Shares of IIFL Finance, a prominent non-banking financial company (NBFC) specializing in retail credit, surged by 10% during today’s trading session, reaching Rs 420.40 per share. This increase follows the announcement that Canadian billionaire Prem Watsa has committed to providing $200 million in liquidity support to the company, should it encounter any funding challenges after the regulatory restrictions imposed on its gold loan business by the banking regulator. Fairfax India Holdings Corporation, backed by Watsa, holds stakes in IIFL Finance and other entities within the IIFL group.
The stock had experienced a significant decline of 35% over the past two sessions following the Reserve Bank of India’s (RBI) decision to prohibit the company from issuing gold loans.
In response to concerns regarding liquidity prompted by the RBI’s actions, IIFL Finance stated in a regulatory filing, “The RBI’s embargo has raised liquidity concerns amongst the company’s investors and lenders. In response to these concerns, Fairfax India has agreed to invest up to US$200 million in liquidity support on terms to be mutually agreed and subject to applicable laws, including regulatory approvals (if any).”
Fairfax India initially invested in IIFL in 2011, acquiring a 9% stake through the Hamblin Watsa Investment Counsel Fund. Subsequently, in July 2015, Fairfax India made a voluntary offer to acquire a 26% stake in IIFL for Rs 1,621 crore, ultimately increasing its stake further. As of March 2016, Fairfax’s total shareholding in IIFL stood at 35.7%. Over time, it has divested some of its holdings in the company.
Following the RBI’s decision to restrict IIFL Finance from offering gold loans, the stock witnessed a sharp decline of 20% in the subsequent two trading sessions.
Addressing the regulatory action, IIFL Finance stated, “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.”
Motilal Oswal, a domestic brokerage firm, remarked, “It is difficult to predict how long it could take to work with the regulator and get this ban reviewed and revoked.” They anticipate potential volatility in the stock price in the near term but maintained a ‘buy’ rating with a target price of Rs 560 per share, factoring in the recent regulatory observations by the RBI.