“To ensure smooth implementation, there has to be uniformity between bank- and bond-default disclosure norms. The discrepancy between the two could lead to complications for rating agencies, who are expected to take cognizance of any kind of default and take immediately take rating action,” said an official with a rating agency.
Rating agencies fear they could be pulled up if their rating action changes 30 days after the default when a company makes the disclosure.
Industry players said Sebi
and the RBI
would have to come together to iron out these issues.
in 2017 issued a circular directing companies to report any bank default within 24 hours. However, following an industry backlash, the regulator withdrew the circular.
in November asked companies to disclose to shareholders if they were in default for 30 days. The new norms were aimed at cushioning companies that missed deadlines due to technical factors.
“For a cash credit account, there could be temporary factors, such as mismatch in flows, leading to ‘default’. However, this can be rectified in a matter of days. Hence, Sebi provides a month’s time to companies to inform exchanges,” explained V G Kannan, former managing director, Indian Banks’ Association.
Karan Mitroo, partner, L&L Partners, said a 30-day period to prevent a “technical default” did not have to be disclosed because “it may not necessarily represent the true picture and may lead to negative sentiment of a perfectly financially sound company”.
Sources said CRAs had sought tweaking the definition of “default” to differentiate between an actual default and a technical default.
Kannan says this concept is unique for India.
“India is the only country where we have got this cash credit system. It’s all term loans for others, where one-day default is a default. And in case of cash credit, there is this concept of inflows and outflows and RBI
possibly is feeling that if in the cash credit system there is a default then it cannot be treated as a permanent default,” he said.
Moin Ladha, partner, Khaitan & Co, said there had to be some safeguards for CRAs.
“The implementation of Sebi’s proposal could require enabling language in the agreement to provide CRA’s with timely information regarding the defaults on borrowing. In some cases, information shared may not give a complete picture, making it challenging for CRAs to take a decision,” said he said.
Industry players say CRAs have sought wide-ranging clarifications from RBI
and Sebi to understand how the new rules could impact their rating process.
The move comes at a time when rating firms are facing criticism over their handling cases where default by top-rated issuers had stunned the Street.
Most rating agencies refused to comment on the issue.