Listed companies might soon have to make a quick disclosure in the event of a default on debt securities or even if the company is merely expecting a possible delay or default in the payment of the interest or the principal amount.
The Securities and Exchange Board of India (SEBI), whose attempts last year to tighten the disclosure norms for default of loans taken from banks or financial institutions met with opposition and failed ultimately, plans to amend the listing regulations to make such disclosures mandatory.
The capital market regulator has proposed amending the Listing Obligations and Disclosure Requirements Regulation 2015, which all listed companies have to comply.
The watchdog has proposed changes that would make it compulsory for a company to disclose within 24 hours, any default or an expected default or delay in the payment of interest or dividend on debt instruments like non-convertible debt securities (NCDs) or non-convertible redeemable preference shares (NCRPS).
Further, if there is any action or proposal that could affect the redemption, conversion, cancellation, retirement in whole or in part of the debt securities then it will also have to be disclosed “as soon as reasonably possible but not later than twenty four hours from occurrence of event or information”, as per SEBI’s discussion paper.
“There was a view that SEBI’s circular last year on debt default disclosure went beyond the securities market and so got stalled. This time though the regulator has acted within its powers and has proposed changes to tighten the regulations for disclosure by amending the LODR regulations, which every listed entity has to comply with,” said Sandeep Parekh, founder, Finsec Law Advisors.
“With the proposed changes, the regulator aims to move from principal-based to regulation-based disclosure requirements. While there are obvious incentives for companies to suppress such disclosures, the proposed changes would explicitly state the compliance requirements for the listed entities.” added Mr.Parekh, who has earlier worked with SEBI as an executive director in-charge of legal affairs.
Among other things, the regulator wants listed companies to disclose five days prior to every quarter details related to interest or dividend payable on all NCDs or NCRPS during the quarter. Thereafter, within two working days from the end of the quarter a certificate needs to be provided confirming all such payments.
Tejesh Chitlangi, Senior Partner, IC Universal Legal is of the view that the proposals, if accepted in the form currently proposed, would address certain discrepancies in the manner disclosures are currently done.
“SEBI has sought to address two key issues in relation to the listed companies who have their debt securities listed. First, to tighten up the disclosure and governance norms whilst leaving no room for delay in dissemination of material information... Second, to also rationalise the disclosure norms to mitigate the unwarranted hardships faced by the issuers,” said Mr. Chitlangi.
Companies will also be required to report any material deviation in the use of proceeds on a quarterly basis instead of the current requirement of providing such information every six months.
“Material deviations in the use of proceeds is a serious issue and needs to be intimated more frequently than the instant provision,” said SEBI.
While stressing on the need for a review of the LODR Regulations, the regulator highlighted the fact there have been a spate of incidents regarding non-compliance with the listing regulations by issuers of debts securities.
“Therefore, in order to ensure safeguard of interest of investors, a need has been felt to review and strengthen the SEBI LODR Regulations wherever necessary pertaining to NCDs and NCRPS,” stated the SEBI paper.
The capital market regulator has also proposed empowering the investors in instances wherein the company plans to change the structure of an NCD or NCRPS.
“It is proposed that the listed entity shall not make any material modification without obtaining consent in writing of the holders of not less than three-fourths, by number, of holders of that class of securities for which modification in structure is proposed,” said the SEBI paper.
Further, such consent has to be an affirmative one and a mere non response shall not be treated as deemed consent, it added.
Thereafter, the debenture trustee will have to vet the consent and issue a certificate to the company that will have to disclose the same to the stock exchanges.
According to the norms currently in force, a company can modify the structure by taking an approval from the board of directors and debenture trustees in the case of NCDs.
Market participants have been given time until June 11 to submit their feedback for the proposals.
