Why in news?
SEBI (Securities and Exchange Board of India) had asked listed companies to publicly disclose any default beyond 30 days.
What is the new rule?
- Default in repayment of principal or interest on loans from banks and financial institutions are to be disclosed.
- Such disclosure shall be made promptly, but not later than 24 hours from the 30th day of such default.
- In August, 2017, SEBI had issued a similar circular.
- It asked all listed entities to make such “disclosures within one working day from the date of default at the first instance of default.”
- However, SEBI had deferred the implementation of that rule hours before it was to come into effect on October 1 2017.
- The new default rule made now will come into force on January 1, 2020.
What is SEBI’s rationale?
- There is a gap in the availability of information, to different classes of investors, on defaults on loans by listed companies.
- Investors come to know of such defaults much later.
- Unlike this, a default on repayment of a bond or a similar instrument issued by a company has to be disclosed immediately.
- SEBI thus says the change was necessary to address this information asymmetry.
- An early disclosure can act as an early warning system.
- This can help investors make considered decisions on whether to stay on or sell the stock and exit, reducing their losses.
- In the current scenario, a meltdown such as those at IL&FS, DHFL, or PMC Bank, can leave many investors wary.
- It is thus expected that SEBI’s move will lead to greater credit discipline in the banking industry.
- RBI’s move - The RBI’s February 12, 2018 circular directed banks to start the process of resolution or restructuring of a loan even if the default was for only a day.
- The April 2, 2019 ruling of the Supreme Court striked down the circular.
- Following this, the RBI revised its rule in June 2019 offering a 30-day window to classify an account as a Non Performing Account.
- SEBI’s circular now could be seen as a sign of regulatory synergy with the RBI.
- Investments - In 2017, SEBI restrained at the last minute on implementing the disclosure norms on default.
- But, 2018 and 2019 have seen the collapse of several corporates.
- Little was known about the true state of such companies before they went into bankruptcy.
- That too was based on anecdotal evidence with credit rating agencies way behind the curve.
- Resultantly, the erosion of faith could be detrimental to boosting fresh investment.
- It is now essential for both SEBI and the government to hold firm on the decision taken to instill confidence in investors and other stakeholders.
Source: Indian Express
