INTRODUCTION

The main purpose of taking loans against shares is to preserve investment, apart from taking care of personal needs. People also resort to such a loan to meet their contingencies and get liquidity without actually selling the shares. It is advisable to take loan against equity (shares & debentures) only when you are expecting a certain sum of money a few months down the line and you need some funds in the interim. If you are reinvesting the loan amount, ensure that the benefits you derive are more than the cost you have to incur (which includes interest and processing fee). Carefully consider the risk involved in such a move.

Loan against shares is available in the form of an overdraft facility against the pledge of financial securities like shares/units/bonds. After you submit the loan application with all the share certificates and other relevant documents, a current account is opened in your name. You can then withdraw up to the amount sanctioned and interest will be charged only for the number of days you use the amount. The loan amount that can be sanctioned depends on two factors: the extent of funding on a particular stock and the price (called the base price) considered by the lender for calculating the value of the shares.

The Reserve Bank of India (RBI) allows banks to lend up to 65 per cent of the value of demat shares and 50 per cent of the value of physical shares. However, banks can, and do, fix their own limits with respect to the extent of funding within that range. Generally, demat shares get you a larger loan amount, in a much faster time, at lesser rate of interest and at smaller processing fee, than those in physical form. Every lender has an approved list of securities that he lends against and this list varies from one lender to the other. There are other conditions that lenders apply on equity loans.

The loan is extended against shares of eligible companies and, in a few cases, units of reputed open-ended mutual funds.

Generally, a maximum of 20 shares can be pledged, at a time. Only fully paid-up shares, in the lenders approved list of securities, are accepted. Shares held in the name of minors, HUFs, NRIs and companies are generally not accepted.

Loans against mutual fund units are based on their NAV value

NECESSITIES FOR LOAN AGAINST SHARES Necessary Conditions

The shares should be on the approved list of the bank, which would be revised from time to time.

The shares should be fully paid up Scrips in the name of corporate, minors, Firms, HUF, and NRIs are not eligible for finance under this scheme.

The directors or promoters of companies cannot pledge scrips of the same company. All shares should be strictly in their marketable lots.

Documents Required Shares in Demat Form

Request form for transaction. Photocopy of dividend warrants of shares and units to be pledged. Covering letter from the company received by the shareholder at the time of transfer. Shares in Physical Form

Share certificates Signed and valid transfer deeds (not more than a month old) Photocopies of dividend warrants of shares and units to be pledged Allotment letter for rights or bonus shares from the company, or broker contract note specifying share certificate and distinctive numbers.

Covering letter from the company received by the shareholder at the time of transfer.

General Information

The amount of loan that can be availed under "Loans against Shares" depends on the form of shares - physical or demat. A minimum amount of Rs. 50,000 has to be taken under the scheme. As for the maximum amount, it is up to Rs. 10,00,000 for physical shares and up to Rs 20,00,000 for Demat shares.

The rate of interest that is charged on loan against shares usually ranges between 12% and 18%. An extra interest of 2% p.a. might also be charged on the amount by which your outstanding amount exceeds the limit and for the period it is in excess.

Apart from your own shares, you can also pledge the shares of your spouse, children (above 18 years of age), parents, brother(s)/sister(s), in laws, grandparents and grandchildren (above 18 years of age)

The amount of loan that you will get depends on the valuation of the security, applicable margin, your ability to service and repay the loan and other conditions, as applicable from time to time and from bank to bank.

The charges that are levied in case of loan against shares include processing fees (usually 1-1.5% of the loan amount) and, at times, documentation charges (varies from bank to bank).

In case of demat shares; around 65% of the amount of scrips pledged is available as overdraft. The percentage drops down to 50% if the shares are in physical form.

