All You Need to Know Before Giving a Loan Against Shares to a Listed Company

Loans against shares (LAS) to listed companies or their promoters are often perceived as low-risk, fully secured exposures—especially when the initial Loan-to-Value (LTV) appears comfortable (2x cover).

In reality, equity-backed lending is one of the fastest deteriorating credit exposures if governance, monitoring, and documentation are weak. This blog sets out everything lenders should evaluate before and after sanction.

Understand the Risk: Shares Are Not Static Collateral:

Unlike real estate or fixed assets, listed shares:

• Are marked-to-market daily;

• Are exposed to price volatility, liquidity risk, and sentiment shocks;

• Can lose value before the lender is operationally ready to act.

A “2x cover” at sanction is only a point-in-time comfort, not a risk mitigant by itself.

Initial LTV Is Only the Entry Point — Stress Testing Is Critical:

Before sanction, NBFC should stress-test:

• 30/60-day average;

• Fall in trading volumes during market stress;

• Impact of simultaneous invocation by multiple lenders;

• Existing promoter-level encumbrances.

If the structure fails under stress, the loan is weak—regardless of initial LTV.

RBI Directions:

For NBFCs with asset size of ₹100 crore and above, RBI (NBFC- Credit Facilities) Directions, 2025, lays down mandatory conditions for lending against listed shares.

Key Requirements under Para 106:

1. LTV of 50% must be maintained at all times:
   Any shortfall due to share price movement must be made good within seven working days.

2. Additional conditions for capital market loans:

   • For loans above ₹5 lakh meant for investment in capital markets, only Group 1 securities (as specified by SEBI) may be accepted as collateral.

The phrase “at all times” is critical—it makes continuous monitoring a compliance requirement, not a best practice.

Why Daily Monitoring Is the New Minimum Standard?

1. Given the regulatory requirement of maintaining LTV “at all times”:

• Daily (or automated end-of-day) LTV monitoring is the only defensible approach;

• Weekly or monthly checks create compliance blind spots.

2. Share prices move daily; risk cannot be assessed monthly for a daily-moving asset.

3. Delay in invocation often leads to:

• Lower realisable value

• Promoter resistance

• Market signalling risk once pledge invocation is disclosed

4. Even if market cap is large:

• Promoter shares may have low free float;

• Bulk invocation can depress price further.

Daily monitoring allows graduated responses, not panic invocation.

What Should Be Monitored?

Daily:

• Closing price;

• Post-market LTV percentage;

• Any breach of the 50% threshold.

Weekly / Event-Based:

• Trading volumes and liquidity;

• Bulk / block deals;

• Earnings, SEBI or exchange actions;

• Promoter pledge changes;

• Rating actions;

• Regulatory or governance developments.

Immediate Margin Call vs. Seven-Day Cure Period:

A common mistake is treating the seven working day window as a grace period before taking action. That interpretation is incorrect.

What the NBFC Must Do Immediately (Day 0)?

Upon detection of any LTV breach:

• Immediately issue a written notice to the borrower requiring, at the NBFC’s option:

  • Pledge of additional listed shares; or

  • Part repayment sufficient to restore LTV to 50%.

This communication should:

• Be issued on the same day as breach detection;

• Record the time and extent of breach;

• Clearly mention the seven working day outer limit.

What the Seven Days Mean?

• Time granted to the borrower to cure the breach;

• Not a buffer for delayed monitoring or delayed communication;

• Does not prevent the NBFC from preparing for invocation.

Immediate action by the lender and a seven-day cure right for the borrower are two distinct timelines.

Documentation: Rights Must Be Unambiguous:

Loan and pledge documents should clearly provide:

• Waiver of prior notice of default upon LTV breach;

• Right to sell shares to restore LTV, not merely on payment default;

• No obligation to wait if market conditions deteriorate; 

• Authority to act even during the seven-day cure period if market conditions worsen.

Weak documentation converts a secured loan into a negotiated exposure at the worst possible time.