The Hindu Business Line : Financial firms cash in on bear market

Chennai, June 21 Dwindling trading volumes and tumbling stock prices may have dented brokerage-related income for companies offering financial services.

But financial firms are looking to convert this bearish market into an opportunity by focusing on products such as ‘promoter funding’. Promoter funding, a part of the wholesale financing business for these firms, involves offering loans to company promoters who are keen to capitalise on rock-bottom stock prices, to shore up their stakes in companies.

Typically, promoters access these loans to buy stock through the ‘creeping’ acquisition route, convert outstanding warrants into equity shares or to buy-out other investors such as PE funds, which seek an exit from the company. Many new entrants have entered this business, where loans are offered at interest rates between 14 per cent and 18 per cent, with shares or property taken as collateral.

Domestic financial groups such as Religare Enterprises, Indiabulls Financial Services, and Edelweiss Capital have this product on their menu through their NBFC (non-banking financial company) arm. GE Commercial Finance, part of GE India, also offers such a product.

Mr Atul Gupta, President, Religare Finvest, says that his company has stepped up thrust on promoter funding in recent times, responding to demand for the product. “In today’s scenario, we think the promoters have become proactive because of market dynamics. The size of promoter funding with respect to Religare’s overall portfolio is not substantial. However, we are expecting this business to grow exponentially in the coming months”, he says.

Market-watchers point to the increasing instances of ‘insider buys’ reported to the bourses in recent times; this trend could be aided by easier access to finance against shares. Pledging of shares to financial institutions is also regularly reported on the stock exchanges with NBFCs increasingly figuring more on such disclosures than banks, the ‘old-timers’ in this space.

“Loan against shares (LAS) is a product offered by most of the banks and NBFCs. Brokerage houses are not allowed by SEBI to indulge themselves into funding activities. We are offering this product from our NBFC-Religare Finvest Ltd,” remarked Mr Gupta. “Generally the collateral is in the form of shares as well as any other security as defined under the Securities Act,” adds Mr. Gupta.

Others such as Indiabulls Financial Services say they have been in this area for several years now. “IBFSL has this product since 2000. Loan against shares is a key product for us,” said Mr Gagan Banga, Chief Executive Officer.

Loans offered under this avenue are usually upwards of Rs 5 crore, with the loan amount at 25-50 per cent of the market value of the securities pledged. Some lenders reserve the right to sell off the shares pledged, if the market value of the offered security erodes substantially.

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