MUMBAI: A key source of funding for promoters is set to dry up with the Securities and Exchange Board of India (Sebi) tightening rules for lending by mutual funds against shares as collateral. The capital market regulator has asked fund houses to collect shares worth four times the investment as collateral.
The new threshold will make it unviable for promoters to raise money from mutual funds, which drew flak for reckless lending against shares, said asset managers and experts.
Until Thursday, there were no rules on the equity cover that mutual funds should take as collateral. Fund houses generally took shares worth 1.5 to 1.75 times the investment. This meant that for raising Rs 1,000 crore, promoters had to pledge shares worth as much as Rs 1,750 crore. That pledge value has risen to Rs 4,000 crore, based on the rules approved by Sebi on Thursday.
“Loan against shares by mutual funds will become increasingly uncommon from now on because of the higher cover,” said G Pradeepkumar, chief executive officer of Union Asset Management.
The capital market regulators move to tighten rules stems from concerns that the industrys rising exposure to such structures was risky.
The matter erupted after Subhash Chandras Essel Group failed to add more equity as a collateral topup following the crash in the shares of units Zee Enterprises and Dish TV late in January. The promoters had borrowed from mutual funds and nonbanking finance companies (NBFCs) to fund their entry into the infrastructure and financing businesses, which turned out to be loss-making ventures. The promoters then entered into a standstill agreement with mutual funds that allowed them to defer repayments by September 31. Mutual funds refrained from selling the pledged shares in the market on fears it would have led to a crash in their value and sparked a crisis in the financial markets. That however didnt stop a sharp sell-off in the shares of various groups with high share pledges by promoters. This was at a time when the market was already dealing with a liquidity squeeze sparked by the Infrastructure Leasing & Financial Services (IL&FS) default in September last year.
According to unofficial estimates, mutual funds may have loaned around Rs 50,000-60,000 crore in total against shares as collateral. In the past three years, such loans have jumped, fuelled by the surge in flows into debt schemes.
“We dont recognise any such standstill agreement,” Sebi chairman Ajay Tyagi had said on Thursday, the first time the regulator was commenting on the matter.
Sebi was worried about risks that this posed to debt schemes and the wider financial system. “This instrument was not looked upon favourably by the regulator after the recent instances,” said Pradeepkumar. “The message is very clear that the regulator wants funds to be in investing and not in the lending business.” Promoters looking to borrow with shares as collateral will now go to banks and NBFCs, since the cover level is lower.
NEGOTIATION ON RATES
“Given that regulatory arbitrage between MFs and NBFCs is lost, the structures will find NBFC more attractive given that the NBFCs, as per RBI, operate at a regulatory minimum of two times cover,”Read More – Source