Advisory Services
Audit
Consulting
ESG Advisory
RBI Registration
SEBI Registration
IRDA Registration
FEMA Advisory
Compliances
IBC Services
VCFO Services
Growing
Developing
ME-1
ME-2
EU-1
EU-2
SE
Others
Select Your Location
The Reserve Bank of India has prescribed norms for NBFC Loan against shares. This was done with a view to tackling volatility in the capital market due to offloading of shares by NBFC.
Non-Banking Financial Companies (NBFCs) whose asset size is Rs 100 crore and above have been forbidden to give more than 50 % of the value of shares pledged by the borrowers with NBFCs. Its applicability would be on loans of Rs 5 lakh and above.
This step has been taken to minimize volatility in the market.
There is a requirement of maintaining a loan to value (LTV) ratio of 50% for a loan against shares by NBFCs. This has been done to bring in place some alignment. However, there might be a short-term impact but not too negative impact. In case of any movement in the share prices due to which shortfall arise in the maintenance of the 50% LTV, it shall be made good within 7 working days.
Previously there were many attempts have been made to address the margin-financing loophole that NBFCs with capital market exposure sought to exploit.As per the Rules framed by Securities and Exchange Board of India, it has allowed brokers to provide only 50 percent margins to customers.
As NBFCs are regulated by RBI, not by the SEBI, it has allowed brokerage groups to use the regulatory area.
When share prices fall down below a certain level, in such a case NBFCs sell the shares against which they lend. Usually, with this, it results in sharp falls in a company’s stock.
Securities & Exchange Board of India has made it mandatory for trusts and such entities which were extending loan against shares should reveal their source of funds or names of beneficiaries.
RBI said in a statement that however NBFCs had internal controls for lending against shares, including an LTV ratio, there were cases of volatility in the capital market due to offloading of shares by NBFC Registration.
NBFCs can accept only group-I securities as collateral for loans valued at more than Rs 5 lakh.
For NBFCs having the asset size of more than Rs 100 crore will have to inform stock exchanges regarding the shares pledged borrowers in their favor for availing the loans.
As per the reports, there have been many cases of NBFCs being overexposed to certain stocks as well as borrowers being overleveraged.
Now loan against shares by NBFCs isn’t subject to specific norms apart from the general regulation specified for all NBFCs.
A margin call occurs in case of the fall in the value of the securities. After this, brokers may sell the shares of the borrower the purpose of recovering money and to keep the loan to value ratio at 50 percent, brokers can ask clients to bring in additional securities.
Read our article:NBFC Registration Procedure with Reserve Bank of India
Experienced Finance and Legal Professional with 12+ Years of Experience in Legal, Finance, Fintech, Blockchain, and Revenue Management.
On 18th May 2023, the Securities Exchange Board of India (SEBI) released a Consultation Paper o...
Infrastructure and real estate have been regarded as India's "sunshine sector" since the turn o...
On 22nd May 2023, the Central Board of Direct Taxes (CBDT)[1] issued a new circular under secti...
Anyone can have different sources of income. With globalization and the opening up of economies...
The Reserve Bank of India (RBI) is crucial in regulating NBFC, including branch openings and cl...
In India, Non-Banking Financial Companies are subject to certain restrictions from taking publi...
It's usually a good idea to diversify the assets in your financial portfolio, especially during...
A nation is being built by the non-banking finance company through the development of wealth, t...
A corporate entity known as a portfolio manager complies with a contract or agreement with the...
Identifying and analysing risks associated with individual portfolio investments, such as equit...
Are you human?: 8 + 6 =
Easy Payment Options Available No Spam. No Sharing. 100% Confidentiality
A nonbanking financial institution is a type of financial institution that is not governed by any regulatory bankin...
24 Oct, 2017
FLA stands for Foreign Liabilities and Assets. FLA Return is a mandatory filing under Foreign Exchange Management A...
31 Mar, 2021
Red Herring Top 100 Asia enlists outstanding entrepreneurs and promising companies. It selects the award winners from approximately 2000 privately financed companies each year in the Asia. Since 1996, Red Herring has kept tabs on these up-and-comers. Red Herring editors were among the first to recognize that companies such as Google, Facebook, Kakao, Alibaba, Twitter, Rakuten, Salesforce.com, Xiaomi and YouTube would change the way we live and work.
Researchers have found out that organization using new technologies in their accounting and tax have better productivity as compared to those using the traditional methods. Complying with the recent technological trends in the accounting industry, Enterslice was formed to focus on the emerging start up companies and bring innovation in their traditional Chartered Accountants & Legal profession services, disrupt traditional Chartered Accountants practice mechanism & Lawyers.
Stay updated with all the latest legal updates. Just enter your email address and subscribe for free!
Chat on Whatsapp
Hey I'm Suman. Let's Talk!