Chased by banks, indebted midcaps cut informal deals with high networth individuals

With banks stepping up the pressure on stressed borrowers ahead of the financial year ending, many debt-laden midcap firms are learnt to be striking informal deals with high networth individuals (HNIs) for funds. [caption id=“attachment_2585368” align=“alignleft” width=“380”]  AFP[/caption] These listed companies are said to be offering annualized interest rates as high as 50 percent, said one person who was approached by a struggling steel company for a six-month loan. Brokers are worried that this could add to the systemic risk since most HNIs would not be aware of the problems these companies are having with their banks. The person who was approached by the steel company said that the company was willing to pledge shares with a 50 percent ‘haircut’. Simply put, the company is willing to pledge Rs 100 worth of shares for a loan of Rs 50. Also, this pledging is done ‘unofficially’, and so will not have to be disclosed to the stock exchanges. “HNIs are being approached by chartered accountants associated with the company,” said the source, adding that brokers were reluctant to be part of deals where they know the company is in trouble. Also, companies too are trying to avoid brokers as far as possible because they don’t want word to get around about these deals. Stock exchange rules require companies to disclose the details of shares pledged by them. But many companies are known to get around the rules, because promoters hold shares in benami accounts as well. In an informal pledging of shares, a company will transfer shares to the demat account of the financier through an ‘off-market’ transaction. The shares will be held by the financier for the tenure of the loan and returned through an ‘off market’ transaction at the end of it. Under the agreement, the entire interest amount will be paid on maturity. While a 50 percent ‘haircut’ may appear a safe bet, prices of quite a few stocks have nearly halved in the last couple of months because of the market meltdown. Brokers say the RBI and Finance Ministry need to ensure that the names of loan defaulters are in public domain so that people are better informed when they are striking deals with these companies.