1. thecorporatetreasurer.com38 corporate treasurer December 2014 / January 2015
Following higher corporate defaults and subsequent tighter lending rules, treasurers are
resorting to pledging company shares and assets to lock in investors. India’s central bank
is not overly fond of the practice, however. Emma Bi reports
the shares or other pledged assets are
delivered to the investors.
“I saw many more corporates use
promoter financing [in 2014], as
borrowing is more difficult,” said Manoj
Lodha, CFO of Jain Irrigation Systems, a
micro-irrigation systems maker based in
India and a user of promoter financing.
Long nights
India has recently set up 39 debt
recovery tribunals to help state-owned
banks recover debt by selling defaulters’
assets more efficiently. The nation also
allowed banks to label corporates’
directors and debt guarantors as “wilful
defaulters” – a tag that makes loans to
violators practically impossible. Even for
corporates that are not wilful defaulters,
financing has become more challenging.
Jain Irrigation was no exception.
Short of funds at a time when the
company was trying to grow to benefit
from government initiatives to improve
agricultural efficiency, Lodha was
struggling to secure the necessary capital.
With a market capitalisation of Rs37.61
H
undreds of Indian
companies have been
surrendering their own
shares and company
property as a means to
help raise funds this year. Although
not unheard of, the recent spate has
been driven largely by a regulator-led
clampdown on lending standards that
have forced treasurers outside of the
traditional bank markets.
As of November 7, 19% of the 4,380
corporates listed on Indian stock
exchanges have pledged shares to raise
funds, according to Bloomberg data. Tata
Consultancy Services, Sun Pharma, Tata
Motors, Mahindra & Mahindra, Bajaj
Auto, and Asian Paints – companies all
with a market capitalisation of more than
$10 billion – have committed their stock
for this purpose.
Broadly put, this is called promoter
financing – where the stock, or other
assets or securities, are used as collateral
via a third party “promoter” to convince
investors to stump up cash in the form
of a loan. If the loan is not paid back,
billion ($607 million), Jain Irrigation sells
systems to more than 3,000 dealers who
distribute equipment to farmers in India.
Jain Irrigation also sells to Coca-Cola,
Nestlé, Unilever, and Amari Plastics.
“We needed financing to meet our
growth needs, as some Indian state
governments have mandated the use of
drip-irrigation systems for grow-for-sale
crops,” explained Lodha.
Having failed to lock in a suitable
lender, in March this year, Lodha turned
to Religare Credit Advisors (RCA), a
subsidiary of Indian financial services
firm Religare, and used promoter
financing.
“I tried for months, but couldn’t get
anything from traditional [financing]
channels, and I had a very limited
time left [to raise funds],” said Lodha.
“I remember sitting with [RCA] for
meetings until 12 midnight, and it turned
out to be the first time in my 20-year
professional career that we could have a
transaction done within about 15 days.”
Jain Irrigation and RCA thrashed out
an agreement whereby the latter would
Pledging
fundingsecure
sharesto

2. thecorporatetreasurer.com December 2014 / January 2015 corporate treasurer 39
indiafocus
provide a loan through a non-operating
promoter-owned investment holding
company, Jalgaon Investments Private
Limited. Jalgaon Investments holds
Jain Irrigation shares, which it pledged,
together with its properties, to a fund that
is managed by RCA called the Religare
Credit Opportunities Fund.
“A quarter of the fund is from Religare
Group’s balance sheet, and 75% of the
fund is from investors arranged by
[RCA],” explained Kanchan Jain, CEO
and principal managing partner of
RCA. “These investors include high
network individuals, rich families, and
corporates.”
Through this structure, Jain Irrigation
raised a three-year loan worth Rs500
million at an annual interest rate of 15.5%
(75 basis points over India’s present prime
lending rate). The total collateral pledged
is worth approximately Rs1 billion. The
funds were moved over to Jain Irrigation
on March 24.
RCA and investors in the fund have
full recourse to the shares and property
in the event Jain Irrigation defaults on
its debt. The debt is repaid back to RCA
via Jalgaon Investments. Operating
companies in India cannot hold their
own shares; a third party promoter is
necessary in this arrangement.
RCA subjected Jain Irrigation and
Jalgaon Investments to due diligence,
with a focus on assessing business
models, performance records, and the
need for funds. Religare also analysed
Jain Irrigation’s existing debt profile,
along with the repayment track records,
said Sandeep Adukia, managing partner
of RCA.
No magic bullet
Although promoter financing has worked
for Jain Irrigation, lawyers are generally
warning CFOs against using the strategy
for loans with long tenors.
“[Pledging shares to finance] may be an
attractive route, with a short duration of
less than two years, but it’s better not to
use it for long-term debt,” said Dipankar
Bandyopadhyay, a partner at Indian law
firm Verus, who is concerned that stock
market volatility could force companies to
pledge more shares.
“Besides, bank loans may still be
cheaper, despite the many restrictions
on whether and how a bank can lend to a
corporate,” he said.
Beyond just losing shares in the event
of a default, a company could potentially
lose control if the company fails to pay
its debt. “Our investors have the right
to invoke the pledge on shares and
liquidate to recover and, in the case of
Jain Irrigation, also take possession of the
property if Jalgaon Investments fails to
pay back the funds,” said Adukia.
“Pledging shares
may be an
attractive route…
but it’s better not
to use it for long-
term debt”
Regulatory worries
The increasing volume of the corporates’
borrowing against pledged shares has also
attracted the attention of the Reserve Bank
of India (RBI), India’s central bank. “This
has been a very less regulated area, but
the central bank is now trying to improve
the transparency and avoid stock market
volatility from the promoter financing
transactions,” said Bandyopadhyay.
When borrowers default on their
borrowings, the lenders, who are non-
banking financial companies (NBFCs),
have in the past offloaded shares in the
market, creating stock volatility, said
the RBI.
As a transparency requirement, the
RBI issued new rules on August 21 to
requesting all NBFCs with assets of more
than Rs1 billion to report the information
about pledging shares to stock exchanges.
Two online reporting websites have
been established to protect shareholders’
interests.
The central bank also requires NBFCs
to maintain a loan-to-value ratio of 50% or
below and imposes strict requirements on
what kind of shares can be pledged. For
example, only Group 1 securities can be
used as collateral for loans of more than
Rs500,000 and is subject to central bank
approval. Group 1 securities are highly
liquid stocks with a low mean impact cost.
It is a tricky time for India’s companies.
When making a decision to raise funds
through promoter financing, a treasurer
should be mindful the rules surrounding
it could change any time. He should also
be ready to communicate very clearly with
shareholders what exactly the company is
doing with its stock, and why. n