IIFL Finance shares rose 10% to ₹420.40 after Fairfax India agreed to invest up to US$200 million in liquidity support during the RBI’s gold loan distribution restriction.
IIFL Finance, a leading NBFC in retail credit, saw a 10% intraday gain to ₹420.40 per share after Fairfax India agreed to invest up to US$200 million in liquidity support due to the recent RBI embargo on gold loan disbursements.
“The RBI’s restriction has prompted liquidity concerns among the company’s investors and lenders. In response to these concerns, Fairfax India has agreed to invest up to $200 million in liquidity support on mutually agreed-upon terms and subject to applicable legislation, including regulatory approvals (if any),” the business stated in a filing.
The Canadian investment firm, run by India-born Prem Watsa, first invested in IIFL in 2011, purchasing a 9% share through the Hamblin Watsa Investment Counsel fund.
In July 2015, Fairfax India made a voluntary offer to buy a 26% share in IIFL for ₹1,621 crore, with an additional 21.85% ownership. The group also has an economic stake of 5.15% in derivative instruments.
Fairfax’s total shareholding in IIFL was 35.7% as of March 2016. Over the years, it has sold some of its share in the company.
On February 5, the Reserve Bank of India (RBI) stopped IIFL Finance from sanctioning and disbursing gold loans due to serious supervisory concerns. Following this regulatory development, the stock fell by 20% in the next two trading sessions.
issued a statement clarifying the decision. “We reaffirm our commitment to rectify observations of the RBI in the gold loan portfolio to comply with RBI findings at the earliest and will continue with our endeavor to provide gold loan services in the overall interest of customers” .
Domestic brokerage firm Motilal Oswal stated, “It is difficult to foresee how long it will take to negotiate with the regulator to have this restriction reviewed and lifted. However, in light of prior incidents in which the RBI banned particular financial institution activities/products, our base case considers that it could take roughly six months to get the RBI to perform a special audit and then remedy the observations to the RBI’s satisfaction.”
After accounting for the impact of the prohibition on IIFL’s gold loan growth, the brokerage reduced its FY24, FY25, and FY26 earnings predictions by 2%, 14%, and 15%, respectively.
Beyond the immediate impact on incremental gold loans, IIFL will need to work with existing clients and co-lending partners to protect its gold loan brand and the confidence it has developed over the years. The brokerage also stated that it will need to make efforts to retain existing clients and workers.
The brokerage anticipates that the stock price will remain volatile in the near term. However, it retained its ‘buy’ rating and set a target price of ₹560 per share. This aim is based on revised target multiples for each of its standalone, HFC, and MFI businesses, which take into account recent RBI observations.
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