DEMAT ACCOUNT Definition Demat account is a safe and convenient means of holding securities just like a bank account is for funds. Today, practically 99.9% settlement (of shares) takes place on demat mode only. Thus, it is advisable to have a Beneficiary Owner (BO) account to trade at the exchanges. Bank Account Vs Demat Account S. Basis Of Bank Account Demat Account

No. Differentiation 1. 2. Form of

Holdings/Deposits Used for

Funds Safekeeping of money Transfer of

Securities Safekeeping of shares of shares actually

money Transfer actually (without

3.

Facilitates

(without handling money)

handling shares) A DP of choice (can be a bank) Mandatory (effective

4.

Where to open Requirement PAN Number Interest accrual of

A bank of choice

5.

Not Mandatory

from April 01, 2006)

Interest income is subject No interest accruals on to the applicable rate of securities held in demat interest AQB* maintainance is specified for certain bank No such requirement accounts account

6.

on holdings Minimum

7.

balance requirement

8.

Either

or

Survivor facility

Available

Not available

*AQB - Average Quarterly Balance

 Benefits Of Demat Account 1. A safe and convenient way of holding securities (equity and debt instruments both). 2. Transactions involving physical securities are costlier than those involving dematerialised securities (just like the transactions through a bank teller are costlier than ATM transactions). Therefore, charges applicable to an investor are lesser for each transaction. 3. Securities can be transferred at an instruction immediately. 4. Increased liquidity, as securities can be sold at any time during the trading hours (between 9:55 AM to 3:30 PM on all working days), and payment can be received in a very short period of time. 5. No stamp duty charges. 6. Risks like forgery, thefts, bad delivery, delays in transfer etc, associated with physical certificates, are eliminated. 7. Pledging of securities in a short period of time. 8. Reduced paper work and transaction cost. 9. Odd-lot shares can also be traded (can be even 1 share). 10. Nomination facility available. 11. Any change in address or bank account details can be electronically intimated to all companies in which investor holds any securities, without having to inform each of them separately. 12. Securities are transferred by the DP itself, so no need to correspond with the companies. 13. Shares arising out of bonus, split, consolidation, merger etc. are automatically credited into the demat account of the investor. 14. Shares allotted in public issues are directly credited into demat account of the applicants in quick time.

AS PER THE SEARCH BANKS PROVIDING LOAN AGAINST SHARES State Bank Of India

HDFC

ICICI

IDBI

Corporation Bank

Standard Charted

Axis Bank

Citibank

COMPARISON STUDY OF BANKS Citi bank & ICICI bank

PRODUCT NAME

Citi Bank Stock Power

ICICI bank Loan against Securities

BANK NAME INTEREST RATE

CITIBANK

ICICI

Most competitive rates levied NA on reducing balance method

PROCESSING FEES

Na

2000 on a/c opening and 1500 at renewal end of the year

MAXIMUM LOAN AMT

Get up to 50% of the market Minimum 1 lakhs value of securities as your Maximum 20 lakhs overdraft limit. Approx. 375 approved equity shares and mutual funds

MARGIN SECURITY

Na No security need

50% value of shares pledged except No security need except

shares pledged Bonus/dividends

shares pledged

Enjoyed by the owner of the Enjoyed by the owner of the shares shares

IDBI & SBI PRODUCT NAME IDBI LOAN AGAINST SBI LOAN AGAINST

SHARES INTEREST RATE PROCESSING FEES MAXIMUM AMOUNT NA NA

SHARES/DEBENTURES 14.50% NA You can avail of loans up to Rs 20.00 lacs against your shares/debentures.

