, 18 tweets, 22 min read Read on Twitter
After the buildup and the crash-course in my last post, here is my post analysing Promoter Financing market in India. The analysis attempts to explain the slowdown in promoter financing in India and brings out some interesting facts. Read on to know more. Thread 1/12
As per BSE data, the aggregate value of promoters' pledged shares was ~1.85 lakh crore as at Aug 23, 2019. In comparison, the value of promoters' pledged shares stood at ~Rs 2.5 lakh crore as at Aug 30, 2018. The fall in pledge levels indicate slowdown in promoter financing. 2/12
An ET article (July 22), observed that 'pledging of shares by promoters of NSE companies dropped to a six-year low'. Another ET article (Aug 15), noted that 'interest rates on loans against shares (LAS) have surged by about 300 basis points in the past 3 months'. 3/12
So what lead to the drop of Rs. 65,000 crore in share pledge levels (or ~Rs. 35,000 Cr of promoter funding)? What caused the interest rates on LAS to surge?

A series of events and actions lead to the present turmoil in promoter funding (or LAS). Here is a list. 4/12
1) The NBFC liquidity crunch - Owing to the default/delay in debt facilities of IL&FS and DHFL, the funding to NBFCs dried up. As a result NBFCs stopped/ slowed disbursements. LAS, a major product for NBFCs, too suffered as result of the liquidity crunch. 5/12
2) Outflows in Mutual Funds (MFs) - Owing to a series of accidents in debt portfolios of MFs, investors grew risk averse and withdrew funds from riskier MF schemes. Consequently, MFs pruned their exposure in promoters entities e.g. stake sale of Emami at the behest of MFs. 6/12
3) Stress in ZEE LAS - In Jan 2019, the share price of ZEE dipped sharply causing breach of covenants in promoter borrowings. This was the nail in the coffin for LAS borrowings from MFs. MFs not only stopped lending to promoters but also started calling back the funds. 7/12
4) Activism of equity investors/ analysts - Post the Zee debacle, equity investors/ analysts realised the risks of an over-leveraged promoter on stock price. As a result, share prices of all companies with a leveraged promoter tanked, forcing promoters to reduce pledge. 8/12
5) SEBI regulations - In June, 2019, SEBI, in the minutes of the board meeting guided that MF investments in LAS should have a minimum share cover of 4 times. Though guidelines in this regard are awaited, MF investments in LAS have come to a grinding halt. 9/12
With NBFC funding crippled and MFs bowing out, the demand for LAS has dropped significantly causing interest rates on the product to rise obnoxiously. Promoters are working round the clock to arrange for refinancing and/ or to reduce pledge levels. 10/ 12
Some FPIs, associated with foreign banks, have ceased the opportunity and are extracting high returns from promoters in lieu of providing a liquidity succour. If NBFCs remain out of the market for long, some promoter entities could well sink. 11/12
Source of charts
1) Economic Times
2) Morningstar
3) Business Standard
4) Times of India

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