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

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.