Mandating disclosure of defaults on loan repayments will serve investors well

The Securities and Exchanges Board of India has received much flak for its perceived inaction in protecting fixed-income investors of companies, many of which have recently gone bankrupt. The regulator has now tried to address this matter in its recent board meeting by stipulating that from January 1, 2020, all listed companies should disclose any default in repayment of principal and interest of loans from banks or other financial institutions that are outstanding beyond 31 days. This will help give an early-warning signal to investors in bonds and debentures of listed companies. With the companies’ financial statements in many instances not really presenting the true state of affairs, and given inadequate communication from the credit rating agencies, investors are often in the dark about the true state of affairs in a company, until it is too late to act. Such disclosure is also in the interest of minority shareholders of companies that may eventually go for resolution under the Insolvency and Bankruptcy Code. These shareholders witness severe erosion in the value of their holdings once the IBC process begins, and prior intimation about possible stress could help them make adequate adjustments to their portfolios. It is good that the regulator has given the companies a 31-day window between the repayment date and the disclosure. This will give adequate opportunity to repay the dues, while ensuring that they are not unduly punished by shareholders for operational delays. It needs to be kept in mind that even after the disclosure the company has two more months to salvage the situation before their assets become NPAs. The regulator also needs to spell out the details that need to be included in the announcement, to avoid ambiguous disclosures.

Streamlining the rules governing rights issues is also welcome. The timeline for completion of rights issue has now been reduced from 55 days to 31 days, ensuring that trading disruption caused by the offer is shorter. The move to allow trading of rights entitlement in demat form will considerably simplify the process for rights renunciation.

Another segment that enjoyed lighter regulation so far, with more leeway to fund managers in asset allocation, was Portfolio Management Schemes. There have been reports of portfolio managers struggling to repay investors mainly due to the excessive risk taken by them. SEBI’s move to tighten the regulations governing PMS should help restore credibility in this segment. Laying down limits for the extent to which funds can be deployed in unlisted securities and unregulated investment vehicles will help avoid future fiascos. By increasing the networth requirement for companies offering PMS to ₹5 crore from ₹2 crore, the regulator is trying to keep away fly-by-night operators. Doubling the minimum investment by clients to ₹50 lakh will restrict the access to PMS to high networth individuals, with better ability to take risk.

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