Lenders seek more collateral for promoter financing on frothy valuation concerns

Concerns of frothy valuations leading lenders to seek more collateral for promoter financing

Lenders have started asking promoters to pledge more shares as collateral against their borrowings, concerned over frothy valuations, especially in the midcap and small-cap segments, sources told Moneycontrol.

In several recent instances in the midcap and small-cap space, lenders have asked promoters to provide security cover of as much as three times the loan value, against the usual practice of two times or less.

The BSE Midcap index and the BSE Smallcap index have gone up by 64.5 percent and 60.5 percent, respectively, in the past 12 months compared with the 21.6 percent increase in the benchmark Sensex, reflecting the sharp rise in midcap and small-cap stocks in a market flush with domestic liquidity.

“In any extended bull market scenario, share-backed financing lenders become cautious and tighten their financing covenants and collateral coverage norms,” said Ankur Jain, managing director, private credit strategies, at InCred Asset Management. “We see such scenarios already playing out in private credit markets where the lenders' ask on security coverage for financing is going up.”

Also Read: MC Explains | Why promoters pledge shares

Lenders have become cautious especially when valuations have run up significantly and average trading volumes are thin, experts said.

Select pockets

“In a bull market, liquidity is overstated. So, a lender might feel that in the worst case they can exit by selling the pledged stock in x days. However, as the bear market starts, the trading volume dries up and the same amount of shares take 5x days to sell,” the head of a domestic credit fund that lends to promoters said on condition of anonymity.

The lender added that in a couple of recent cases, they came across instances of the majority ownership of listed stocks was being pledged, and the LTV (loan to value) negotiated was deeper than in earlier rounds.

To be sure, while there may be some caution among lenders, some experts pointed out that this level of concern is prevalent only in select pockets and is not a market wide phenomenon.

“It is really stock specific. The usual borrowers of high-grade stocks - Motherson, Asian Paints, Max insurance (Max Financial Services), JSW, JSPL are still at 2.0 or may be even less,” said the head of an NBFC, adding that for mid corporates where the average daily trading volume is less, the collateral ask is seen going up.

Others pointed out that pledging shares to raise funds has become less attractive for promoters and the funds raised through this route are coming down.

“Promoter funding has not remained a meaningful borrowing tool for promoters given the disclosures and the impact on stock. The bigger promoters have stopped doing it. The midcap promoters always had to give higher collateral,” said the head of an NBFC focused on corporate lending.

According to an analysis of pledged holdings of BSE-500 stocks by Kotak Institutional Equities, the value of the promoter (majority shareholder) pledged holding as a percentage of promoter holdings came down to 1.10 percent in the March 2024 quarter from 1.17 percent in the December 2023 quarter.

Also Read: 6 takeaways from KIE's analysis of promoters' pledged holdings in March 2024 quarter

The March 2024 number compares with 1.3 percent in March 2023 and 1.71 percent in March 2022.

The value of pledged promoter holdings stood at Rs 1.96 lakh crore (about 0.56 percent of the total BSE-500 Index’s market capitalisation), the report said.

Promoters of 73 companies in the BSE-500 Index pledged part of their holdings in the March 2024 quarter, down from 90 companies at the end of March 2023, according to the Kotak report.