A collateral damage of a wildly gyrating market is the sudden selloff of pledged shares — a phenomenon that one of the promoters of the 92-year old private sector lender Lakshmi Vilas Bank (LVB) is grappling with. Tangerine Capital Assets Holdings, the shareholder concerned, has moved the capital market regulator Sebi after discovering that IIFL Wealth Finance has liquidated a chunk of LVB shares that Tangerine had pledged to borrow from an arm of the Mumbai-based financial services group IIFL. In the latest round of market volatility, this is the first such instance of a promoter shareholding being impacted. The closely-held Tangerine, owned by Prabakarans, has sought the regulator’s permission to buy shares from the open market to restore its shareholding within the overall holding limit laid down by the Reserve Bank of India.
As per securities market regulations, a shareholder belonging to the promoter group cannot purchase shares of the company for six months from the date it has sold the stock. Similarly, it cannot sell shares for six months after buying the stock. If IIFL has mistakenly sold the shares, or unwittingly sold more than the shortfall in margin, Sebi can give Tangerine the permission to buy shares. For this the regulator has to see the books of IIFL to check whether there was indeed a mistake on the part of the non-banking finance company, a person aware of the development told. However, when contacted, an IIFL spokesman said, The shares were sold as per contractual terms signed with the client under the loan agreement. While selling shares relevant statutory and regulatory guidelines as well as all standard operating procedures have been adhered to. According to the 50 per cent margin requirement for loan against shares, the value of shares pledged by a borrower has to be twice the amount of the money lent. When price of the pledged stock falls, the lender is required to immediately alert the borrower about the shortfall and ask the latter to bring in cash or additional securities to replenish the margin. Before giving Tangerine the permission to buy LVB shares, the regulator has to check whether the LVB shareholder was given adequate time to bring in extra collateral.
If a borrower either overlooks or ignores such emails and messages, the NBFC, as per RBI rule, will have no choice but to liquidate some of the pledged shares. More than 4.5 lakh shares were liquidated by IILF wealth — bringing down Tangerine Capital’s stake in the bank to 1.05 per cent from 1.23 per cent. Shares of LVB fell 19 per cent on September 28 (Friday) to Rs 71.9 from Rs 89 the previous day. According to sources, in the following week, K.R.Pradeep, the largest promoter shareholder of LVB bought two lakh shares of the bank. Pradeep held 2.43 per cent in LVB as per June 30 data. In the next trading session, the stock, probably buoyed by promoter buying, bounced back to Rs 85.7 (up 19 per cent). On September 28, a total of 27.26 lakh shares were traded on NSE and BSE. This was three times the traded volume on the previous day and 2.7 times the average daily volume recorded this year. On October 1 (Monday), traded volumes were even higher — crossing 83 lakh shares which was 10 times the average daily volume. The total promoter holding in the bank is capped at 10 per cent. As on June 30, promoters (comprising 27 parties) held 8.98 per cent in the bank while the balance 91.02 per cent was with the public.
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