Promoter funding/ financing, is the colloquial term used for raising of debt funds by Promoters of companies usually against the security/ comfort of shares. Thread 1/13
If he doesn't have enough cash at his disposal, he borrows from finance firms. 2/13
These shares are pledged to the financing firm (or a trustee) to avail of the debt facility. 3/13
The borrowing is so structured that additional shares are pledged if share price of the company goes down and vice-versa. 4/13
Usually, a notice period of 2-3 days is given to the promoter before the extreme step of disposing-off the shares is taken. 5/13
1. Promoters are able to unlock their capital.
2. Enables entrepreneurial efforts.
3. A very liquid security for lenders that enables recovery within 2-3 days.
4. Enables corporate governance - promoter need not resort to hanky panky related party transactions. 8/13
1. Rapid movement in share price could erode the security cover.
2. Selling promoter shares may lead to bad blood between promoter and lender.
3. Exiting oversized positions could lead to price erosion, which could result in lower realisations from share sale. 9/13
1) Daily monitoring of share price and share cover.
2) Timely intimation to promoter to top-up the shares if share price dips.
3) Monitoring and ensuring that top-ups are done within the timelines. 10/13
A) By lending against shares -
1. Of companies with market cap of 5k crore and above.
2. Of companies with relatively lower volatility of share prices.
3. With high liquidity/ turnover. 11/13
1. Borrowing against promoter guarantee.
2. Borrowing without pledge of shares but agreeing to keep a certain no. of shares unencumbered at all times.12/13