LOAN Rs 20 Lakhs

MARGIN

Margin is 50% of the value You will need to provide a of the securities pledged margin amount of 50% of the

prevailing market prices of the shares/ non-convertible debentures being offered as security. (The market prices refer to the prices in the Stock Exchanges as reported in the Economic Times.) SECUTRITY Pledged shares Pledge of the demat against

shares/debentures

which overdraft is granted. BONUS/DIVIDENDS Earned by owner For owner of the shares

HDFC & CORPORATION BANK PRODUCT NAME HDFC Loan against Loan securities INTEREST RATE HDFC 2% of shares AXIS the 1% processing fees against Corp Cash dematShare Loan Corporation bank 0.50% of the limit sanctioned, subject to a minimum of Rs. 500/- and maximum of Rs. 5000/-

PROCESSING FEES Upto

overdraft limit with no other charges minimum of Rs.1250/at the time of setting up the limit or or

enhancement

annual renewal. (In case of mid-term

enhancement of limits, processing fees will be charged only on a prorata basis) MAXIMUM AMT LOAN overdraft of up to 50% 1 lakh to 20 lakhs of the market value of your Demat shares, in amounts ranging from Minimum Rs.

50,000/- ; Maximum Rs. 20.00 lakh

[ A declaration from

Rs. 50,000/- to Rs. 20,00,000/-.

the

borrower

indicating aggregate of loans against by our

shares him/her Bank

availed from /

Financial

Institutions should be obtained] MARGIN 50% of the market 50% of the value of Minimum 50% of the value of the shares the total shares market value of

pledged

shares pledged

SECURITY

No security needed Only pledged shares other thn the pledged shares

Pledge of fully paid up Equity Shares of approved companies, which are mandated for trading compulsory in Demat

form loan. DIVIDNED/BONUS Enjoyed by the owner Enjoyed of the shares by the Enjoyed shareholders by

owner of the shares

RANKING
5 4.5 4 3.5 3 2.5 2 1.5 1 0.5 0

RANKING

As per the findings and survey SBI declares to be the topers in providing loan against shares Axis bank has the lowest interst rate applicable for loan still stands out to be in the 3rd position

Rate of Interest
16 14 12 10 8 6 4 2 0 0-10lakhs 10-20lakhs

Banks rate of interest for loan against shares in % SBIs rate of interest is 14.50% for shares, debentures and bonds and 12.00% for NSC/KVP/RBI bonds etc

Axis rates fluctuates as per the market changes its lending rate is 12.75% for loan ranging between 1-10 lakhs and 12.50% for 10-20 lakhs Corporation bank has a lending rate of 14.00%p.a with EMI Customer Awareness Chart

60 50 40 30 20 10 0 SBI AXIS ICICI IDBI HDFC lowest highest

AWARENESS IN CUSTOMERS FOR LOAN AGAINST SHARES IN %

SBI states that 40% to 60% of its customers are aware of loan against shares Axis and ICICI say 25% to 50% of it customers are aware of loan against shares IDBI and HDFC 0 to 25% of customers aware of loan against shares

LOAN TENURE SBI

To be liquidated in maximum period of 30 months through a suitable reducing DP programme. In case of a default or if the outstanding is over Rs.20.00 lacs, the shares/debentures will be transferred in the name of the Bank. The initial tenure is for a year. At the end of the year, it will automatically be renewed for another year unless we receive intimation in writing from you not to do so.

ICICI

HDFC IDBI

A year Facility will be renewed after every 12 months depending on the performance of the account.

AXIS BANK CORPORATION BANK STANDARD CHARTED CITIBANK

Renewed after a year Facility will be renewed after every 12 months depending on the performance of the account. NA Subject to renewal after a year

LOAN AMOUNT GRANTED ICICI

Minimum loan amount is 1 lakh Maximum loan amount is 20 lakh The loan is applicable for a year and subject to renewal at the end of each year

SBI

You can avail of loans up to Rs 20.00 lacs against your shares/debentures. HDFC

Minimum loan amount: Rs. 50,000/Maximum loan amount is 20 lakhs in case of shares and bonds

IDBI

You can take a loan anywhere between a minimum of Rs 25,000 to a maximum of Rs 20.00 Lacs (subject) to Loan against shares/ Equity based mutual fund units not availed from any other bank). The limit depends on the valuation of the security, applicable margin, and your ability to service and repay the loan.The limit of Rs. 20.00 lacs is subject to the condition that Loan against Shares or Equity based Mutual Fund units has not been availed from any other bank. Other conditions will apply as applicable from time to time.

