Securities Laws Updates (Country: India)
An Article By: Ms. Priyanka Bhandari, 4th year, Hidayatullah National Law University, Raipur (C.G.), India
Securities and Exchange Board of India (SEBI), issued the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’) with the aim to rationalize and streamline the rules, requirements and disclosure norms for different segments of capital markets, including equity shares (including convertibles), non-convertible debt securities, etc. for ensuring better enforceability.
In accordance with these Regulations, SEBI issued a circular on August 4, 2017 [Note #1], which requires listed entities to make disclosures to the stock exchanges by the listed entities of defaults on payment of interest/ repayment of principal amount on loans from banks / financial institutions, debt securities, etc.
The circular shall have effect from October 1, 2017. This is to enable listed companies to put appropriate systems in place for prompt submission of disclosures as stipulated by SEBI.
Current Regime and its glitches
LODR Regulations currently require disclosure of material events / information by listed entities to stock exchanges. Specific disclosures are required under the LODR Regulations in certain matters such as delay / default in payment of interest / principal on debt securities, including listed Non-Convertible Debentures, listed Non-Convertible Redeemable Preference Shares, Foreign Currency Convertible Bonds (FCCBs) etc. Similar disclosures are not stipulated with respect to loans from banks and financial institutions.
The Government, vide Banking Regulation (Amendment) Ordinance (‘Ordinance’) on May 5, 2017 [Note #2], gave extensive statutory powers to the Reserve Bank of India (RBI) to issue directions to any banking company to initiate insolvency proceedings for the recovery of bad loans under the provisions of the Insolvency and Bankruptcy Code (IBC), 2016 and empowered RBI to issue directions to banks for resolution of stressed assets. Though RBI assured action against 12 defaulters, who owed an overall amount of over Rs 2,00,000 crore, it did not disclose the names of the defaulters to the public.
Need for change in Status Quo
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.
Even though the RBI was given abundant power from the Government to act against the defaulters who shook the entire economy of the country, the RBI was reluctant to not disclose their names, which could help the lenders, and the public at large to invest wisely.
SEBI Circular (“the circular’) and its Implications
On July 18, 2017 [Note #3], pursuant to a notification by RBI on April 18, 2017, SEBI directed listed banks to make disclosures in cases of divergence in the asset classification and provisioning as a part of its financial statements, if the bad loan assessment by the central bank exceeded by that by the lenders by a margin of more than 15%.
While the Ordinance gave RBI the power to Issue directions to banks for resolution of stressed assets and/or initiate Insolvency proceedings, the circular on August 4, 2017 makes it mandatory for listed entities to make disclosures to the stock exchanges when the entity has defaulted in payment of interest / instalment obligations on debt securities (including commercial paper), Medium Term Notes (MTNs), Foreign Currency Convertible Bonds (FCCBs), loans from banks and financial institutions, External Commercial Borrowings (ECBs) etc., within 1 working day from the date of the default.
The circular shall be applicable to all listed entities which have listed specified securities (equity and convertible securities), non-convertible debt securities and non-convertible and redeemable preference shares.
‘Default’ for the purposes of the circular means non-payment of interest or principal amount in full on the pre-agreed date.
List of disclosures to be made
In case of default, the companies would need to make disclosures to stock exchanges about date of default as well as date of making such disclosure, name of the lender, number of investors in the security as on date of default, details of the obligation, current default amount and gross principal amount on which the default has occurred.
The listed entities are also required to separately provide information pertaining to defaults to the concerned Credit Rating Agencies in a timely manner and as may be specified by SEBI from time to time.
Considering the acute gap in the information available to investors regarding default in payment of loan amounts, this circular is a welcome and much needed move by SEBI that will help in maintaining some transparency and clarity in the disclosure mechanism.
In the present circumstances, where RBI refused to disclose the names of the 12 defaulters, this action by SEBI will help lenders identify defaulters and take wise decisions by ensuring that the true picture of the listed entity is portrayed in the public.
However, RBI may initiate insolvency proceedings in case of default and SEBI, on the other hand requires listed entities to make disclosures in case of default. In such a situation, a jurisdictional conflict might arise between SEBI and RBI, in case of non-compliance, either by the bank or the listed entity.
#1 - SEBI Circular No.: CIR/CFD/CMD/93/2017 dated August 4, 2017- Link
#2 - Banking Regulation (Amendment) Ordinance, 2017 - Link
#3 - SEBI Circular No.: CIR/CFD/CMD/80/2017 dated July 18, 2017- Link