IIFL Finance says Watsa’s Fairfax to invest up to $200 mn in liquidity support

Fairfax held a 15.1% in IIFL Finance as of December.

“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 $200 million of liquidity support on terms to be mutually agreed and subject to applicable laws, including regulatory approvals (if any),” IIFL Finance said in a stock exchange filing on Wednesday.

Prem Watsa, chairman of Fairfax India, said the company had been long-term investors in IIFL and had “full trust and confidence” in the company’s management, and that it would “take corrective actions to meet and exceed RBI’s compliance standards”.

The Canadian investment firm, led by India-born Prem Watsa, first invested in IIFL in 2011, when it acquired a 9% stake through Hamblin Watsa Investment Counsel Fund. 

In July 2015, Fairfax India made a voluntary offer to buy a 26% stake in IIFL for ₹1,621 crore, picking up an additional 21.85% stake. The group also had an economic interest of another 5.15% through derivative instruments. 

Fairfax’s total shareholding in IIFL stood at 35.7% as of March 2016. Over the years, it has divested some of its stake in the company.

On Monday, RBI barred IIFL Finance from disbursing gold loans citing concerns including serious deviations in assaying and certifying the purity of gold.

A day later, the IIFL Finance stock opened 20% lower on the bourses as investors dumped its shares.

During an analyst call on Tuesday, the management of the non-bank lender ruled out any significant impact on profitability in the near term because of RBI’s action. 

With liquidity of ₹4,000 crore at the group level, the IIFL management assured that it did not envisage any liquidity-related issues as it would continue to recover dues from existing customers.

The management also emphasised that there were no corporate governance issues in RBI’s observations. “These (the points raised by the regulator) are operational issues, which will be addressed with utmost sincerity by the company,” IIFL said.

Analysts at Jefferies India Pvt. Ltd, however, have downgraded their recommendation on the IIFL Finance stock to ‘hold’ from ‘buy’. 

“RBI’s restriction on disbursing gold loans due to material supervisory concerns should dent earnings due to rapid unwinding of profitable gold loan book (32% of assets under management), lower co-lending income and potentially higher CoF  (cost of funding). Timing of lifting of the ban is uncertain, but assuming ban stays for 9 months, we cut FY25-26E EPS by 26-27% and ROE by 460-480 bps,” the the Jefferies analysts said in a report on Tuesday.

On Wednesday, IIFL Finance shares were down 20% at ₹382.20 apiece on NSE.

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Published: 06 Mar 2024, 11:41 AM IST