Promoter Share Pledging for Business Loans Financing

Under Promoter Funding facility the promoters of listed companies can pledge their shares to to get loans to meet their fund requirements. Promoter loans against shares is an instant line of credit and interest is charged only on the amount utilized. Another benefit of loan against shares is that owners do not have to liquidate their holdings to meet short-term cash requirements. The facility is increasingly used by promoters to hike their stake via the creeping acquisition route, convert outstanding warrants into equity shares, buy out other investors/ PE funds, meet company’s short term borrowing requirements etc.

The tenure of the loan is mostly short term, from 6 months to 1 year, at an interest rate in the range of 14-20% p.a. The haircut for the loan would be in the range of 40-60% (of the value of pledged equity), depending upon the liquidity in the counter, promoter’s reputation and risk profile of the business and the stock.

Initially, a large pie in this product was earlier controlled by non-bank financial services companies (NBFC’s) floated by foreign banks, however post global meltdown and liquidity pressures they were forced to reduce their exposure in this segment and this has opened up a new window for domestic NBFC and public sector banks. Now domestic NBFCs and public sector banks have also become very aggressive in extending promoter funding facility by providing customized solutions to promoters. The SEBI regulation making it mandatory to disclose the pledge of shares by promoters has led to more transparency and the acceptability of the product.

Accordingly to Mr. Sanjay Dhoka, Business Head – Security Based lending, Karvy Financial Services Ltd., the concept of loan against promoter holding provides a good opportunity to the NBFC’s for building and expanding their loan book size as promoters will be increasingly utilizing this facility for meeting their liquidity requirements. As of 31st December, 2009 shares worth Rs. 1,477 billion are being pledged by listed companies and assuming a conservative funding ratio of only 25% (haircut 75%) the total loan book works out to Rs. 370 Billion (Rs 37,000 Crs). He further adds that looking at the immense potential available in this segment, NBFC’s can encash on the opportunity by taking an early lead and setting up a dedicated security based lending division comprising of good credit & risk team.