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| TIPS: SHARE LOAN |
1.Paper Tiger Predator
2: What do you do with a loan?
3: Where do I get the loan?
4: What are the criteria for getting a loan?
5: What's the process and time involved?
6: What are processing charges and rate?
7: How does bank value your asset?>
8: Dispose pledged shares
9: Any freebies?
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The paper tiger predator
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This for those who are active on the stock markets. Are you sitting on some shares, biding your time to sell them off or waiting for them to appreciate? If you do, all we can say is that you are a bad funds manager. The shares in your possession are no paper tigers for leveraging your initial investment in them for a second round of investments to help you make money all over again.
The question now is: How will you leverage your initial investment in shares, many times over? The answer isn’t too tough — take a loan for re-investment purposes. One can raise as much as Rs 1 million in the case of physical shares and upto Rs 2 million in the case of dematerialised shares.
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What do you do with the loan, if and when you get it? |
Returns of a MINIMUM 50 per cent are possible with a payout of just 15-18.5 per cent on a loan taken! Are we talking through our hat? No chance. The least we can be accused is of sensationalising the ordinary, but that’s how attention gets attracted to mundane things in life.
How does one achieve this? Investing the money in another asset like a car, two-wheeler or similar self-consumption purposes isn’t a prudent financial decision. There would be a mismatch of funds as the asset is being put to financing consumption — a durable asset, but consumption expenditure nevertheless. Generating cash flows is important because the loan has a cost and in the barest minimum this cost has to be covered. Therefore, if the idea is to make more money from this loan then it has to be re-invested in a productive asset. All pointers would lead to channeling the money once again into the secondary market or subscribing to a good issue in the primary market.
The advantage of having money to play in the stock market during a bull run is pretty obvious. But can this be a good tool during a bear phase? Yes, while a bear run reduces shares to a mere scrap of paper, pledging it with a bank and raising money would make better sense, if….IF one is able to find a good investment avenue to generate returns on the loan amount.
There is an alternative available in the primary market as well. So, say you invest in the primary market in an IPO and the par value offering lists at Rs. 15; the return will be a huge 50 per cent over a period of just around four months. Considering the interest rate you pay (15- 18.5 per annum), the spread is evident and it is a win- win situation all the way. In the primary market, some of the better offers during the last 1year, such as yielded returns exceeding 100 per cent in a year's time. The idea should be to make a quick exit from the scrip once it is listed without locking up one's funds. The same holds for forays into the secondary market. The KEY POINT in all this exercise of forays into the primary or secondary market is to select the RIGHT SCRIP. Having you got all starry-eyed with a healthy dose of pessimism about what leveraging your shares can do, we come to the nitty-gritty details of the process of getting a loan, how volatility affects your loan value through the value of your shares among other things.
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Where do I get the loan |
Almost all the foreign banks operating in the retail sector and a few nationalised banks offer this service of `loans against shares' under fancy names like LADS, Cancash, Moneyequity, Stock power depending on which bank you go to. The schemes they offer are roughly identical with a marginal difference in the interest rates charged.
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What are the criteria for getting a loan
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There are a number of criteria, which have to be fulfilled:
- Only selected shares allowed — Every bank has an approved list of securities (not more than 500 scripts find a place in the list) against which it lends of approved securities. So, any potential borrower has to be a holder of one of the scrips that are part of the bank’s list.
- Type/quality of scrips — Banks have a margin of 50 per cent for physical scrips and 35 per cent for demat scrips.
- Your share portfolio/ max. no. of companies accepted — Banks are finicky about lending against single share portfolios. Some like Standard Chartered and Citibank do. Others require a minimum of 3 shares in the portfolio offered as security. Of course, where a bank lends against a single share portfolio, it imposes a higher margin. Again, within the portfolio, there are norms regarding weightage of any one scrip. Some banks manipulate the margin requirements based on the weightage of the portfolio. In the case of Standard Chartered, where one scrip exceeds 50 per cent of the total portfolio value, the margin will be 60 per cent as against the normal 50 per cent.
