NBFC’s – Lending against shares

RBI/2014-15/186
DNBS (PD).CC.No. 408 /03.10.001/2014-15

August 21, 2014

All NBFCs with asset size of `.100 cr and above
(excluding Primary Dealers)

Dear Sirs,

NBFCs- Lending against Shares

1.At present, lending against shares carried out by NBFCs is not subject to specific instructions apart from the general prudential regulation applicable to all NBFCs. Lending against shares could be in the normal course where shares are accepted as collateral or as part of their capital market operations. NBFCs lend either by way of pledge of shares in their favour, transfer of shares or by obtaining a power of attorney on the demat accounts of borrowers. Irrespective of the manner and purpose for which money is lent against shares, default by borrowers can and has in the past lead to offloading of shares in the market by the NBFCs thereby creating avoidable volatility in the market. Certain other associated areas of concern relate to absence of adequate prior information to the stock exchanges on the shares held as pledge by NBFCs, probable overheating of the market, over-exposure by NBFCs to certain stocks and overleveraging of borrowers. Further, while NBFCs in general are understood to have in place their own internal controls with regard to lending against shares including a loan to value (LTV) ratio, there are anecdotal evidences of volatility in the capital market being the result of offloading of shares by NBFCs. It is, therefore, found necessary to introduce a minimum set of guidelines on lending against shares while at the same time ensuring that these do not result in unnecessary constraints to the requirements of genuine borrowers.

2. Accordingly, NBFCs lending against collateral of shares shall, with effect from the date of this circular:

1. Maintain an LTV ratio of 50%; and

2. accept only Group 1 securities (specified in SMD/ Policy/ Cir – 9/ 2003 dated March 11, 2003 as amended from time to time, issued by SEBI) as collateral for loans of value more than `. 5 lakh, subject to review by the Bank.

3. All NBFCs with asset size of `.100 crore and above shall report on-line to stock exchanges, information on the shares pledged in their favour, by borrowers for availing loans. The infrastructure for on-line reporting to the stock exchanges has been put in place. The exchanges may be approached for creation of user IDs. The web links for
the respective exchanges are provided below:

BSE : http://nbfc.bseindia.com
NSE: https://www.connect2nse.com/LISTING/

4. The format for reporting as desired by SEBI shall be followed.

Yours faithfully,

(K.K. Vohra)
Principal Chief General Manager

The Details of the above notification can also be accessed below.

NBFC’s -Lending against shares