Rating agencies want listed companies to disclose on a real-time basis any defaults in the settlement of obligations. Absence of such a critical information in public domain is a disservice to the investor community at large, they feel.

The rating agencies have held discussion with the capital market watchdog, the Securities and Exchange Board of India (Sebi).

Sources said that Sebi may take time to push for mandatory disclosure of defaults on a real-time basis, as it first wants to assure itself that such disclosures will not cause panic and intensify the difficulties of defaulting companies.

The material information of a company defaulting on its obligation of payment of interest or principal on a due date needs to be conveyed to stock exchanges, officials with rating firms said.

In most global markets, corporates are required to disclose any default in payment of interest or principal within 24 hours of the due date. In India, companies inform the bourses when they receive bulk orders from their clients but feel shy of making public the incidents of defaults.

ICRA joint managing director, Naresh Thakker, said immediate disclosure of defaults will infuse greater transparency.

A real-time disclosure of a default will resolve the problem of smaller investors remaining in the dark on such a critical happening. Institutional investors get to know of such a development during their routine interactions in the market.

Disclosure of defaults will ensure investors make informed investment decisions and not necessarily cause any kind of destruction of the market, Crisil managing director and CEO, R Ravimohan, said.

Ravimohan said Lupin Laboratories was a defaulter for several years and still got support from the lenders during the entire period as lenders found the fundamentals of the company to be strong.

The company’s financial position has since improved and is now in the non-default category.

A regulation was introduced about two years ago requiring a corporate defaulting on payments to disclose the information to its auditors.

This requirement does not meet the right of investors to be informed of any material development in a corporate on a real-time basis.

The information provided to auditors finds mention in the annual report which comes into the public domain much later.

There is no system in place for the immediate detection of companies defaulting in redeeming listed debt instruments, and of reporting such incidents.

In case of a companies defaulting to clear bank dues, the Credit Information Bureau (India) circulates the defaulters’ list within the banking community for appropriate action.

The default of corporations in redeeming public deposits falls under the ambit of Company Law Board. But these agencies do not have the mandate of circulating such information to all and sundry.

The problem with auditors carrying their comments on a default in the annual report is that it can happen only once a year and if a default has happened at the beginning of a financial year, the information would be in public domain only after over a year, Thakkar said.

An official with a global rating agency, not willing to be quoted, said absence of information destroys the market and any attempt at opaqueness can only be harmful.

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More than 12,000 companies fighting the government for years on end for minor violations of Company Law, will soon get some respite. For, the company affairs ministry will shortly identify means to resolve the nearly 50,00 cases involving 12,459 companies accused of technical and procedural violations of the Companies Act.

The company affairs minister, Prem Chand Gupta, today said a committee has been set up to evolve an effective mechanism to resolve these cases. The committee, chaired by Delhi-based senior advocate OP Vaish, will prescribe remedies in two months.

The expert group has members from the Institute of Chartered Accountants of India (ICAI) and the Institute for Company Secretaries of India (ICSI), besides ministry officials. B S Swaroop, member, Settlement Commission for Income Tax, is also a member of the committee.

“Our objective is to effectively administer the Act, but at the same time not to increase unproductive work,” Mr Gupta said. “The courts are already over-burdened. It is our duty to do everything possible to reduce this burden,” he further said.

As on March ‘04, 45,562 cases are pending. Around 4,500 cases have so far been settled, including 2,600 convictions, 370 acquittals, 538 instances of case withdrawal by the government and 990 cases of other kinds of settlement.

Sources also said that while the pending cases will be addressed in this way, the new company law in the making, will try to reduce litigation due to technical defaults. The punitive provisions will be aligned with the gravity of the fraud so that it becomes an effective deterrent.

Besides, the Irani committee is also looking into the possibility of introducing different levels of punishment as per the gravity of the default. At present, not paying the meagre fine for a technical default, attracts prosecution proceedings.

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The Securities an Exchange Board of India chairman warned that it will impose stiff penalties on companies that fail to comply with corporate governance norms of appointing the requisite number of independent directors by the end of this year.

Speaking at a seminar on Disclosure Requirements organised by Assocham, Sebi chairman M. Damodaran said, "I expect companies in the public and private sectors to find independent directors by December 31. There could be penalties after that which could be costly."

Mr Damodaran said, "the inclusion of independent directors should not be viewed as ‘opposition' by the corporates to their freedom. Rather it should be seen as a step forward to protect and gain the confidence of millions of investors in the corporate sector". Sebi had extended the last date for appointing independent directors to December 31 as it was found that the earlier deadline of April was difficult to meet. The provision is part of the clause 49 of listing agreement. Mr Damodaran said that Sebi will ensure that "corporate companies in India sticks to the deadline this time."

"The clock is ticking and we must get the process started. If that does not happen, there could be penalties that are uncomfortable, that strike at the root of wide acceptance of the company, penalties which erode investor confidence and at the end of the day, the company might become irrelevant," Mr Damodaran said. He said that there could be dire consequences for companies that do not comply with norms. He warned that companies may have to pay a high price if they try and score debating points about many issues, including how many independent directors should be there instead of complying with the norms. The Sebi chief said that in a country of one billion, it is highly improbable that 25,000 independent directors were difficult to find for corporate India.

