Stricter rules for pledged holding, Sebi exploring various options

By: |
Published: February 23, 2019 2:25:54 AM

Sebi is exploring various options to introduce some checks and balances with regard to sale of pledged share, said an industry source. For its part, the Reserve Bank of India (RBI) has asked NBFCs to submit details of moratorium granted to certain borrowers.

Stricter rules for pledged holding, Sebi exploring various optionsStricter rules for pledged holding, Sebi exploring various options

The finance ministry is closely monitoring the issues of liquidity in the NBFC space and loans against pledged shares of promoters of listed firms, along with Sebi and the central bank, and the regulatory mechanism could be tightened around such pledged holding to prevent unscrupulous elements from manipulating the system, an official source told FE.

“There is no systemic crisis but we are watchful. If required, regulators may take steps to ensure the knee-jerk reaction of a very few players in a given situation doesn’t affect the broader market stability,” said the source.

Sebi is exploring various options to introduce some checks and balances with regard to sale of pledged share, said an industry source. For its part, the Reserve Bank of India (RBI) has asked NBFCs to submit details of moratorium granted to certain borrowers.

The banking regulator could take a grim view of any attempt by lenders and NBFCs to subvert established processes to evergreen loans, said another source.

READ ALSO | Warren Buffett’s only real-estate stock is a multi-bagger; here’s how much he made

The Anil Ambani-led Reliance Group recently reached an understanding with more than 90% of its lenders to prevent sale of any stock pledged by the promoters until September 30. In January, Subhash Chandra-led Essel Group reached a similar stand-still pact with lenders, which provided promoters time until September 30, after the shares of group companies plunged.

The moves come amid fears that a crisis in some companies whose promoters pledged a substantial part of their holding against loans could cause ripples in the broader financial market. The value of shares pledged by promoters is around Rs 2 lakh crore, and in at least 13 companies, promoters have pledged more than 80% of their holding.

While pledged promoter holding dropped in companies like Fortis Healthcare and Suzlon Energy, promoters of many others have increased their pledged holdings. For instance, the pledged shareholding of promoters in Indiabulls Real Estate, Coffee Day Enyterprises and Jain Irrigation jumped by 21%, 19.7% and 17.6%, respectively, as of December 2018 from the previous quarter, according to a report by Kotak Institutional Equities.

Lenders are permitted to finance up to around 50% against the value of equity shares pledged. Thanks to a sharp fall in shares of many small and mid-cap companies from their peak in 2018, NBFCs have asked company promoters to bring in additional margin, failing which they would be forced to sell the shares.

This could further pull down the share price in the market, industry official said. Also, there are speculations that some large mutual fund houses have lent to companies without adequate collateral, which could further worsen the situation.

Raman Aggarwal, chairman of the Finance Industry Development Council, a body of NBFCs, said the liquidity remains tight, especially for small players, but the situation is far from a crisis. He said the current problem of pledged shareholding is limited to some companies and won’t adversely affect the broader system.

However, the government needs to work on ways to improve the fund flow into NBFCs.

Get live Stock Prices from BSE and NSE and latest NAV, portfolio of Mutual Funds, calculate your tax by Income Tax Calculator, know market’s Top Gainers, Top Losers & Best Equity Funds. Like us on Facebook and follow us on Twitter.

Next Stories
1Warren Buffett’s only real-estate stock is a multi-bagger; here’s how much he made
2Kotak Mahindra Bank share price falls 3.5% after block deals; ING sold stake, say reports
3Midcap strategy for investors: Investment mantra from IIFL’s Venkataraman to get good returns amid carnage