Overseas pledge share loans on rise lately, say dealers

Santosh Nair

Moneycontrol.com

Despite fairly tight liquidity conditions in the last couple of months, there have not been too many instances of mid and small cap companies borrowing money by pledging shares with non-banking financial companies (NBFCs).

This has been true even for real estate companies, almost all of which are badly starved for cash because of huge inventory and slack demand.
Brokers tracking the sector and other second line companies say of late, promoters of these firms have been borrowing money from foreign institutional investors instead of domestic NBFCs.

This practice, which is in violation of Sebi rules, is not new, and some companies have been indulging in it in the past. But this activity has gained momentum in the last couple of months, says brokers, as promoters are betting that the economy may revive sooner than expected. And there is a good reason for second line companies to take this route for borrowing money. Foreign institutional investors are said to charge between 6-8% for loan against shares, compared to 14-18% being charged by NBFCs.

Many leading foreign investment banks are said to be sourcing funds for Indian corporates through an arrangement with either their global arms or with clients who participate in the Indian equity market through participatory notes (P-notes). In P-note transactions, foreign brokerages warehouse shares bought on behalf of overseas institutional investors who are not registered with Sebi.

Such overseas borrowing by many mid-cap companies partly explains the dramatic rise in the share prices of many companies, especially realty companies, where there has not been any improvement in fundamentals, say brokers.

The modus operandi is thus:

Most promoters own shares in unofficial accounts, in addition to the quantum that they disclose to the stock exchanges. It is the shares in these accounts that are pledged with foreign investors in return for money. The overseas investor buys the shares from the promoter through what is actually a negotiated deal, but appears as a normal open market transaction.

The foreign investor