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Detecting the defaulters early ...

posted 6 years ago

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

 

***************
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 [email protected].

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