The Reserve Bank of India’s new norms for gold loan companies are a heavy blow to private equity players in India. The move to restrict loans by gold finance firms to 60 per cent of the value of jewellery pledged as collateral may have a huge impact on the revenue of gold loan-lending firms such as Manappuram Finance and Muthoot Finance.
Both firms have a major exposure to private PE and venture capital firms.On Wednesday, shares of both went down as much as 20 per cent on the BSE. PEs such as Baring Private Equity Partners India, Sequoia Capital India and Matrix Partners have strong exposure to gold loan lending firms.
Last week, Baring PE Partners and Sequoia Capital had increased their stake in Manappuram by buying shares from its promoter, V P Nandakumar. Nandakumar sold around 4.3 per cent stake worth Rs 145 crore in the Kerala-based company for repaying deposits taken by his privately held firm, Manappuram Agro Farms. The sale was done at Rs 40 per share. The stake sale brought down promoter holding in Manappuram from 36.3 per cent (as of end 2011) to 32 per cent. With the latest transactions, Baring India and Sequoia increased their holding in the company to 2.65 per cent and 3.71 per cent, respectively.
Baring PE holds three per cent stake in Muthoot Finance. Another PE firm, Matrix Partners India, holds 2.11 per cent stake in Muthoot as of December 2011. On Thursday, Manappuram shares went down 18.5 per cent to close at Rs 36.9 on BSE. Muthhot Finance shares touched 52-week low of Rs 130.3 and closed at Rs 146.65, down 9.9 per cent. Early last month, Manappuram stocks were hit by the RBI circular that warned the company against accepting any public deposits by either Manappuram Finance or by Manappuram Agro Farms (Magro).
Rahul Bhasin, managing partner with Baring Private Equity Partners India, did not respond to repeated calls and mail. A Sequoia spokesperson, when contacted, said, “We do not comment either on change in regulation or on public companies.” However, PE fund managers are worried over the regulatory changes.
Said K Srinivas, managing director of BTS Investment Advisors, “The changes in regulatory norms, which happen often, make PE investments vulnerable in India. In the last one year, some PE investments have been affected badly due to regulatory changes. We are confused due to the continuos change in environment.”
Last year, new norms introduced by the Andhra Pradesh government in the microfinance space had affected a lot of PE firms which had invested in MFIs.
However, Sequoia was lucky when it exited from Manappuram about two years ago. In 2010, in one of the largest venture capital exits, Sequoia made a five-time return by selling the Manapuram stake in the open market. Sequoia, which had acquired about 14 per cent stake in in Manappuram General Finance and Leasing Limited for $14 million in 2007, sold the entire stake for $70 million in the open market in April 2010.
George Alexander Muthoot, managing director of Muthoot Finance Ltd, said gold loan firms, in their bid to attract customers, used to offer even up to 75 per cent of loan to value. “That would now be restricted to 60 per cent; it is a little harsh move,” he said. “We feel the same should be extended to banks also for a fair regulation.”
Another PE firm, Ashmore Alchemy India, which is a joint venture between Alchemy Partners LLP and Ashmore Investments (UK), currently holds 1.1 per cent in Manappuram. AA Develop-ment Capital India Fund I LLC, the entity through which Ashmore Alchemy held 5.23 per cent in the company as of June 2011, diluted its remaining stake in various phases.
Time to govern
But, if the economy’s rebound accelerates, the Fed will have to get serious about its exit from extraordinarily easy policy well before that. Returning to normalcy is no longer just about raising interest rates. Simply changing its recently-introduced rate forecasts has the potential to push market rates sharply higher. Discontinuing Fed bond purchases, or eventually reversing them, could also do the same.
The timing of such turns is always difficult to predict, which is why it’s better to get Stein and Powell in place before the fireworks begin. Powell’s voice, in particular, would be an asset on a board that tilts heavily toward academic theorizing. His stints at Carlyle Group and Dillon Read would bring a markets perspective that has been absent from the Fed since former Morgan Stanley banker Kevin Warsh stepped down last year. The quicker the Senate realises that the Fed functions best with a greater diversity of views and experiences, the better.