NBFCs want status quo over private placement norms

An association has already been written to RBI on th eissue, a top official of a financing company said

Finance Industry Development Council (FIDC) – an association of asset financing non banking financial companies (NBFCs) will approach Reserve Bank of India to have status quo on private placement of non convertible debentures (NCD) norms issued by the central bank few days ago. 

“We would be making a representation from association because of hardships created due to this sudden regulation” said R Sridhar, chairman, FIDC. 

“Since capital adequacy norms take care of gearing, there is no need of having fresh caps on fixed deposits and bringing restrictions on fundraising,” Sridhar added.

A top official of an asset financing company said that association has already written to RBI on the issue.  

RBI, in late June issued a circular for NBFCs which restricted NBFCs private placements twice a year and capped the number of investors to 49 in each private placement. It also said that the investor investing in this instrument should invest minimum of Rs 25 lakh.

However RBI after few days lifted the gap of six months between the private placements of NCDs and said that it would be reviewed later by the central bank.     

But NBFCs are lobbying with RBI to lift maximum investor cap as well as minimum investment amount.   They say if someone has done something wrong, why should someone who is doing business genuinely should suffer? The reference was towards Sahara Group and Saradha Group. While Sahara has been ordered to refund the depositors money, Saradha investors’ money is as good as lost and there is bleak possibility of recovery.        

“NBFCs are already raising resources and doing well and because somebody has done something so we are also getting affected so status quo should be maintained would be represented to RBI” Sridhar said. 

Privately placed NCDs are one of the biggest sources for NBFCs to raise money. For example, Mahindra Finance’s 15 per cent borrowings are in the form of privately placed NCDs. However Mahindra Finance has placed those NCDs with institutions and not with retail investors.  Similarly Magma Fincorp has 22 per cent of total liabilities in privately placed NCDs with institutions.  Shriram Transport Finance Company about has retail NCDs of about Rs 3,500 crore which constitute about 15 per cent of its total liabilities. 

“We have told (as association) RBI that if they want to cap retail investors they can do so but don’t cap the institutional investors” said a top official of a NBFC. “Institutional investors are well read investors and they are completely aware of the risks involved and only after understanding the risks they invest in NCDs so it doesn’t make sense to cap those investors” this official added. “What happens if say 51 institutions are interested in NCD” he further said.                     

According to industry players most big NBFCs however don’t raise money through private placement of NCDs to retail investors and they place such NCDs only with institutional investors.  Insiders however say this practice is rampant with gold loan NBFCs and small NBFCs.  Shriram Transport was however an exception among big NBFC to this however the company has stopped the practice since RBI issued the circular.  

KUB Rao committee set up by RBI to look into gold loan sector had also expressed concerns on the practice of raising money through privately placed NCDs by gold loan companies.  These directions are applicable to them too.         

FIDC seems to be also interested in protecting smaller NBFCs even if big NBFCs aren’t affected by raising minimum subscription amount to Rs 25 lakh. “When you put 25 lakh restriction retail (investor) is out” said Sridhar. “There should be exemption given to NBFCs who are doing well” he said.  

“This is channel which NBFCs have been raising and no NBFC has defaulted and it’s a secured instrument which is good for investors also” argued Sridhar. He further said, “If good companies are restricted from raising resources then what happens to investors? They have to put money where they don’t get it back.”  It’s unfair to target companies with a good track record due to acts of some he says. “Why people invested in Saradha because they had no alternatives” he said.