When a business needs funds but the promoter or company does not want to sell its valuable investments, Loan Against Shares (LAS) can be an effective financing option. Under an LAS facility, eligible shares are pledged with the lender as security and the borrower receives funding against the value of those shares.
Tourism Finance Corporation of India (TFCI) offers Loan Against Securities as part of its lending portfolio. TFCI's current published terms provide a short-term facility against eligible equity shares, primarily for working-capital requirements. TFCI also identifies Loan Against Shares as one of its lending areas for eligible corporates and individuals.
This article explains the TFCI LAS facility, its eligibility, benefits, risks, documentation, application process, security requirements, and important points borrowers should understand before applying.
A Loan Against Shares (LAS) is a secured financing facility where the borrower pledges eligible shares to a lender instead of selling them.
For example, suppose a business promoter owns listed shares worth ?10 crore. Instead of selling those shares to raise working capital, the promoter may pledge eligible shares with the lender and obtain a loan against their value, subject to the lender's Loan-to-Value (LTV), security and eligibility criteria.
The borrower continues to have an economic interest in the shares, but the shares remain pledged until the loan obligations are discharged.
The key advantage is that the borrower can potentially unlock liquidity from an existing investment portfolio without immediately liquidating the investment.
Tourism Finance Corporation of India Limited (TFCI) is a specialised financial institution that finances projects and businesses across hospitality and several other sectors. Its current offerings include Loan Against Securities.
According to TFCI's currently published terms, its short-term Loan Against Securities facility has the following key features:
| Particular | TFCI LAS – Current Published Terms |
|---|---|
| Eligible Borrower | Company, LLP or Firm |
| Loan Amount | ?2 crore to ?25 crore |
| Purpose | Working Capital |
| Tenure | Up to 12 months |
| Repayment | Bullet repayment at the end of tenure |
| Interest Rate | 11% p.a. to 15% p.a., linked to TFCI MCLR |
| Processing Charges | 0.25% of loan amount + GST |
| Documentation Charges | 0.10% of loan amount + GST |
| Security | Pledge of eligible equity shares, guarantees and other stipulated documents |
| Minimum LTV | 50% |
| Prepayment | Nil, subject to 3 days' advance notice |
| Share Form | Dematerialised shares |
| Primary Use | Working-capital financing |
These terms are based on TFCI's currently published product information and may be changed by TFCI from time to time.
The quality and liquidity of the pledged shares are extremely important.
Under TFCI's published terms, the short-term LAS facility requires equity shares of eligible Group-I companies in dematerialised form, with a minimum market capitalisation of ?5,000 crore and a minimum LTV of 50%.
TFCI's broader business presentation also identifies LAS against eligible listed equity shares of Group-I companies and indicates LAS offerings for eligible corporate borrowers as well as individuals meeting specified credit criteria.
Therefore, borrowers should not assume that every listed share is automatically acceptable. The lender evaluates the security based on eligibility, liquidity, market capitalisation, volatility, valuation and its internal credit policy.
The basic structure is simple:
Eligible Shares ? Pledge with TFCI ? Security Valuation ? Loan Sanction ? Disbursement ? Interest/Repayment ? Pledge Release
For example:
If eligible shares have an acceptable value of ?10 crore and the applicable LTV is 50%, the potential funding capacity could be around ?5 crore, subject to TFCI's valuation methodology, credit assessment and sanction terms.
TFCI states that pledged securities are valued using the average of the last 180 days' moving average trading price and the previous trading day's closing price, with the lower value being used.
Eligibility depends on the borrower, security, purpose of funds and TFCI's credit assessment.
Borrower Constitution
Company
LLP
Firm
Eligible Shares
Shares must satisfy TFCI's eligibility criteria.
Shares should generally be in dematerialised form.
The security must meet applicable market-capitalisation and liquidity requirements.
Credit Profile
The borrower and relevant promoters/guarantors are subject to credit evaluation.
TFCI's broader presentation specifies BBB credit rating for certain corporate LAS facilities and a minimum credit score of 700 for its indicated individual LAS offering.
Clear Ownership
The pledgor must have ownership/control of the shares being offered as security.
The borrower must provide the required demat evidence.
Financial Strength
TFCI may evaluate the borrower's net worth, financial statements, existing debt and repayment capacity.
No Material Default
Existing defaults, regulatory issues, litigation or adverse events may affect eligibility.
Permitted End Use
The facility should be used for an approved purpose.
TFCI's published short-term product specifies working capital as the purpose.
The exact document list can vary depending on the borrower and transaction structure. Generally, borrowers may be required to provide:
Certificate of Incorporation
Memorandum and Articles of Association
Partnership Deed/LLP Agreement, where applicable
PAN and statutory registrations
Board resolutions
Constitutional documents
Audited financial statements
Profit & Loss Account
Balance Sheet
Cash-flow information
Existing borrowing details
Net-worth statements
Income-tax returns, where applicable
Demat account statement
Evidence of ownership of shares
Details of pledged shares
Pledge-related documents
Non-disposal undertaking
Power of Attorney as required
KYC documents
Net-worth statements
Personal guarantees, where applicable
Other documents requested during credit appraisal
TFCI specifically states that pre-disbursement requirements include KYC compliance, net-worth information, certified demat statements and completion/perfection of the share pledge and related security documentation.
