InvestorQ : InvestorQ-Ask,Answer & Share All About Finance!
Arti Chavan made post

What does the SEBI new rule that companies have to disclose defaults within 31 days really mean for banks and companies?

Answer
user profile image
9 months ago


There is a brief history to this stipulation that you need to understand. In the past, when companies missed a single payment of principal or interest, the default information would come very late. This created a problem because when the rating agencies finally got this information, they would suddenly downgrade the instrument as happened in the case of Amtek Auto, IL&FS and DHFL. This forced all the bond holders to write down more than 50% of the value of these holdings immediately leaving a huge hole in their valuations.

To avoid this, SEBI proposed a 24 hour limit wherein companies were required to report this default within 24 hours. However, this led to protests from banks and corporates saying that this was not practical. To strike a mid way, SEBI has now called upon the companies to disclose defaults within 31 days. This will ensure that there are no sudden surprises and the de-rating of bonds will be gradual rather than sudden.