Need of the hour: Disclosure transparency

With rising defaults by listed companies, it’s not only the institutional investors who suffer. Retail shareholders, too, face a big risk of losing their investments.

Written by George Mathew , Sandeep Singh | Published: December 4, 2015 1:46:34 am
Sebi can address this issue by including ‘default on interest payment’ within the definition of material price-sensitive information.(Illustration: C R Sasikumar) Sebi can address this issue by including ‘default on interest payment’ within the definition of material price-sensitive information.(Illustration: C R Sasikumar)

Banks are not the only victims of bad loans. Retail shareholders, too, are let down by companies that have defaulted on their loan repayments or have been classified as ‘most vulnerable’ by rating agencies.

Over the last three to five years, several of these companies have taken huge hits on their share prices and valuations and, retail investors, who, in most cases, miss the red flags within the financials of a firm, are often left in the lurch, while others, including promoters, make a quiet exit.

Market experts say that the Securities and Exchange Board of India (Sebi) should ensure that financial status (such as a default on interest payments) relating to a listed company should be included in the definition of material price-sensitive information and banks should be made to disclose them to the stock exchanges on the same day when an interest payment default happens. While this will bring in more transparency, it will also reduce the information lag between retail and institutional investors, according to the experts.

Examples of defaulting firms and its effects are strewn across the Dalal Street.

Sterling Biotech, which defaulted on payments of around Rs 3,880 crore to banks and financial institutions, saw its share plunge more than 90 per cent from a value of Rs 103 five years ago to a share price of Rs 6.10 on Wednesday.

Also, ABG Shipyard, which was undergoing corporate debt restructuring (CDR) has declined from Rs 419.65 in December 2010 to Rs 71.50 now, registering a fall of 83 per cent, while S Kumar Nationwide has plummeted from Rs 68 in April 2011 to Rs 2.35, witnessing a decline of 96.5 per cent. GTL, one of the biggest CDR cases, has crashed from Rs 416.85 in December 2010 to Rs 13.62 — a plunge of 96.7 per cent.

There are other cases too. Era Infra Engineering, which has defaulted over Rs 8,446 crore, plummeted 98 per cent from Rs 215 in December 2010 to Rs 3.84 now. Gitanjali Gem has declined by 93 per cent from Rs 531.43 to Rs 39.35 in the last three years while Rei Agro, which has defaulted on Rs 5,571 crore bank loan, has plunged 97 per cent to just 85 paise from Rs 27.20. PSL which has a debt of close to Rs 10,000 crore has fallen from 2010 high of Rs 188.40 to Rs 11.21 now.

In most of these cases, it is the retail investors who have been caught unaware and have witnessed erosion of capital and, therefore, experts call for a protective umbrella for them, especially by bringing in more transparency into the system.

According to an India Ratings (Ind-Ra) study, shareholders of 100 large listed defaulters have faced share value erosion in the range of 95-99 per cent from the time the corporate was a regular debt servicer. The loss in shareholder value of these 100 firms would be of comparable magnitude to their stressed debt amount to the tune of Rs 4 lakh crore.

Banks, especially state-owned ones — already weighed down by a huge pile of bad loans — are now up against a stiffer challenge with 37 lenders reporting a consolidated 26.8 per cent rise in non-performing assets (NPAs) at Rs 3,36,685 crore in the 12 month-period ended September 2015. This is compared to a growth in bad loans of 16.9 per cent a year ago.

Questions have been raised over banks keeping their NPA figures shrouded in a curtain of secrecy. According to experts, total bad loans of the banking sector could be higher than what have been reported, a major factor that had recently raised concerns even within the Reserve Bank of India.

Although the RBI has revealed the overall NPA figures, the names of defaulting companies remained undisclosed with banks claiming reasons like “client confidentiality”.

“The RBI and credit information companies like CIBIL have revealed only the names of defaulters against whom banks have filed suits in courts, which is only half of the problem,” said an official working with a financial services firm.

Sebi, which, asks all listed companies to disclose every material price sensitive information, is also silent on the issue of disclosure of bad loan status of listed banks.

“Actually, Sebi can address this issue by including ‘default on interest payment’ within the definition of material price sensitive information. If that is done then, the day a listed company defaults on interest payment, the bank will have to disclose it to the exchanges. This will ensure that all investors, big or small, have the information on such development at the same time,” said the head of a leading financial services firm, who did not wish to be named. He further added that while banks don’t want to disclose it and talk about client confidentiality, “When a client defaults on payments, what is the need of confidentiality.”

The India Ratings report, too, says that minority shareholders should know the delinquency status of the companies they own. “Thus far, they have to typically wait for the annual report for such disclosures or somewhat non-systematic reports from media. A conversion of debt into equity by lenders is likely to affect existing minority shareholders. Thus, the corporate delinquency status and not just default may be made available to the stock exchanges as and when they happen by the company itself. Default and delinquency are major corporate events and minority shareholders may like to be aware of such developments immediately,” says the report. It says firms classified as ‘Known Stress’ and ‘Vulnerable’ have their market capitalisation eroded by 80-99 per cent over last two to four years. The debt-to-market capitalisation (median) for these corporates is currently around 8.0. Thus, theoretically even if existing shareholders are wiped out and equivalent debt is converted into equity, it would address only 10-12 per cent of the total debt. The rating firm has estimated that while ‘Known Stress’ corporates requiring Rs 2,40,000 crore equity to barely survive as going concerns, ‘Vulnerable corporates’ would need Rs 89,200 crore to avoid slipping.

If the assessment of rating agencies are anything to go by, banks have managed to evergreen of non-performing assets with the help of 5/25 scheme (under which banks can extend loans for a longer period of time for infrastructure projects up to 25 years, with periodic refinancing every 5 years), loan restructuring through the Joint Lenders Forum (JLF), corporate debt restructuring (CDR) and strategic debt restructuring (SDR). The CDR cells of banks, formed under the regulatory framework of the RBI, says 655 companies with a debt of Rs 4,74,002 crore have approached them for loan recast, indicating that these companies are carrying stressed loans. And bankers say a corporate, in a normal case, seeks the CDR when it faces acute repayment problem.

Banks classify a bad loan account technically as NPA only after three months. As per the RBI norms, an account becomes NPA if interest and/ or installment of principal remain overdue for a period of more than 90 days in respect of a term loan. “Many of them may not be classified as NPAs as there are methods to keep them out of the NPA books. They get fresh loans or through changes in regulatory policies or loan recasts,” said an official involved in loan restructuring.

The modus operandi of many firms involved in defaults is to get a group company approach banks for another loan. This firm, in turn, lends the money to the defaulting firm which is also eventually defaulted. The RBI and the government are usually in the dark about the real picture on bad loans.

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