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SEBI’s actions for Disclosure of Defaults

Finsec Law Advisors

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The Reserve Bank of India has recently taken several initiatives to reduce the amount of non-performing assets in India. In line with this, on July 13, SEBI has amended the SEBI (Debenture Trustees) Regulations, 1993. Further, on August 4, it has also issued circular obliging listed entities to disclose defaults.

The amendments in Debenture Trustees Regulations are incorporated with an intention to align the Regulations with the allied laws, such as, Companies Act, 2013 and to enhance the efficacy of debenture trustees in India. Some of these are: (i) The list of disqualifications applicable for the person who could be appointed as a debenture trustee has been expanded. Persons holding beneficial shares in a company, is a promoter, director, officer or even an employee in the company or any of its associate companies, or has any kind of pecuniary relationship amounting to 2% of more of its gross turnover or receives income of Rs. 50 lakhs or more, etc. are prohibited from being a debenture trustee of the company’s assets. This amendment will ensure that the debenture trustees are purely independent and have no connection/interest with the debtor company. (ii) The contents of debenture trust deed shall now be same as prescribed in form SH-12 of the Companies (Share Capital and Debenture) Rules, 2014. This is a welcome move, as the contents of the trust deed provided under the company rules are comprehensive in nature and it will ensure consistency between the two laws. (iii) An additional certification requirement for compliance officer appointed under Regulation 17A has been introduced and they are now required to obtain a certificate under the SEBI (Certification of Associated Persons in the Securities Markets) Regulations, 2007. This will ensure that the compliance officer possesses specialized knowledge to perform the functions entrusted to him. (iv) A comprehensive list of duties of debenture trustees, combining the obligations under both Companies Act and Debenture Trustee Regulations has been prepared and Regulation 15(1) has been amended accordingly.

In the August 4 circular, SEBI has asked the listed companies to disclose any default in payment of principal / interest amount on debt securities, foreign currency convertible bonds, loans from banks and financial institutions, external commercial borrowings, etc. to the stock exchanges. Such disclosure has to be made within one day of the default and in a format specified in the circular. Companies are required to comply with these obligations from October 1, 2017. Moreover, they have also been asked to provide this information to the credit rating agencies; however, no time period has been specified for such disclosure.

With an increase in the number of bad loans, the protection of creditors and identification of early signs of potential default in repayment has become critical in the financial markets. Implementation of above actions is expected to keep the investors conversant with the changes in the financial conditions of the companies, which may have a major impact on their investments.

While some commentators have expressed concerns about the impact on the market price if too much real information was released in the market, however this is an important step from two perspectives. One, it breaks the omertà code between the borrowers and lenders, both of whom are interested in suppressing news of default. Two, it elevates what was earlier merely a breach of contract to rating agencies, to a breach of laws for suppressing information.