Companies should not only disclose payment defaults to the bourses but also technical defaults such as those relating to breach of non-financial conditions in loan agreements so that investors and lenders are protected, said Krishnamurthy V Subramanian, Executive Director-India, IMF.

Global practise on disclosure of default by companies actually goes beyond missing payment obligations to also cover technical default, Krishnamurthy said in his address at ASSOCHAM’s national summit on stressed assets.

He emphasised that such disclosure needs to be made fully to the bourses and the regulator, irrespective of whether a company has raised resources from investors via equity or debt.

Referring to SEBI’s 2017 report of the committee on corporate governance, the IMF ED said there was a lot of push back from the industry on the recommendations on disclosures and there is push back even now.

“In India, the situation we have is that some of the borrowers actually either defaulted on their obligations or delayed making payments, but disclosures about these material developments have not been made to the bourses,” Krishnamurthy said.

Reflection in rating

The IMF ED cited the example of an auto component company, which was rated ‘AA’ (investment grade rating) and then all of a sudden, in the face of distress, its rating, rather than sliding down the ratings matrix, got summarily downgraded (to default category). This was a rating “jump risk” for investors.

“But if there is a disclosure of a borrower missing payment even by a day, that will actually start reflecting in the rating and investors will not face jump risk. This will happen only if information on default is shared,” he said.

Krishnamurthy cautioned that evergreening (of loans) gets encouraged by the current disclosure practices.

“If a borrower is not required to disclose that he has not paid on an obligation then there is no way for investors to know and thereby put pressure on banks to recognise the natural state of that loan…Both evergreening and zombie lending lead to distressed assets not being recognised,” he said.

The IMF ED opined that there needs to be a time bound plan for disclosure of defaults, initially starting with 15 days, moving to a week and then to as soon as a default occurs.