Muthoot Finance's method of raising money through gold bonds has been questioned by its competitors, including a few public sector banks. This has resulted in a probe by the Reserve Bank of India (RBI).
According to a few banks, the bond issues by Muthoot Finance were not in strict compliance with norms relating to raising money from the public, and this gave Muthoot Finance an advantage over its competitors, said two people familiar with the development.
“The complainants have, in their detailed report to RBI, said how the bonds were being issued to walk-in clients at any Muthoot Finance office in the country,” one of the sources said. An RBI spokesperson confirmed the probe. When asked whether there were concerns over the debentures, the spokesperson said, “We are examining the books of gold loan companies. This will probably cover everything.”
Muthoot Finance, which is registered as a non-deposit taking non-banking financial company (NBFC), is regulated by the central bank and had raised about Rs 3,900 crore through non-convertible debentures. For gold loan firms, these debentures are an important source of funds, since RBI had, in February, taken the sector off the priority sector list. According to company officials, this money is raised through private placement in several tranches. The terms of these debentures can be found in the forms available in any of the Muthoot outlets, the officials said. Company officials also said the RBI audit was a routine one and nothing untoward was found. A senior Muthoot Finance official said, “The company has followed all applicable rules and regulations, and the bonds are in the form of secured debentures, which are privately placed.” He added these debenture sales would not amount to a public issue, as there was no invitation or an advertisement inviting the public to subscribe.
Provisions in the Companies Act allow NBFCs governed by RBI to raise money from more than 50 people, without attracting the public issue provisions of the Act. However, such efforts should not, directly or indirectly, be aimed at raising money from members of the public or from people to whom the offer is not made directly, say experts.
According to these rules, “The offer for shares or debentures made by an NBFC or a public financial institution, should not be calculated to result, directly or indirectly, in the shares or debentures becoming available for subscription or purchase by people other than those receiving the offer or the invitation.”
“In short, an NBFC can send named invites to even 1,000 people. But if it keeps blank forms and takes deposits from walk-in customers, that would amount to a public issue and would attract the relevant provisions,” said a company secretary.
Gold finance companies, including Muthoot Finance, have been raising money through non-convertible debentures at an interest rate of around 12 per cent per year. However, being a non-deposit taking NBFC, it is not subject to restrictions like liquidity reserves and cash reserves, conditions banks are subject to. “This makes their cost of funds much lower than their competitors and margins much better. However, it exposes them to that much more risk, since there is no protection against depreciation in gold prices or liquidity risks,” said one of the sources.