Mr Damodaran rejected the argument of the Indian industry that as many as 25,000 professionals of experience and wisdom were not available in the country who could be appointed on the board of the corporations as "independent directors".

"I refuse to subscribe to this argument as I find there is no dearth of qualified and seasoned corporate czars in the country. I, therefore, advise the corporate sector in both public and private that they should appoint independent directors well within the deadline who can rightly question the decisions of the board and demand disclosures of information that can protect the investors capital and their commercial interests," said Mr Damodaran.

Endorsing the suggestion mooted by Assocham president, Mr Mahendra K. Sanghi to put a stop to Enron-like incidents in the Indian corporate sector, the Sebi chairman said that an Enron repeat could conveniently be avoided if corporates have seasoned and right people as their independent directors, adding that such people would help investors from being fleeced in corporate scandals and scams.

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The Reserve Bank of India (RBI) today directed banking companies to obtain its approval for proposed mergers between banks and non-banking finance companies (NBFCs) before submitting the scheme of amalgamation to the high courts for approval.

The regulator said the Securities and Exchange Board of India (SEBI) regulations on prohibition of insider trading will be applicable for NBFC merger with listed and unlisted banks.

It also stated that the bank board should ensure that the NBFC has not violated or is likely to violate any of the RBI/Sebi norms and must comply with “Know Your Customer” norms for all accounts, which will come under the banking company after amalgamation.

The bank board would also have to check if the NBFC has availed of credit facilities from banks/financial institutions and whether the loan agreements mandate the NBFC to seek consent of the bank/FI concerned for the proposed merger/amalgamtion, an RBI release said.

The issuance of the guidelines was triggered by the merger of Ashok Leyland Finance (ALF) with IndusInd Bank without prior approval of the RBI.

IndusInd Bank had followed the procedure laid down under the Companies Act and got the merger approved from the high court. Following this, the RBI in July 2004 had issued a circular making central bank’s prior approval mandatory for merger of an NBFC with a bank.

Bhaskar Ghose, managing director of IndusInd Bank, said: “It’s good for IndusInd Bank as we would continue to grow through acquisitions of NBFCs.

There was no provision in the Banking Regulation Act that stated that banks need to acquire prior RBI approval before approaching the court.”

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There is a likelihood that corporate governance norms may be diluted by the Securities and Exchange Board of India so far as the disclosures are concerned. The market is also abuzz with reports of Mapin being put on the backburner or scrapped altogether.

Implementation of both corporate governance norms and Mapin (The Central Database of Market Participants) -- were pushed to the end of the year after both corporates and investors made representations to Sebi that it would not be possible to comply with the regulations within such a short span of time.

While the minimum requirement for non-executive directors -- a major bone of contention for corporates -- is expected to remain unchanged and the corporate will have to comply with it, disclosure norms would be relaxed.

Sources said a good part of the disclosures in the corporate governance document puts the onus on the promoters and the majority shareholders to not only comply with it but also to ensure its implementation in the proper manner. "There is a lot of resistance against it," the sources said.

So far as Mapin is concerned former Sebi chairman GN Bajpai's ambitious plan to

have a comprehensive identification program for market participation -- the market expectation is that it would be dropped. The market watchdog is preparing a concept paper on this and in all likelihood an alternative -- demat accounts along with PAN (permanent account number) - would be worked out.

The main reason why Mapin ran into problems was the sheer logistics involved in the exercise, especially where individual market participants were concerned. Also the exercise faced some kind of resistance from people especially against finger printing it is associated with criminal activity.

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The Securities and Exchange Board of India (Sebi) has opposed the RBI proposal to expand the definition of derivatives as given under the RBI Act 1934. Expanding the definition of over the counter (OTC) derivatives will give more regulatory powers to RBI. However, whatever is traded through stock exchanges comes under the regulatory ambit of Sebi.

With the new definition, the possibility of allowing OTC derivatives in shares, corporate bonds, commodities and indices will also open up, according to Sebi.

RBI, on the other hand, believes that a broader definition will help it manage its books better as the OTC derivatives of all banks will also come under its purview in the books of accounts, officials said. Sebi wants that the expanded definition of the OTC derivatives to be restricted to the relevant provision of the RBI Act 1934. The market regulator is of the view that such an expansion should not lead to further enlarging the scope in the relevant section of the RBI Act of 1934. Moreover, the definition should be applied selectively.

At present, there is a lot of legal ambiguity regarding the regulation of the OTC derivatives. Sebi further adds that this move will bring about an overlap in the regulatory powers of the board and the apex bank.

The RBI Amendment Bill of 2005 says that since derivatives play a crucial role in reallocating and mitigating the risks of corporates, banks and financial institutions, the ambiguity regarding their legal validity has to be removed. The amendment bill tabled in the Budget session of Parliament this year, seeks to empower the RBI to deal in derivatives as well as lay down policy and issue directions to any agency dealing in derivatives. Once the amendment is passed by the parliament RBI will have the powers to inspect the records of these agencies.

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