IIFL Finance shares surge 10% after Fairfax commits $200 mn liquidity support

Breaking its two-session losing spree, shares of IIFL Finance surged as much as 10% to hit the upper circuit at ₹421.05 apiece on the BSE, a day after Fairfax India Holdings Corporation announced its commitment to provide liquidity support worth $200 million to the company, amidst the Reserve Bank of India's (RBI) ban for issuing gold loans. The stock of the Mumbai-based financial services company has fallen 35% following the apex bank's directive.

Notably, Fairfax's commitment to liquidity support has led to a sharp recovery in the stock. The scrip opened higher at ₹382.20, up 1.88%, as against the previous closing price of ₹382.80. At 10:41 am, the share price of the company was trading 9.54% at ₹419..30. In contrast to this, the broader BSE Sensex was trading almost flat at 74,085.86.

The market capitalisation of the financial services company stood at ₹15,907.85 crore with more than 10.51 lakh shares exchanging hands on the BSE, as against the two-week average of 0.59 lakh shares. At present, the share price of the company is trading 40.7% lower than the 52-week high of ₹704.20, which the company touched on October 16 last year. The company hit a 52-week low of ₹382.80 on March 6, 2024, thus hitting lower-circuit. The stock exchange, on March 6, revised the lower circuit limit from 20% to 10%.

"We have been long-term investors in the IIFL group of companies and have full trust and confidence in the company's strong management team led by Nirmal Jain and R Venkataraman. We are confident that Nirmal and Venkat will take corrective actions to meet and exceed RBI's compliance standards," says Prem Watsa, Chairman of Fairfax India.

According to Nirmal Jain, MD and founder, IIFL Finance, the company is committed to complying with RBI's directives and "growing the business under the regulator's guidance on the strong foundation of compliance, risk management, and fair practices."

On March 4, the apex bank asked the financial services company to stop sanctioning and disbursing gold loans with "immediate effect". The central bank raised material supervisory concerns in IIFL Finance's gold loan portfolio. The company can, however, continue to service its existing gold loan portfolio through the usual collection and recovery processes.

As per the apex bank, an inspection of the company, carried out by the RBI found certain material supervisory concerns in its gold loan portfolio. These issues included serious "deviations in assaying and certifying purity," and the "net weight of the gold at the time of sanction of loans and at the time of auction upon default; breaches in loan-to-value ratio; significant disbursal and collection of the loan amount in cash far over the statutory limit; non-adherence to the standard auction process; and lack of transparency in charges being levied to customer accounts, etc."

Following RBI’s order, foreign brokerage Jefferies downgraded the rating of the stock from 'Buy' to 'Hold,' saying that the RBI’s action would hurt earnings "due to the rapid unwinding of the profitable gold loan book".

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