AXIS

Minimum loan amount is 1 lakh Maximum loan amount is 20 lakhs

CITIBANK

Get 50% of the market value of the shares or bonds approx 375 approved equitys

shares

and

mutual

funds

STANDARD CHARTED

An individual can avail a maximum limit of Rs.20 Lacs against the security of Shares / Equity Mutual Funds. This limit is higher for other securities.

Corporation Bank

Minimum amount 50000 Maximum amount 20 lakhs

PERCENTAGE OF CUTOMERS FOR LOAN AGAINST SHARES OUT ON TOTAL LOANS SBI states 5 % of its customers are for loan against shares because most of its customers are industrial loans Axis bank holds 20% to 25% of its customers, HDFC and Corporation bank are not even awre of thecustomers they hold for loan against shares out of total 100% loan borrowers IDBI has a lesser digit of customers for same MARKETING SRATEGIES SBI has a huge network so marketing is done via publicity.Neither of the banks go for marketing of such loan they have leads through demat accounts and very less walkins RECOVERY The overdraft if not rcovered after a specific tenure than the bank sells of the scrips at the prevailing market price for recovery

BENEFITS OF LOAN AGAINST SHARES Loan against financial instruments is a good option for short-term funds At a time when personal loans have become a norm, most consumers remain unaware of loans against securities, including shares, mutual funds and other financial instruments. Today, almost all the private banks and PSUs offer such loans in the market, with the rate of interest varying from 12% to 15% These loans are not only hassle-free but also offers immediate liquidity. Unlike other loans, you can easily avail of a loan against share and securities. But you should have some good scrips and valued securities. Generally, it takes a day or two to get it, The added advantage with such loans is that there are no pre-payment charges in most cases and an overdraft facility is also attached to them. Another advantage, analysts point out, is that the interest is only calculated on the amount you use. Personal loan and loan against property are generally EMIbased products, where interest is payable after the loan is disbursed. In case of loan against shares, the interest is charged only on utilisation of the limits sanctioned and only for the number of days it is utilised. However, most people who take a loan against share and securities, use it as a leverage mechanism and invest it back into the market, which one should avoid Analysts also believe that loan against shares and securities is a viable option if youre looking for short-term liquidity. But one should always keep a check on the amount utilised. After all, you would not like to lose your gains and end in a debttrap.

DIFFERENCE BETWEEN PERSONAL LOAN AND LOAN AGAINST SHARE Personal loan It is an unsecured loan The interest rate. It is high. The rates start at 12% and go upto 28%. Your shares and debentures are the security for your loan. Normally, when a loan is given, there is some security expected from you, the borrower. So you end up pledging your home, car, securities or gold. If you cannot pay back the loan, the lender can take any of the items you pledged. He just Lower rate of interest You can borrow around 40-60 percent of the value of the shares, with an upper cap of Rs 20 lakh if the security is equity shares. The rates are from 12 to 15% Loan against Security/shares It is a secured loan.

protecting himself. Guarantor is needed EMI is applicable Does not require guarantor or security There is no EMI charged interest on utilization of the amount

CUSTOMER FAQS How is the interest on my account calculated? (ICICI) In the overdraft account, interest will be charged only on the amount you draw and for the period that you draw. Interest will be charged on a daily basis, but will be debited to your account only once a month. What security/collateral do I have to provide? (ICICI) No additional security/collateral need to be provided, apart from the securities against which the loan is granted. Am I required to have a Demat Account with ICICI Bank? No, you can pledge your securities irrespective of whether you have a Demat Account with ICICI Bank or any other depository What are the loan tenure options? ( Icici) The initial tenure is for a year. At the end of the year, it will automatically be renewed for another year unless we receive intimation in writing from you not to do so.

