INSUBCONTINENT EXCLUSIVE:
By Anurag Joshi and Ameya KarveIndia’s business titans are facing a worrying new development: in recent weeks, shadow lenders have been
cutting them off from a key financing channel.
Company founders have long fueled dreams to expand their business empires with loans they get
by pledging stakes in their firms
But recent scares have prompted at least two major shadow banks to turn off the faucet in the past month, the longest dry spell in six
years, people familiar with the matter say.
Observers say the amount of such share-pledged loans, currently at about 1 trillion rupees ($14
billion), will shrink further, raising risks of a broader fallout
Business chiefs around the world including Elon Musk at Tesla Inc
and Larry Ellison at Oracle Corp
have used their shares to access cash for personal ventures
In China, the practice has led to margin call-induced stock routs and lenders fighting in courts to reclaim funds in the case of
defaults.
The twist in India is that founders have relied on such funds to bankroll risky attempts to build business groups into bigger
conglomerates, often with forays into real estate
They may be forced to refinance through more expensive channels if the pledged-share loan market keeps contracting
Such strains would hurt India’s credit market, still jittery after shock defaults by the ILFS group last year.
What Spooked Indian
LendersThe matter came to a head last month with these cases: Lenders sold shares in tycoon Anil Ambani’s companies after the value of
The billionaire’s conglomerate called the sales “illegal, motivated and wholly unjustified,” and filed a suit against one of the
Media tycoon Subhash Chandra’s Essel Group signed a pact with its lenders last month that prevents them from selling shares of the
group’s listed firms until Sept
Lenders won’t classify the group’s borrowings secured by shares as bad debts even if the stock prices fall, according to the pact
Offering stock as collateral for loans can be an easy way to obtain cash in good times when stock prices are rising
But when shares fall, and lenders seek additional collateral to cover the declines, owners who have most of their wealth tied up in their
companies may not be able to meet those calls.
How Bad is the SituationTwo lenders who frequently extended loans to founders backed by
pledged shares haven’t done any for at least the last month, according to people with knowledge of the matter, who asked not to be
identified because the details are private
The last time they went so long without doing such loans was in 2013, they said
The total outstanding amount of such share-pledged loans has dropped 20 percent from a year ago to 1 trillion rupees, according to Edelweiss
It’s set to shrink another 30-40 percent in the coming year, said Ajay Manglunia, head of fixed-income at the firm
Brickwork Ratings India, which rates more such debt than any other local firm, has also seen requests for such credit reviews dry up over
the last month.
If the funding channel keeps drying up, one silver lining could be less damage from margin calls
There’s currently still a lot at stake
Founders at 820 companies have pledged 2.3 trillion rupees of shares as collateral against their borrowings, according to the latest
data.
“I hope founders of Indian firms learn a lesson from this and only look to this mode of raising funds as a last resort as it has
implicit risk,” said Manish Sonthalia, chief investment officer of portfolio management services at Motilal Oswal Asset Management Co
