Alert: Major SEBI Update Redefines ‘Default’—Are Your Bonds at Risk?

SEBI’S new circular dated November 18, 2024, is addressed to registered credit rating agencies, debenture trustees, issuers of listed securities, recognized stock exchanges, and registered depositories.
It outlines amendments to Paragraph 15 of the Master Circular for Credit Rating Agencies (CRAs) dated May 16, 2024, concerning the definition and treatment of defaults.

The circular stated razor-sharp default definition: Even a 1-day delay or ₹1 shortfall triggers default classification.

Key points from the circular include:

1. Definition of Default: The definition remains stringent with any delay of even a day or a shortfall of one rupee in debt repayments categorized as a default, except where debt rescheduling occurs prior to the due date.

2. Post-Default Curing Period: Introduced in response to the COVID-19 pandemic, this provision allows CRAs some leeway to upgrade a rating from default to non-investment grade after 90 days if the company regularizes payments satisfactorily, though CRAs can deviate from this period based on their internal policies.

3. Technical Defaults and Other Scenarios: The circular recommends a uniform policy across CRAs for handling technical defaults—defaults due to issues beyond the issuer's control, such as incorrect information or blocked accounts due to governmental instructions. It specifies the procedure for verifying and reporting such defaults.

4. Modification to Master Circular: The term "technical default" is removed from the policy scenarios that can fundamentally alter the credit risk profile of a defaulting firm. Other scenarios like management changes, acquisitions, or significant regulatory benefits remain.

5. Operational Compliance: CRAs must report detailed default information, including reasons for payment failures, to stock exchanges and depositories for dissemination. It also encourages issuers to use the penny-drop verification method to prevent defaults due to payment failures.

6. Implementation and Availability: The amendments take effect immediately, with the circular available on SEBI’s website under the legal category.

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