Loan defaults: Sebi to push for urgent disclosure by listed firms

Seeking to join forces with other agencies to check financial frauds, regulator Sebi plans to make it mandatory for listed companies to make urgent disclosure about all major loan defaults. Concerned over an alleged loan fraud of over Rs 12,000 crore at state-run Punjab National Bank remaining undetected for years, the capital markets watchdog is revisiting its "on-hold" proposal to mandate listed firms to disclose all 'substantial' loan defaults within a day.

The proposal is expected to be discussed by Sebi's board at a meeting later this month, even as a final decision is yet to be reached on the threshold limit for quantifying a loan default as 'substantial', a senior official said. One view is to keep this 'threshold' as low as Rs 5 crore, though some want it higher at Rs 50 crore, the official said, while adding there would be other factors such as direct and indirect systemic impact of the default to determine whether it would be considered 'substantial' or not.

Besides, the Sebi board is also likely to discuss the Kotak panel report on corporate governance. The high-level panel, headed by eminent banker Uday Kotak, has suggested a major overhaul of corporate governance norms for listed companies, including steps to improve oversight of financial irregularities at listed firms. The Securities and Exchange Board (Sebi) has already received public comments on the report, while preliminary discussions have been held with the corporate affairs and finance ministries in this regard.

With regard to the loan default disclosure, Sebi's board will discuss its "on-hold" proposal to mandate listed companies to disclose to the stock exchanges about their loan defaults, to banks and financial institutions, within one working day of such a miss. Once implemented, the move would help investors take an informed decision at the earliest in cases of loan defaults by listed companies and at the banks.

The proposal was put on hold just a day before it was supposed to implemented on October 1 --apparently after reservations expressed by the banking industry that such a move can create a panic like situation. The fresh push by Sebi follows detection of an alleged loan fraud of over Rs 12,000 crore fraud at state-run PNB.

While billionaire jewellery designer Nirav Modi, the alleged perpetrator of this fraud, is not directly linked to any listed company, his relative and business associate Mehul Choksi's Gitanjali Gems is a listed firm and has been involved in some other cases of suspected market manipulations. Sebi has already launched a probe into trading and disclosure related issues in the matter of PNB and Gitanjali Gems in connection with the biggest fraud in the Indian banking industry so far, allegedly perpetrated by absconding Modi.

Ever since the fraud came to light on February 14, investors wealth has seen a massive erosion worth billions of dollars at PNB, Gitanjali Gems and several listed firms including public sector banks with direct or indirect exposure to Modi. "With the PNB fraud coming to light, it has become important to ensure timely disclosure of even a small loan default rather than the situation to balloon into a major crisis," a senior official said.

Sebi is considering to make a fresh push on its earlier proposal, although it is open to make a constructive changes to the proposed framework, he added. Regarding the other important agenda before Sebi, the 177-page report of the Kotak panel has called for limiting the chairmanship to only non-executive directors and appointing at least one woman independent director.
While the proposal for only non-executive director allowed to be made chairman would eventually lead to a split in the posts of chairman and managing director, the committee also suggested increasing the minimum board strength to six and the number of board meetings to five in a year.