Hard blow for promoters as fund raising via pledging gets tough

Mumbai: A key source of funding for promoters could dry up with new restrictions on transfer of shares between dematerialised accounts set to kick in from October 1. Non- banking finance companies will no longer be allowed to ask promoters to shift shares to their accounts as collateral for lending. This could crimp promoters, especially of smaller companies, as NBFCs usually insist on them transferring shares rather than simply pledge them with the financer.Currently, NBFCs lend by asking promoters to pledge shares in their favour, or transfer shares to their account or by obtaining a Power of Attorney (PoA) on the demat account of the borrower. Most NBFCs prefer to lend against transfer of shares as pledged securities cannot be sold if the borrower goes to the court against a lender’s decision to liquidate them.Depositories – Central Depository Services (CDSL) and National Securities Depository (NSDL) – have asked all NBFCs to return client securities, which were transferred to them through off- market transaction as collateral, by September 30, 2019. Last month, both the depositories on instructions from the Securities and Exchange Board of India (Sebi) had put restrictions on various off-market transactions.“Sebi has restricted transfer of shares by removing some reason codes which are used for off-market transactions,” said the CEO of an NBFC.Industry officials said the move was part of Sebi’s attempts to restrict lending against transfer of shares though this could not be independently verified. There is no official comment from the capital markets regulator or the depositories on why it removed some reason codes for transfer of shares.Sebi felt that lending by way of transfer of securities or by obtaining a power of attorney on the demat account of borrowers leads to lower transparency as the pledges are not reflected in the depository system and could be prone to misuse. These methods are also not in accordance with section 12 of the Depositories Act. “Transfer of shares is as good as taking 100 per cent control of the collateral,” said a CEO of another leading NBFC.Sebi’s concern over transfer of shares to NBFCs’ accounts was also because some firms once again pledged these shares with other lenders to raise funds.Industry officials said Sebi had conveyed its discomfort about the system of share transfer to Reserve Bank of India in November 2017. But, the central bank did not share Sebi’s concerns over the matter.RBI, in August 2014, had allowed NBFCs lending against shares in all three methods but told the lenders to keep LTV (loan to value) ratio of 50 per cent.

from Economic Times https://ift.tt/2ou0YL3