What shares can I place as security? (SBI) You can pledge marketable lots of fully paid shares of blue chip companies. These shares should be highly liquid and traded regularly on the stock exchange. In the case of Sebimandated compulsory demat companies, the shares need to be dematerialized before being pledged with the bank.

Can I prepay the loan? You may prepay the loan, either partly or in full, at any stage, with no prepayment penalty .

What are the other benefits that I can get from my Overdraft Account ? Your Overdraft Account comes equipped with all the benefits associated with HDFC Bank's Current Account, such as PhoneBanking, NetBanking, BillPay and ATM facilities. What"s more, as a privileged Loan Against Securities customer, you are entitled to our International Debit Card free of cost. (only for the first holder)

CUSTOMER REVIEW I had taken a loan against my equity shares from IDBI Bank, Warden Road branch, Mumbai last year Now, since the values of the shares was slipping, I wanted to sell some shares and close the loan. My share was quoting at Rs.623 when I told them at 2.55 pm, a full 35 minutes before close of market hours, to sell the shares, but they did not sell the shares, citing lack of enough time to carry out the transaction. This by itself was not acceptable. Next day, I decided to see the rate and then confirm to them to sell the shares, which I did at about 10.30 am. However, despite my repeated attempts to find out when and at what rate they sold the shares, they did not inform me on phone or email about the sale. Then, at about 5 pm, they informed that they have sale orders from all over the country and hence could not sell the shares till market closure time. I was understandably, quite upset about the whole thing, as my experience with any other bank was not like this. Normally, they would take about 5 to 10 minutes to get your order executed. Then, surprisingly, the same staff called me and informed that the shares were sold at market closure time, at about Rs.599 per share, whereas in the morning and even later on during the day, the same shares were selling at about Rs.620 per share. Further, when they sent me the scanned contract note, it transpired that their internal subsidiary was the broker firm, whereas they had informed me earlier that they themselves handled the transaction. When I tried to verify the contract on NSEs site, I could not do so, as the number of digits given by them in the contract note was much lesser than the number of digits required by NSE, as per law. Despite asking them for the same by telephone, email and also complaining to the email address found on their website under CITIZENS CHARTER, till date, i.e. after about a week, I am yet to get the required details. Since I cannot verify on the NSE site after 5 days of the transaction, it means I cannot verify the details now, unless I go through some other, tougher process.
G.M. Srinivasa Bhat

BANKS HAVE STOPPED LOAN AGAINST SHARES SEVERAL banks have stopped issuing fresh loans against shares to brokers in the light of the recent turmoil in the stock markets. Bankers said they would like to be cautious at this juncture. Even for the outstanding loans, they are seeking additional collaterals. There is also no demand for funds due to bearish sentiment in the market. Bank of India, which has exposures in the capital market has suspended issue of loans to brokers. And does not provide loan against shares or securities Besides the existing collateral limits required from brokers, bankers have started demanding additional collateral to the tune of 80-100 per cent of the market valuation on securities as well as asking for property as collateral. Said one official of UTI Bank, ``in most cases, we are asking for more collateral in terms of increased value on securities as well as property.

SUGGESTIONS Banks should make loan against share available in major retail branches of the bank Banks should make the staff aware that loan against share exits in the market as staff member themselves are not aware of loan against share is provided by their banks. Rate of interest is not disclosed by either of the banks Nationalized bank like SBI manger is not even briefed with loan against shares general information so they should be trained in all the segment with some amount of information

CONCLUSION According to the study on loan against shares it can be concluded that it is the easiest and simplest method to acquire funds for business or personal use with less time incurred and quick sanction period It improves the liquidity There is no EMI levied making it hassle free Much better option than personal loans Helps in securing the shares converting it in electronic form by way of demat account SBI declares to be the bank providing the lowest rate of interest per as per the findings AXIS BANK has comparatively pleasing rate of interest It is approved within a short period of time not much paper work required Basic purpose of this report is to create an awareness of loan against shares because the staff member themselves of particular banks are not aware of product in their bank.

