Lenders Law

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 i...

India’s lending regulation is founded on a deliberate legal distinction:  the law regulates the “business of lending”, not every instance of lending . Accordingly: The Reserve Bank of India (RBI) regulates lending by Non-Banking Financial Companies (NBFCs) . State Governments regulate moneylenders under local Money Lending Acts. Yet, a significant and increasingly common practice now sits between these two regimes: Loans are advanced not by the NBFC, but by an individual promoter or by other group entities in which the promoter has a stake—often to borrowers who originally approached the NBFC itself. Such lending falls outside RBI regulation and outside State moneylender laws , creating a regulatory grey zone. Why RBI Regulation Does Not Extend to Individuals and Certain Group Entities? RBI’s powers under the RBI Act, 1934 extend only to entities carrying on the business of a non-banking financial institution . The 50–50 Test for NBFCs- An entity qualifies as an NBFC on...

The Reserve Bank of India (RBI) recently cancelled  the Certificate of Registration (CoR) of four Non-Banking Financial Companies (NBFCs). While CoR cancellations are not routine, they are a powerful supervisory tool used when an NBFC fails to comply with prudential, regulatory, or governance requirements. This development has again placed the spotlight on Section 45-IA(6) of the Reserve Bank of India Act, 1934 , the statutory basis for cancellation of an NBFC’s CoR. What Does Section 45-IA(6) of the RBI Act Provide? Section 45-IA deals with registration requirements for NBFCs . Sub-section (6) empowers RBI to cancel an NBFC’s CoR if it fails to comply with essential conditions. RBI may cancel the CoR if the NBFC: Fails to comply with conditions of registration; Does not maintain the prescribed Net Owned Fund (NOF); Fails to submit statutory returns or documents; Operates in a manner that is prejudicial to public interest; Violates RBI directions, circulars, o...