NBFC lending against shares of little known cos under RBI lens

A few large non-banking finance companies (NBFCs) involved in lending against shares are now under the regulatory scanner of the Reserve Bank of India, sources close to the development told BusinessLine . This comes after the recent market crash that exposed NBFCs for lending huge money against shares of little known companies.

NBFCs are supposed to maintain 50 per cent as collateral value for money lent against shares. But a sharp crash in many small- and mid-cap shares in the past couple of months has exposed laxity in the attitude of NBFCs as the assets they now hold after the sharp price decline have no buyers even after a 70-80 per cent mark-down in their value.

Calls by NBFCs to the borrowers for making good the mark-to-market loss has been futile as some of the promoters and market operators who were the ultimate beneficiaries of the funds have either mounted legal defence or are not traceable, the sources said. Apart from those in Mumbai, Delhi and Gujarat, NBFCs in Chennai too are under the lens, sources added.

Shares against which the NBFCs may have extended loans to either promoters, private firms or high net worth individuals include Sanguine Media, Rushil Decor, Interworld Digital, 52-weeks Entertainment, Mahan Industries, Aadhar Ventures, TGB Banquets, 8K Miles and Ashapura Intimates Fashions. Shares of these companies have crashed by 70-90 per cent from their peak levels this year and a few are even being traded below their par value.

Little due diligence

There are nearly two dozen other such companies against which hundreds of crores were lent by NBFCs. It is also learnt that some of the HNIs and brokerage firms who had borrowed money from NBFCs by pledging small- and mid-cap shares were close associates or fronts for infamous market operators, the sources said.

“There is a view among regulatory officials that due diligence of the borrower entity or shares against which money was lent, was lax. Several recent tax raids on infamous market operators in Mumbai, Gujarat and other cities have revealed their nexus with brokerage houses and NBFCs. It is one of the reasons that the RBI has initiated a crackdown on the NBFC sector,” the source said.

Recently, a list of over 200 shares against which lending will be discouraged was put out by a few NBFCs. Rules specify that eligible shares for the purpose of lending are only those which are classified as Group 1 in terms of volatility and liquidity according to SEBI. The lenders are supposed to conduct valuation of these shares based on the parameters every week.

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