Background

The Securities and Exchange Board of India (SEBI) on 2 September 2015 issued the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations). The Listing Regulations require disclosure of material events/information by listed entities to stock exchanges. Specific disclosures are required under the Listing Regulations on certain matters such as delays and default in payment of interest/principal including:

• Listed non-convertible debentures
• Listed non-convertible redeemable preference shares
• Foreign Currency Convertible Bonds (FCCBs)
• Any other similar types of debt securities.

The Listing Regulations do not require the above disclosures to be provided in respect of loans from banks and financial institutions.

New development

The SEBI, through its circular dated 4 August 2017 has mandated listed entities who have defaulted in payment of interest/instalment obligations on loans from banks and financial institutions, debt securities (including commercial paper), etc. to provide a disclosure of defaults to the stock exchanges within one working day from the date of the default in the manner prescribed in the circular.

This circular is effective from 1 October 2017.

This First Notes provides an overview of the new SEBI disclosure requirements for listed entities in case of default in repayment of loans taken from banks and financial institutions.

Overview of the SEBI circular

Applicability

• The circular will apply to entities which have listed the following securities    on the stock exchanges:

• Specified securities i.e. equity and convertible securities
• Non-convertible debt securities
• Non-convertible and redeemable preference shares.

• The circular applies to a listed entity covered above which defaults in          payment of interest/instalment obligation on any of the following:

• Loans from banks and financial institutions
• Debt securities (including commercial paper)
• Medium Term Notes (MTNs)
• FCCBs
• External Commercial Borrowings (ECBs), etc.

• The term ‘default’ for the purpose of this circular will mean non-payment of interest or principal amount in full on the pre-agreed date.

Formats for disclosures

The SEBI circular prescribes two different reporting formats for:

1. Disclosures in case of first instance of default (to be reported within one day of default)

For debt securities (including commercial paper), MTNs, FCCBs, etc.:
Sr. no.	Type of disclosure	Details
1.	Name of the listed entity
2.	Date of making the disclosure
3.	Nature of obligation/type of instrument (Listed debt securities, MTNs, FCCBs, etc. with ISIN as applicable)
4.	Number of investors in the security as on date of default
5.	Date of default
6.	Details of the obligation (tenure, coupon, secured/ unsecured, etc.)
7.	Current default amount (amount in INR crore) (Please provide the breakup of instalment and interest)
8.	Gross principal amount on which the default above has occurred (in INR crore)
9.	Total amount of securities issued (in INR crore)
10.	Any other details

 

For loans from banks and financial institutions, including ECBs:
Sr. no.	Type of disclosure	Details
1.	Name of the listed entity
2.	Date of making the disclosure
3.	Nature of obligation (e.g. term loans, ECBs, etc.)
4.	Name of lender(s)
5.	Date of default
6.	Current default amount (Amount in INR crore) (Please provide the breakup of instalment and interest)
7.	Gross principal amount on which the default above has occurred (in INR crore)
8.	Details of the obligation (tenure, coupon rate, secured/unsecured, etc.)
9.	Total amount of borrowings from banks/financial institutions
10.	Any other details

2. Disclosures in case there is any outstanding amount under default as on the last day of the quarter (to be reported within seven days from the end of the quarter):

Nature of obligation	Total amount outstanding as on date (In INR crore)	Of the total amount outstanding, cumulative amount of default as on date (In INR crore)
Debt securities (including Commercial Paper, MTNs, etc.) and FCCBs
Loans from banks, and financial institutions, including ECBs

• Timing of disclosures: A listed entity is required to make the prescribed disclosure within one working day from the date of default at the first instance of default in the prescribe format. Additionally, a listed entity is required to report within seven days from the end of the quarter in case there is any outstanding amount under default as on the last date of any quarter.

• Inform credit rating agencies: Listed entities are required to separately provide information pertaining to defaults to the concerned credit rating agencies in a timely manner and as may be prescribed by SEBI from time to time.

Our comments

The recent SEBI circular brings in stricter compliance norms and can help plug the gaps in reporting under different regulations that currently exist. Such disclosures by listed entities will also pose a question of the credibility and market reputation of the defaulter and can help bridge the gap in the availability of information to investors and other stakeholders.

The SEBI circular highlights that there has been an increase in defaults by large borrowers and rise in the level of Non-Performing Assets (NPAs) in banks and financial institutions, and therefore, this action taken by SEBI is a step in the right direction for the following reasons:

• Early disclosures: Early disclosures to stock exchanges by listed entities in case of default in repayment of debt and interest helps to raise the alarm early and banks, financial institutions and other borrowers can take appropriate action.
• Change the current practice: The new disclosure requirements by SEBI can also help to curb a normal practice by wilful defaulters who take loan from banks and financial institution and delay repayment of interest/loan and pay dues just a few days before the 90 days’ deadline to keep their loans in the standard asset classification in the banks’ books.

The new disclosures are likely to raise borrowing costs for such defaulting companies and could lead to such loans being downgraded by banks.

A practical challenge that could be encountered in the context of the proposed disclosure is to determine the extent (and in certain cases, the existence) of default especially in cases where there are disputes between the borrower and lenders in terms of dues/interest rates, etc.

To access the text of the SEBI circular, please click here.