Financiers in Mumbai's loan market are making a mental note of a recent development that can dramatically change the way they do business. One of India's biggest realty groups, Unitech, has moved a court to prevent Morgan Stanley from selling shares that were held against debt raised by Unitech promoter entities.
Morgan Stanley moved in to sell the shares when these entities could not chip in more securities—a condition that borrowers have to fulfill when loan covenants are breached. In a vibrant loan-against-shares market, builders and promoters raise hundreds of crores from non-banking finance companies and finance arms of brokerages by placing debt securities like nonconvertible debentures and various structured papers.
In loan-against-share transactions, the security cover kept by financiers is two to three times, depending on borrowers' credit rating and track record. Borrowers have to top up such margins with more shares and cash if there is a fall in the price of shares that are pledged.
There are other conditions like downgrade and additional borrowings that can also trigger calls for extra margin. In most cases, the loan agreement says lenders will sell shares if borrowers do not cough up extra margin.
It is unclear what triggered the call for the Unitech group entities. "But it raises a fundamental question that lenders are beginning to ask. If borrowers can get court stay to stop lenders from liquidating shares, then the entire loan against share business is on shaky grounds," said the treasury head of a large finance firm.
When a company raises debt, brokerages and wealth management arms of finance firms retain a slice of the debt in their books and downsell the rest to HNIs (or high networth individual ) clients. Morgan Stanley also sold a chunk of the papers placed by Unitech group entities to their HNI clients.
"The trustee arm of Axis Bank is holding the securities against the debt. As far as Morgan Stanley is concerned, over and above its direct exposure to the group, it also has a moral obligation as far as HNI clients are concerned. These clients were advised by Morgan Stanley to buy the papers," said a brokerage official.
Morgan Stanley moved in to sell the shares when these entities could not chip in more securities—a condition that borrowers have to fulfill when loan covenants are breached. In a vibrant loan-against-shares market, builders and promoters raise hundreds of crores from non-banking finance companies and finance arms of brokerages by placing debt securities like nonconvertible debentures and various structured papers.
In loan-against-share transactions, the security cover kept by financiers is two to three times, depending on borrowers' credit rating and track record. Borrowers have to top up such margins with more shares and cash if there is a fall in the price of shares that are pledged.
There are other conditions like downgrade and additional borrowings that can also trigger calls for extra margin. In most cases, the loan agreement says lenders will sell shares if borrowers do not cough up extra margin.
It is unclear what triggered the call for the Unitech group entities. "But it raises a fundamental question that lenders are beginning to ask. If borrowers can get court stay to stop lenders from liquidating shares, then the entire loan against share business is on shaky grounds," said the treasury head of a large finance firm.
When a company raises debt, brokerages and wealth management arms of finance firms retain a slice of the debt in their books and downsell the rest to HNIs (or high networth individual ) clients. Morgan Stanley also sold a chunk of the papers placed by Unitech group entities to their HNI clients.
"The trustee arm of Axis Bank is holding the securities against the debt. As far as Morgan Stanley is concerned, over and above its direct exposure to the group, it also has a moral obligation as far as HNI clients are concerned. These clients were advised by Morgan Stanley to buy the papers," said a brokerage official.
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Some forward looking statements on projections, estimates, expectations & outlook are included to enable a better comprehension of the Company prospects. Actual results may, however, differ materially from those stated on account of factors such as changes in government regulations, tax regimes, economic developments within India and the countries within which the Company conducts its business, exchange rate and interest rate movements, impact of competing products and their pricing, product demand and supply constraints.
Nothing in this article is, or should be construed as, investment advice.
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