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Detecting the defaulters early ...

Published: 01 Feb 2018

The Securities Exchange Board of India (SEBI) is planning to resuscitate the pending proposal (loan default disclosure by companies) that imposes mandatory obligation on all listed companies to disclose loan defaults to the stock exchanges the moment such companies have the knowledge of loan defaults.

The proposal was destined to be instigated on October 1, 2017 – it was put on hold due to the protest of the banks against the operation of the said proposal – as such provisions will enhance burden on banks in addition to their non-performing assets and result in grind down of the earnings.  

Despite of the opposition of the banks to the proposal, SEBI is adamant on implementation of the proposal – the rating agencies plea that companies do not share information related to loan defaults with them and keep rating agencies in the dark must have also contributed to SEBI firm decision to execute the proposal.

SEBI constituted a board to discuss on this matter comprising of its chairman and whole-time members, Reserve Bank of India representatives and Finance/Corporate ministries representatives.

The move has been widely welcomed to bring massive behavioral change in the listed companies. Implementation of the proposal undoubtedly protects the integrity of the capital markets by plummeting the vagueness created by defunct companies which impacting the trading activities and financial transactions of the capital markets. 

As of now companies are not revealing the debt defaults to the public and carrying on with the business activities until to the point company’s end up possessing underperformed and stressed assets. Revelation of loan default by the companies at the early stage will certainly divulge the standing financial state of such company to the stakeholders involved and safeguard the interests of the stakeholders to the maximum extent from the impact of companies default status by preventing any further kind of loss to the stakeholders.

It is evident that with serious implementation of the proposal will protect the interests of banks and shareholders by off-putting banks from advancing any loans and investors from investing funds into the company by revealing the deteriorating financial position of the company to them – most importantly make listed companies responsible for the loans incurred and accountable to protect the interests of all the stakeholders involved – ultimately protecting the integrity of the capital markets.

Research and inputs by Paruchuri Baswanth Mohan

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About the author :

Bhumesh Verma is a lawyer with over 2 decades of experience in advising domestic and international clients on corporate transactions (M&A, Venture Capital, Private Equity, Startups, corporate advisory, etc.) and features in "The A-List - India's Top 100 Lawyers" by India Business Law Journal. He keeps writing frequently on FDI, M&A and other corporate matters and is a guest faculty as well. He can be reached at bhumesh.verma@corpcommlegal.com.

Bhumesh Verma

Firm: Corp Comm Legal
Country: India

Practice Area: Contract

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