same year but just hours before the rules were to be implemented, Sebi withdrew the circular through a late evening press statement after receiving feedback from banks, companies and even RBI against mandating such a move.
The circular was then referred to Sebi’s board in February 2018 and taken up for decision by its board on March 28.
The circular was dropped again as the RBI nominees said that there was still a lack of materiality in such a disclosure and could lead to unnecessary panic in the market.
“Since then to now, the regulators had been talking. The current atmosphere on loan defaults, high non-performing assets and rating actions being stymied due to lack of information prompted the new iteration,” said a Sebi official.
“The timely disclosures about loan defaults by listed companies will ensure transparency and help investors in listed space take an informed call on their investment decisions,” said Indrajit Mishra, Partner, IC Universal Legal, a law firm.
The market watchdog also said that it is working on ways to make listed firms more serious about whistle-blower complaints and disclose such complaints on exchanges if the allegations or its implications are material.
On Wednesday, Sebi also reduced the timeline for completion of rights issues by listed firms. At present, a company is required to complete its rights issue within 55 days from the date of the opening of the issue. Sebi has reduced this to 31 days.
Sebi has also changed norms on portfolio management.