LOAN against SHARES (Securities) | Features & Advantages

Banks provide loan against shares which is advantageous as this helps you to keep your carefully made portfolio intact and get cash against it anytime you want. Each bank has their own list of approved securities (i.e., list of companies) so, if you own the shares of a company not listed with one bank you can go to another. Although, the shares held by you have to be in the physical form or in the demat form. Loan against shares is available in the form of an overdraft facility against the pledge of financial securities like shares/units/bonds. These shares can be owned by you (the borrower) or your immediate relatives (third party pledgers). The loan limit depends on the valuation of the security, applicable margin, your ability to service and repay the loan and other conditions as applicable from time to time A current account is opened in your name (initially for a year) and you are given a personalized cheque book. Like any other bank account you can deposit and withdraw money into/from your account and use host of other services provided by the bank. Some banks allow phone banking or issue an ATM card as well. You would have to pay interest for the amount and period for which your overdraft facility is utilized. Features/Advantages:

 o o o

Finance against Shares enables instant liquidity against shares without selling them. It takes care of all your investment as well as personal needs, meet contingencies, subscribing to primary issues, rights issues. Best for interim (short term) funding. Loan amount ranges from Rs.1 lac to Rs.10 lac (for physical) and up to Rs.20 lac (for Demat) For Demat usually 65% of the scrip pledged is available as overdraft and 50% if shares are physical. Generally physical shares are accepted in market lots only. There is a minimum and maximum number of scrip which are accepted by banks. It ranges from 1-20 although, for few banks there is no limit to maximum. Points to remember:

Consider other options to ensure that the benefits you derive are more than the cost you have to incur, and then go for it. Always keep the interest rate as the benchmark but remember that generating returns higher than the cost of the loan (14-17 per cent) on a sustainable basis is difficult. Investments in mutual fund units that are exempt from capital gains tax (under Sections 54EA/EB) are not accepted as collateral. Loans against mutual fund units are based on their NAV value. The base NAV could be the last closing NAV or the average NAV of the previous week. Compared with loans against shares, the extent of funding against mutual funds is generally lower, at 40-50 per cent of the base NAV. Single scrip lending is available against select scrip at higher margins (of 50%) as few banks have a specific list for single scrip portfolios. If a combination of scrips is pledged, then 40% of the market value is available as overdraft

Legal aspects of lending against shares

As the NBFC segment is booming once again, loan against shares is on an upswing. Most investors in the equity market find it economically viable to leverage their investment with borrowings, to attain higher rates of returns. Loan/lending against shares (LAS) is basically getting instant liquidity from ones investment without selling them, and, at the same time, leveraging the investment. All corporate rights and benefits attached to and accrued on the shares remain with the borrower and still he can avail loan against them. Usually, the loans are granted with a significant margin, and are rolled on a regular basis. The loans are normally secured by pledge of the shares funded. The shares may be either in physical or demat format though demat format is getting more common of late. Besides the pledge, the client usually gives a power of attorney to the lender permitting it to sell the shares to realize the lent amount. This article discusses the basic legal setup for LAS business. Who can grant? The entities which are engaged in LAS activities are generally NBFC-ND, non-banking nonfinancial companies, LLPs, and unincorporated lenders. NBFCs: The lending NBFCs whose principal business is acquiring shares, stocks or securities will fall under this category. The LAS can be granted by NBFC-ND-SI and NBFC-ND. However, they cannot lend against their own shares. Limitation Applicable To NBFCs For Extending LAS Based on section 295 of the Companies Act, 1956 and RBIs circular no. DNBS.PD/CC 94/03.10.042/2006-07 dated May, 8, 2007an NBFC cannot grant this facility to: Directors/their relatives Firms in which directors are partners/employees/manager or guarantor An individual in respect of which director is a guarantor Companies/firms in which directors hold substantial interest o Substantial interest for companies means the holding of a beneficial interest by an individual or

