New Delhi: As large corporate houses resort to standstill agreements with their lenders against pledged shares, the Reserve Bank of India has reportedly asked non-banking finance companies (NBFCs) to disclose the moratorium or grace period given to borrowers.
The RBI has also been closely monitoring the recent cases of deals by companies with lenders to delay selling pledged shares, and is said to be considering tightening the norms to caution lenders from entering into such agreements.
Often, mutual funds (MFs) and NBFCs are the largest lenders of loans against shares or pledged shares. While MFs are not directly under the central bank’s jurisdiction, the regulator would first tighten norms for NBFCs. The Securities and Exchange Board of India (SEBI), on the other side, has been silent over the recent developments despite holding authority on such matters.
‘Pledged shares’ is a loan raising system through which promoters of companies raise loans from lenders using the shares held by them as collateral.
As per stock exchange data, the value of shares pledged by Indian promoters is over Rs 2.2 lakh crore. Out of the over 5,000 listed companies, promoters of 4,274 companies had pledged all or some of their shares, as per SEBI. Of these, promoters of 286 companies had pledged more than 50% of their shareholding.
Recently, two beleaguered corporate giants -- Anil Ambani’s Reliance ADAG and Subhash Chandra’s Essel Group -- announced that they made standstill agreements with their lenders who gave consent not to sell off shares till September this year. Both the groups claimed that the agreements cover more than 90% of the loans pledged against their shares.
But, these deals took shape immediately after few lenders of these promoters sold parts of the shares pledged with them when the companies in question had been continuously failing to repay their debts on time and their share values began declining. In Essel’s case, several lenders, including one Switzerland-based Credit Suisse, sold part of the group promoters’ shares in Zee Entertainment Enterprises worth over Rs 1,000 crore that were pledged with them, as the group’s two listed companies - Zee and Dish TV -- saw their stock price fall by 26% and 33%, respectively. Newsclick has raised several unanswered questions regarding the pledged shares agreement between Subhash Chandra and Credit Suisse.
In Anil Ambani’s case, after Reliance ADAG announced that its firm RCom would file a voluntary bankruptcy process with National Company Law Tribunal (NCLT) in the first week of February, several lenders, including L&T Finance and Edelweiss, sold the group’s shares pledged with them amounted over Rs 400 crore. ADAG even accused that the action by these lenders resulted in a loss of about Rs 13,000 crore market capitalisation in a span of one week.
However, it is not yet clear whether these lenders of both the groups that sold the pledged shares gave their consent to the standstill agreements made by these groups.
It is to be noted that Indian markets rattled after the Infrastructure Leasing and Financial Services Fraud came to light in last September. As MFs and NBFCs were major lenders of the group companies of IL&FS, the fund houses have tightened refinancing terms, incurring huge losses. But, are these new standstill deals of fund houses with companies already under crisis? This appears to be the latest concern of the regulators, both RBI and SEBI.