Sebi bats for defaulters PDF Print E-mail
Wednesday, 04 October 2017 03:58
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Shobhana edit

Bad idea to defer the directive on making defaults public


The decision by Sebi to defer its directive which required listed entities to mandatorily disclose any defaults by them to banks or financial institutions comes as a surprise. In August, the capital markets regulator had said that, by October 1, companies must inform the stock exchanges in the event they failed to pay banks either the interest or the principal amount on time. To be sure, the capital markets regulator has merely deferred the directive and not pulled it out altogether. Nevertheless, the delay is hard to understand. After all, Sebi had rightly observed in its earlier circular there was a “critical gap in the availability of information to investors”. If that is true, why not go ahead with the move?

Indeed, it is surprising that, in all these years, Sebi did not feel it was important for companies to inform minority shareholders of a default to a bank or a financial institution. The level of defaults may not have been very high five years back—often because banks were given to ever-greening accounts—but the situation has changed dramatically since then. As we know, NPAs now account for almost 10% of all loans. Also, as Sebi observed while issuing the directive, companies today rely primarily on loans from the banking sector. With companies stressed for one reason or another, they have been unable to meet their repayment obligations, leaving banks weighed down by NPAs. Surely, minority shareholders, whether institutional or retail, have a right to know whether a particular company they have invested in is paying up on time? Delaying or defaulting on loans is a clear sign of trouble, and should be red-flagged so that investors can sell the shares if they wish to.

The deferral has been interpreted by some to be a move to protect bank balance-sheets; any information of a default by a company, experts say, would prompt the rating agencies to downgrade the account to default status, necessitating a bigger capital provision by the lender. The fact is, in the event of a default, banks should immediately downgrade the account, rather than waiting for the rating agency to do so. Moreover, they must set aside additional capital if the rules call for them to do so, and the balance-sheet must reflect the true value of the assets. After all, minority shareholders in banks too need be to kept informed of the quality of the balance-sheets and alerted about a possible rise in provisioning. The regulator should also make it mandatory for companies to disclose changes in credit-ratings. There is little point in sweeping the dirt under the carpet, and concealing information on errant borrowers is patently unfair.


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