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SEBI mandates prompt disclosure by banks on NPA divergence

SEBI mandates prompt disclosure by banks on NPA diverge

The Reserve Bank of India (RBI) requires banks to disclose material divergences in their asset classification and provisioning from the prescribed RBI norms.

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Background

The Reserve Bank of India (RBI) requires banks to disclose material divergences in their asset classification and provisioning from the prescribed RBI norms. The banks are required to provide such disclosures in the notes to accounts to the annual financial statements under the category ‘Asset Quality (non-performing assets)’. As per RBI circular (RBI/2018-19/157) dated 1 April 2019, banks are mandated to disclose divergences in their annual financial statements, if either or both of the following conditions are satisfied:

  • The additional provisioning for Non-Performing Assets (NPAs) assessed by RBI exceeds 10 per cent of the reported profit before provisions and contingencies for the reference period, and
  • The additional gross NPAs identified by RBI exceed 15 per cent of the published incremental gross NPAs for the reference period.

In line with the mentioned requirements, the Securities Exchange Board of India (SEBI) also requires banks with listed specified securities to disclose to the stock exchanges (along with annual financial results) divergences in the asset classification and provisioning, if either or both of the above-mentioned conditions (as per RBI circular) are satisfied. The disclosures are required to be placed as an Annexure to the annual financial results filed with the stock exchanges in accordance with Regulation 33(3)(d) of SEBI Listing Regulations.

New development

Regulation 30 of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (Listing Regulations) requires listed entities to disclose to stock exchange(s) all events or information, which are material, as soon as reasonably possible and not later than 24 hours from the occurrence of event or information.

Further, SEBI (Prohibition of Insider Trading) Regulations, 2015 (PIT Regulations), mandates prompt disclosure of unpublished price sensitive information that would impact price discovery no sooner than credible and concrete information comes into being.

In view of above requirements, SEBI through its circular (CIR/CFD/CMD1/120/2019) dated 31 October 2019 tightened the disclosure norms for banks after consultation with RBI. As per the circular now banks should provide the disclosure in case of NPA divergence and provisioning beyond specified threshold (as explained in the background sections), as soon as reasonably possible and not later than 24 hours upon receipt of the RBI’s risk assessment report. Therefore, disclosure would be provided in a format prescribed by RBI circular (Annex-A to SEBI circular). They should not wait to publish these disclosures as part of their annual financial statements.

The SEBI circular comes into force with an immediate effect.

Our comments

Considering the requirements of Listing Regulations, PIT Regulations and RBI circulars, SEBI noted that disclosures in respect of divergence and provisioning are in the nature of material events or information and hence, has necessitates immediate disclosure. Further, the information is also price sensitive, requiring prompt disclosure. Accordingly, banks are mandated to disclose such information within 24 hours of the receipt of the RBI’s risk assessment report. Currently, such divergences are disclosed by banks along with their annual financial results.

To access the text of the SEBI circular, please click here.

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