27 October, 2014
Legal News & Analysis – Asia Pacific – India – Banking & Finance
Until now, lending against shares carried out by non-banking financial companies (‘NBFCs’) was not subject to any specific instructions, apart from the general prudential regulations applicable to all NBFCs. By way of a circular dated August 21, 2014 (‘NBFC Circular’), RBI introduced guidelines for lending against shares in order to obviate market volatility when NBFCs offload shares in the market, and to ensure disclosure to stock markets without unnecessary constraints on the genuine borrowers. The NBFC Circular amended the Non-Banking Financial (Depositing Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 and the Non-Banking Financial (Non-Depositing Accepting or Holding) Companies Prudential Norms (Reserve Bank) Directions, 2007 to provide that an NBFC (with asset size of INR 10m and above), while extending loan against security of shares will (i) maintain a loan to value ratio of 50% for loans granted against the collateral of shares; and (ii) accept only Group 1 securities (as specified by SEBI) as collateral for loans of value more than INR 500k, subject to review by RBI. As per a circular issued by SEBI, stocks that have traded for at least 80% (+/-5%) of all the calendar days for the previous 18 months, and having a mean impact cost of less than or equal to 1% are categorized as ‘Group I Securities’. Further, all NBFCs with asset size of INR 10m and above are required to report on-line to stock exchanges, information on any shares pledged in their favour, by the borrowers of such NBFCs for availing loans.
For further information, please contact:
Zia Mody, AZB & Partners
[email protected]
Abhijit Joshi, AZB & Partners
[email protected]
Shuva Mandal, AZB & Partners
[email protected]
Samir Gandhi, AZB & Partners
samir.gandhi[email protected]
Percy Billimoria, AZB & Partners
[email protected]
Aditya Bhat, AZB & Partners
[email protected]