his spouse or minor child, whether singly or taken together, in the shares thereof, the amount paid-up on which exceeds Rs. 5 lacs or 10% of the paid-up capital of the company, whichever is less o Substantial interest for firms means the beneficial interest held therein by an individual or his spouse or minor child, whether singly or taken together, which represents more than ten per cent of the total capital subscribed by all the partners of the said firm Any company in India/outside where the flagship name reflects association with the NBFC. However, the above limitations are applicable to NBFC-ND-SI only and will not be applicable if the lending company is a private company Non-Banking Non-Financial Companies: The companies incorporated under Companies Act, 1956 which are not engaged primarily in financial business as mentioned in section 45IC of RBI Act, 1934 may start lending business without falling within the purview of NBFC. However, if the financial assets of a company are more than 50 per cent of its total assets (netted off by intangible assets) and income from financial assets is more than 50 per cent of the gross income, then the company will be a NBFC and all the lending provisions applicable to NBFC will apply to such companies. The criteria of income/assets are cumulative, that is, both the tests are required to be satisfied simultaneously as the determinant factor for principal business of a company. Though, there is no ambiguity in the fact that it is the primary activity carried on by the company which gives it a character and although the figures reported in the balance sheet reflects the business activity of the company, but the same cannot be the sole criteria to determine the character of a company. Unincorporated Lenders: There is no bar on unincorporated lenders engaging in financial business, including loans against shares. However, one may note sec 45S of the RBI Act. According to this provision, an unincorporated entity cannot accept deposits if it is engaged in financial business. Hence, as long as unincorporated entity is not accepting deposits, there is no bar against carrying business of loans against shares. Also, it is worthwhile noting the provisions of State Money-lending laws. There are money lending laws in different states for example, Karnataka Money Lender Act, 1961, The Punjab Registration of Money-Lenders Act, 1938, The Bombay Money Lenders Act, 1946, The Assam Money Lenders Act, 1934, The Bengal Money Lenders Act, 1940 and many more. These laws may require a moneylender to have a license before one may carry money lending business. Banks have been kept out of the purview of these Acts as the same are governed by RBI Directions in this regard. LLPs: Since LLPs are a new form of entity, there are very scanty regulations currently applicable to LLPs. LLPs are not companies, and hence, they are not regulated by NBFC regulations. Sec 45S of the RBI Act or sec 58A of the Companies Act are also not applicable to LLPs. Hence, there is virtually no restriction on LLPs engaging in LAS business. Applicable Rules and Directions to NBFCs If the lender is an NBFC, RBI Regulations applicable to NBFCs apply to the lender. Below, we discuss significant provisions. RBIs Fair Practice Code The company must frame and approve lending practices that comply with RBI fair lending practices code (DNBS (PD) CC No. 80 / 03.10.042 / 2005-06 dated September 28, 2006). The fair lending codes must be published on the website of the company and must cover the following: Transparent terms/clauses of loan agreement- The terms and conditions of the loan must be clear and it should not have any hidden meaning to misguide the borrower

