Mutual Fund (MF) investors, over the past few months, have learnt that many Indian promoters have relied heavily on pledging their shares, raising money from their MF schemes to support their core and non-core business activities. The sharp fall in the prices of pledged shares has resulted in a cause of concern for mutual funds and non-banking financial companies (NBFCs).
Somasekhar Vemuri, Senior Director at CRISIL Ratings, Ananth Narayan, Professor at SPJIMR and Jayesh Mehta, Managing Director and Country Treasurer at Bank of America, shared their views on the same.
Ananth Narayan believes the pledged share issue has been exaggerated, reasoning that no market or economy is perfect.
“There is a problem. It is probably being made out to be a lot more than it is. We are a growing economy. No economy is perfect, no market is perfect and we will stumble our way through and go ahead, " he said.
Somasekhar Vemuri, Senior Director at CRISIL Ratings, said, “Let me start by adding a caveat that CRISIL has not rated any of these debts which are backed by pledging of shares. That said, our estimate of the debenture which are backed by pledging of shares is about Rs 40,000 crore. If you look at the NBFC space which gives loan against shares ... maybe it is about Rs 1 lakh crore which is outstanding in the market. So from a systemic perspective and the size of the market, it is just about Rs 1 lakh crore which is not very large and is not concentrated in one or two names."
“In reality, both these real estate and loan against shares market moved to NBFC because banks cannot do that. That is the basic genesis. Over-construction finance banks can do but they cannot do real estate land acquisition finance, which NBFCs were doing and then of course loan against shares. Mostly pledge of shares by promoter generally gets rolled over. We were the pioneers to start both these construction finance and this loan against shares way back in 2004-2005. I think the norms ... in the last few years ... people have valued it a lot,” said Jayesh Mehta, Managing Director and Country Treasurer, Bank of America.