The first step is to determine:
How much funding is required?
Why is the funding required?
Which shares are available for pledge?
What is the current value of those shares?
What is the existing debt position?
What is the repayment source?
The proposed shares are checked against TFCI's eligibility criteria.
This may include:
Market capitalisation
Group classification
Liquidity
Trading history
Share price volatility
Demat status
Ownership
Existing encumbrances
TFCI evaluates the borrower and transaction.
The assessment can include:
Financial performance
Net worth
Existing liabilities
Credit history
Business profile
Repayment capacity
End use
Promoter background
Security coverage
TFCI determines the value of the proposed security according to its applicable valuation methodology.
For the published short-term product, TFCI states that the pledged security is valued using the lower of the relevant 180-day moving-average trading price and the previous day's closing price.
If the proposal meets TFCI's credit requirements, the loan may be sanctioned.
The sanction terms may specify:
Loan amount
Interest rate
Tenure
Repayment structure
Security requirements
Conditions precedent
Covenants
Margin requirements
Reporting requirements
The borrower/pledger completes the required demat pledge process in favour of TFCI.
The lender's security is perfected before disbursement as required under the sanction terms.
The borrower executes the necessary:
Loan agreement
Pledge documents
Guarantees
Demand Promissory Note
Undated cheques, where required
Undertakings
Other security documents
TFCI's published terms include personal guarantees, a Demand Promissory Note, undated cheques and a Power of Attorney relating to the pledged shares as part of the stated security structure.
After completion of the applicable pre-disbursement conditions and documentation, the sanctioned amount can be disbursed according to the facility terms.
LAS is not simply a one-time collateral arrangement.
Because the value of listed shares changes every trading day, the borrower must monitor the security cover.
If the share price falls and the security cover falls below the required level, the borrower may need to:
Pledge additional shares, or
Repay part of the loan.
TFCI states that the borrower is responsible for monitoring and maintaining the stipulated security cover on a daily basis.
| Merits | Demerits |
|---|---|
| Allows borrowers to unlock liquidity without immediately selling shares | Share prices can fall sharply |
| Can provide working-capital funding against existing investments | Margin shortfall may require additional collateral |
| Shares can remain an investment while being pledged | Lender may sell pledged shares under specified trigger/default conditions |
| No need to liquidate the entire investment portfolio | Interest cost applies |
| Can be useful for businesses with strong marketable securities | Facility may have a relatively short tenure |
| Potentially faster than asset-backed financing involving property, depending on transaction | Bullet repayment can create a significant maturity obligation |
| Does not necessarily require creation of a mortgage over property | Additional pledge, DP, brokerage and related charges may apply |
| Suitable for borrowers having eligible listed shares | Eligibility of shares is restricted by lender policy |
The biggest advantage is that an existing investment portfolio can potentially be converted into business liquidity without selling the shares.
Instead of liquidating shares, the borrower can pledge them as collateral.
This can be particularly useful when the borrower wants to retain the investment exposure.
TFCI's published short-term LAS product specifically provides funding for working-capital requirements.
The currently published short-term product provides loans between ?2 crore and ?25 crore, making it relevant for businesses requiring substantial funding.
The primary security is eligible pledged equity shares rather than necessarily creating a mortgage over immovable property.
TFCI currently states that prepayment charges are nil, subject to three days' advance notice for partial or full prepayment.
The biggest risk is volatility.
If the market value of pledged shares declines significantly, the borrower may need to provide additional security or repay part of the loan.
If security coverage falls below the stipulated level, additional shares or repayment may be required.
TFCI's published terms provide for restoration of the required security cover within two working days after a breach.
If the borrower fails to restore the required security cover or defaults under applicable trigger conditions, TFCI reserves the right to sell pledged shares according to the facility terms.
The published short-term facility provides for repayment at the end of the tenure. This means the borrower must plan the repayment source carefully.
Not every listed share may qualify as collateral.
Apart from interest, borrowers may have to bear applicable:
Processing charges
Documentation charges
Stamp duty
DP charges
Pledge/revocation charges
Demat transfer charges
Brokerage
Bank charges
TFCI specifically lists these additional security and transaction-related charges in its published terms.
Borrowers should understand the lender's collateral protection mechanism before taking an LAS facility.
According to TFCI's currently published terms:
If the required security cover falls below the stipulated level, the borrower may need to provide additional shares or repay the shortfall.
If the security cover is not restored within the specified period, TFCI may have the right to sell pledged shares.
A 30% fall in the market price from the price considered at disbursement is one of the stated sale triggers.
Certain trading or surveillance-related events can also trigger sale rights.
Defaults and cross-defaults can lead to recall and enforcement actions.