 Disclosure of true rate of interest in the loan document- The loan agreement must be specific about the interest rates to be charged by the lender. Simple method showing interest calculation for the understanding of the client A policy regarding non-discrimination on grounds of race, sex, religion etc so as to be fair and reasonable to all customers must be framed by the lender KYC Norms The lender must evaluate the KYC norms before granting any loan. The general norms will include following: The lenders must develop a clear Customer Acceptance Policy laying down explicit criteria for acceptance of customers. The CAP must be in place to ensure that o No account is opened in benami or fictitious name o Necessary checks have been made to ensure that the identity of the customer does not match with any person with known criminal background or with banned entities such as individual terrorists or terrorist organizations etc. Documents for customer identity are in order or not: If an existing customer, then KYC required for customers o ID and address proof, in case of individuals o Certificate of Incorporation, MOA/AOA, Board resolution, PAN etc in case of corporate o For partnership firms, check registration certificate, if registered, address proof, name of all partners and their address proof, power of attorney on the name of the partner for signing on behalf of the firm o For trusts and foundations, check registration certificate, if registered, Power of Attorney granted to transact business on its behalf, Any officially valid document to identify the trustees, settlers, beneficiaries and those holding Power of Attorney, founders/managers/ directors and their addresses etc. Transactions must be reviewed and monitored periodically Risk Management- normal and reasonable activity of the customer is recorded so that the company has the means of identifying transactions that fall outside the regular pattern of activity. Corporate Governance Guidelines As per the requirement of corporate governance guidelines, the NBFCs whose asset size is 50 crores or more are required to have an audit committee. This committee will ensure the proper compliance of the RBI norms. In addition, the companies are also required to have Nomination Committees and Asset Liability Management Committees for ensuring appointment of directors and for understanding asset liability mismatch risk etc. Compliance with Prevention of Money Laundering Act and Rules In terms of PMLA Rules, the lender must ensure that the borrower is not in the list of individuals and entities, approved by Security Council Committee established pursuant to various United Nations' Security Council Resolutions (UNSCRs). The company is required to maintain and preserve the records if the transaction value exceeds Rs. 10 lacs and is of suspicious nature and must report to FIU-IND in this respect. How LAS Can Be Granted? Generally, the loans are granted by creating a pledge on the shares funded. In addition to the pledging of shares, the borrower normally gives a power of attorney in favour of the lender so that the lender can sell and realize the money lent. However, in case the lender is a broker, such power of attorney should not be accepted as the same will be in violation of circular no. NSE/INSP/2005/42 dated 9th December, 2005. The shares available for pledge may be in physical or demat form. Though after introduction of Depositories Act, 1996 demat form of shares available for pledge is most common. The shares held in physical form are accepted by the lenders with higher margin as physical shares involves

more risk and can only be pledged in market lots. RBI vide its various circulars has also put a threshold limit on the loan amount to be provided against physical shares by banks. Moreover, the interest rates charged on the pledge of physical shares are also higher than one charged on the pledged demat shares. The laws have many provisions for making easier the pledge of shares. Section 108(1C) and 108(B) of the Companies Act, 1956 provides for exemption from the requirement of pre-stamping of a transfer deed in case of pledge of shares to banks, financial institutions etc. Further, Regulation 58 of SEBI (Depositories & Participants) Regulation, 1996 lays down the manner of creating pledge over the shares. The general practice is: If a beneficial owner intends to create a pledge on a security he shall make an application to the depository through his participant. The participant shall make a note in its records of the notice of pledge and forward the application to the depository The depository, after confirmation from the pledge, shall within fifteen days of the receipt of the application create and record the pledge and send an intimation of the same to both the participants. On receipt of the intimation, both the participants shall inform the pledger and the pledgee respectively of the entry of creation of the pledge. If the depository does not create the pledge, it shall send along with the reasons an intimation to the participants. The entry of pledge may be cancelled by the depository if pledger or the pledgee makes an application to the depository through its participant. Any entry in the records of a depository should be evidence of a pledge or hypothecation.

ESOP Financing
Many companies are issuing Employee Stock Options Plan (ESOP) for retaining their key staff. An employee who has been awarded ESOP can avail loan against exercised shares. The ESOP funding is a loan facility offered against these shares allotted to employees. This facility is also used by many corporates to facilitate exercise of ESOP options by their employees. Features

Benefits

Loan available against shares allotted under ESOP Margin 10% of the purchase price or 50% of the market value of the shares whichever is lower Attractive Interest Rate Tenor 1 year with a option to renew at the end of term Loan Amount INR 2 Lacs to INR 50 Lacs Simple Documentation Available for selected listed corporate having strong fundamentals

Instant line of credit and interest is charged only on the amount utilized To take advantage of investment opportunity with small margin money Employee can create wealth in long run with appreciation in value of shares