Note on SEBI Circular – Default in Loans from Banks and financial institutions
Currently, SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“SEBI LODR Regulations”) requires disclosure of material events / 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. by listed entities to stock exchanges. At present, disclosures are not stipulated with respect to default on loans from banks and financial institutions. Many banks are under considerable stress on account of large loans to the corporate sector turning into stressed assets / non-performing assets (NPAs).
In order to address this critical gap in the availability of information to investors, SEBI has issued a circular on 4 August 2017 and shall come into force with effect from 1 October 2017, which requires disclosures to be provided by listed entities for default on payment of interest/ repayment of principal amount on loans from banks / financial institutions, debt securities, etc. in the form of commercial paper, Medium Term Notes (MTNs), Foreign Currency Convertible Bonds (FCCBs), External Commercial Borrowings (ECBs) etc. Default shall mean non-payment of interest or principal amount in full on the pre-agreed date.
Listed entities shall also provide information pertaining to defaults to the concerned Credit Rating Agencies.
Listed entities shall make the following disclosures within one working day from the date of default at the first instance of default:
- Name of the Listed entity
- Date of making the disclosure
- Nature of obligation/ Type of instrument
- Name of the Lender(s)/ Number of investors in the security as on date of default
- Date of default
- Current default amount
- Gross Principal amount on which the default above has occurred
- Details of the obligation
- Total amount of borrowings from Banks/ financial institutions
Listed details shall disclose total amount outstanding as on date and of the total amount outstanding, cumulative amount of default as on date with respect to the obligation defaulted as on the last date of any quarter within 7 days from the end of such quarter.
The above disclosure will be helpful at regulator level to understand such defaults and frequency of such occurrence.
If one may analyze from a lender’s perspective, such disclosure may significantly increase borrowers’ risk profile impacting the credit quality of such borrower. None the less one may need to be cognizant of the fact that there may be other factors responsible for such default. Though the disclosure does not require to state the reason of such default by the borrower, it is empirical that lender would ask for reasons for such a default.
Timeline of one working day is very stringent and wouldn’t allow borrower for any exemption from such disclosures, even if the negotiation for extension of timeline are under discussion. One may note that there are no exemptions provided even if the default is for non-material reason. This is critical given that the borrower’s name would be made available to SEBI and to the concerned credit rating agencies.
 entities whose specified securities (equity and convertible securities), non-convertible debt securities and non-convertible and redeemable preference shares are listed