TFCI may also recall the facility in specified circumstances such as significant deterioration in security eligibility or credit profile.
These provisions make it extremely important for borrowers to maintain adequate liquidity to meet potential margin requirements.
| Parameter | TFCI LAS | Traditional Business Loan |
|---|---|---|
| Primary Security | Eligible pledged shares | May involve property, receivables or other assets |
| Asset Required | Eligible marketable securities | Depends on lender/product |
| Market Risk | High | Generally lower direct market-value risk |
| Margin Requirement | Yes | Product dependent |
| Top-Up Risk | Yes, if collateral value falls | Depends on collateral structure |
| Property Mortgage | Generally not the primary security | May be required in secured loans |
| Working Capital | Yes | Yes |
| Loan Size | Current published TFCI LAS: ?2–25 crore | Depends on lender |
| Tenure | Current published short-term TFCI LAS: up to 12 months | Can be longer depending on product |
| Repayment | Bullet under current short-term terms | EMI/bullet/structured, depending on facility |
| Main Risk | Share-price volatility | Repayment/business/collateral risk |
TFCI LAS may be worth considering for businesses or eligible borrowers who:
Own substantial eligible listed shares.
Need short-term working capital.
Do not want to immediately sell their investments.
Can comfortably manage margin requirements.
Have a strong financial profile.
Have a clear repayment plan.
Understand the risks associated with market-linked collateral.
It may be less suitable for a borrower who has limited liquidity and would struggle to provide additional collateral if share prices decline.
A good credit history can support the overall credit assessment.
Maintain audited financial statements, tax records and current debt details.
Highly liquid, eligible securities generally provide a stronger collateral profile.
Do not borrow the maximum possible amount if doing so leaves little cushion against market volatility.
Clearly explain how the funds will be used and how the facility will be repaid.
LAS borrowers should ideally maintain liquidity for unexpected margin requirements.
Not necessarily. It depends on the borrower's circumstances.
If the borrower expects the investment to remain valuable and needs temporary liquidity, pledging shares can be attractive.
However, if the borrower cannot tolerate margin calls or believes the shares may fall significantly, selling some investments may sometimes be financially more appropriate.
The decision should consider:
Loan Cost + Market Risk + Tax Impact + Investment Outlook + Repayment Capacity
A professional financial assessment should be undertaken before making the decision.
Loan Against Shares can be a powerful business-financing tool when used carefully. Instead of selling valuable investments, eligible borrowers can pledge shares and access liquidity for working capital.
TFCI's current Loan Against Securities offering provides a structured route for eligible borrowers, with the published short-term facility ranging from ?2 crore to ?25 crore, up to 12 months, and secured against eligible shares subject to TFCI's valuation, LTV and other conditions.
However, LAS is not risk-free. The biggest consideration is share-price volatility. A fall in the value of pledged securities can result in a requirement to provide additional collateral or repay part of the loan. In certain circumstances, the lender can enforce its rights over the pledged securities.
Therefore, borrowers should evaluate not only the interest rate but also the LTV, margin requirements, repayment structure, security triggers, charges and exit strategy before taking a Loan Against Shares.
TFCI Loan Against Shares is a secured financing facility under which eligible shares are pledged as security to obtain funding. TFCI's published short-term Loan Against Securities facility is intended for working-capital requirements.
TFCI's currently published short-term Loan Against Securities terms specify a loan amount between ?2 crore and ?25 crore, subject to eligibility, valuation, LTV and credit approval.
The current published short-term facility has a tenure of up to 12 months and provides for bullet repayment at the end of the tenure.
TFCI's published short-term terms specify eligible equity shares of Group-I companies in dematerialised form, with minimum market capitalisation requirements and a minimum LTV of 50%. The exact eligibility should be confirmed with TFCI before applying.
Yes. TFCI's published short-term LAS terms identify companies, LLPs and firms as eligible borrower categories, subject to the lender's other conditions.
If the value of the pledged shares falls and the required security cover is breached, the borrower may need to pledge additional shares or repay part of the loan. TFCI's published terms also specify circumstances in which it can sell pledged securities.
No. In an LAS facility, eligible shares are pledged as collateral rather than sold. However, the lender obtains rights over the pledged securities as specified in the loan and pledge documents.
Typical requirements may include KYC documents, constitutional documents, financial statements, net-worth statements, demat statements, proof of share ownership, board resolutions, guarantees and pledge-related documentation. TFCI's pre-disbursement conditions specifically include KYC, net-worth information and certified demat statements.
TFCI's currently published short-term terms show an interest rate of 11% to 15% per annum, linked to TFCI MCLR. The actual rate applicable to a particular borrower will depend on the sanctioned terms.
LAS can be useful, but it carries market-related collateral risk. If the value of pledged shares falls substantially, the borrower may need to provide additional security or repay part of the loan. Therefore, borrowers should maintain adequate margin and have a clear repayment strategy before using LAS for business financing.
CA Vikas Jain - Our Mentor
9863-02-02-02