- Ownership — For most of the banks, you can pledge your own shares or those belonging to any of the following:
- Your spouse
- Your children (above 18 years of age)
- Your parents
- Your brother(s)/sister(s)
- In Laws
- Grandparents
- Grandchildren (above 18 years of age)
Many banks do not accept third party shares. So check out
the individual schemes at myiris.com loan
section.
- Eligibility — The shares should be fully paid up to be
eligible for loans. Scrips in the name of Corporates, minors, Firms, HUF, and
NRIs will not be eligible for finance under this scheme. Individuals cannot
pledge scrips of companies of which they themselves are
directors/Promoters.
The 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.
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What’s the process and time involved in obtaining
loans |
The borrower has to execute a transfer deed along with the
certificates. While some banks require the borrower to transfer the shares in
the name of the bank some others waive this requirement. Few banks require a
power of attorney in favour of itself from the borrower. This is to take care of
cases where the transfer deed lapses after the record date. Another major
requirement is that the shares have to be in market lots so that bank can easily
dispose them of in the market should the eventuality arise. Market lots can vary
from scrip to scrip — 5, 10, 50 or 100 — in the case of physical scrips and 1 in
the case of demat scrips.
Normally, the following documents are required:
- Transfer Deeds
- Demat Pledge Forms
- Pledging of Physical shares
- Proof of Residence
- Proof of Identity
- Attestation of Borrower's and Guarantor's signatures as per
Banks format
- Account opening form to be signed by Account holder
- Power of Attorney
Though most banks claim that they process the documents
expeditiously, enquiries with borrowers reveal that it takes typically anything
from a week to a fortnight for the whole process to be completed.
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What are processing charges and rate of interest on the loans |
For most of the banks, interest rate range varies from 15% ( IDBI Bank charging the lowest ) to 18.5% (standard chartered charging the highest). The borrower is given a cheque book and the operations are just like any other overdraft account. Normally, interest is calculated on a daily basis and charged only for the amount and period during which you utilize the funds. This applied every quarter. You will also be charged an additional 2 % interest p.a. on the amount by which your outstandings exceed the limit and for the period it is in excess.
As part of their processing fee, banks usually charge 1-1.5 per cent on the loan amount sanctioned. However, if you are an existing customer of the bank, the processing charges might be lowered. Besides the processing fees, one might have to pay documentation charges which varies from bank to bank.
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Given market fluctuations in share prices, how does the
bank value your assets? |
ALL BORROWERS HAVE TO KEEP THIS FACT UPPERMOST IN MIND WHEN GOING FOR A LOAN.
The value of the underlying asset is subject to fluctuations depending on the state of the market and other variables. Depending on an upward or a downward movement in the share value, the bank revalues the portfolio. Valuation of portfolios is done on a regular basis by the bank, the periodicity ranging between fortnightly valuation to monthly valuation. If there is a downward revision in the portfolio, the bank gives the borrower the option of either a lower borrowing limit or a fresh lodgement of some approved securities to make good the erosion in the portfolio.
In the case of an upward revision in the portfolio, the bank grants an enhancement of limits subject to certain conditions.
In case the company whose shares are pledged with the bank declares a bonus or a rights issue, the portfolio value is adjusted by the bank thus upping the drawing power changes accordingly.
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What happens in case you want to dispose those pledged
shares?
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You can simply replace the share with another approved one for a small charge. The borrowing power will not alter, provided the replacement is equal to the original. Some banks charge a fee as a rule everytime a withdrawal is made. The fee typically ranges from Rs. 100 to Rs. 250 per withdrawal.
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Are there any freebies?
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There are advantages to becoming a ‘Loans against Shares’ customer. For eg. if one has a demat account with IDBI Bank, one can avail of 0.5 per cent discount in processing charges on taking a loan against shares otherwise a normal processing charge of 1.5 per cent applies for others. This way, many banks give you a host of value added services, which depending on the bank include:
Concessional rates on your depository account.
Concessional rates on various Loan Products
Free access to 24 hour ATM facility
Free Access to 24 hour Bank by Phone facility
You can lodge or withdraw your shares, 6 days a week.
You get all dividend, bonus and rights issues even while the
shares are with the bank.
You pay interest only on the amount utilised.
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