ED raids can hit Manappuram Finance hard

The Enforcement Directorate’s (ED) recent investigations against Manappuram Finance managing director and chief executive officer (MD & CEO) VP Nandakumar could lead to a further correction in the share price of the gold loan NBFC, and affect its ability to raise funds, analysts said.

According to rating agency Fitch, searches by the ED at Manappuram Finance’s offices highlight the complexity of the country’s corporate governance landscape. Such searches may not lead to further regulatory action, but the investigation itself raises reputational risk that could tarnish a lender’s business prospects and constrict funding access due to reduced market confidence, potentially affecting an issuer’s credit profile, even if no wrongdoing is identified

After conducting raids at six locations last week, the ED had frozen Rs 143 crore of Nandakumar’s assets, including eight bank accounts, investment in listed shares and shares of Manappuram Finance, for alleged violation of the Prevention of Money Laundering Act, 2002.

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The ED said it found evidence regarding alleged money laundering and large-scale cash transactions in the form of public deposits, done by Nandakumar, through his proprietary firm, Manappuram Agro Farms (MAGRO) without the approval of the Reserve Bank of India.

“The outstanding illegally collected deposits which are the proceeds of the crime have been detected to be Rs 143 Crore. When the RBI detected the same and directed to return the amount to depositors, the accused (Nandakumar) have responded to RBI that they have returned the money. But ED investigation revealed that there is no proof of repayment or no KYC of the depositors,” a release by the ED said.

During a rare conference call on May 5, Nandakumar said he would approach the Kerala High Court to seek a stay on the ED’s investigation and unfreezing of assets seized by the investigation agency. Nandakumar did not immediately respond to calls from FE for comments on this story.

As per Fitch, though India has set minimum governance standards for listed corporates, and regulatory requirements for NBFCs have also been made stricter in recent years, the prevalence of founder- and family-driven corporations can concentrate decision-making, and alignment of interests among key company decision-makers may be skewed in favour of equity-holders.

“Fitch had identified a history of non-compliant activities as a weakness in MFIN’s (Manappuram Finance) credit profile and assigns ESG Relevance Scores of ‘4’ for MFIN’s customer welfare practices and governance structure, which is weaker than the average of ‘3’ among peers in our portfolio of Indian non-bank financial institutions,” the agency said.

Any new findings from the ED investigations or negative market response could affect Manappuram Finance’s credit profile, the rating agency said, adding that significant adverse disclosures could lead Fitch to reassess corporate governance, execution and risk controls, and may also prompt regulatory action that could weaken the NBFC’s business profile.

As per Cyril Charly, research analyst at Geojit Financial Services, though the ED said it has received some evidence of misappropriation of funds, the NBFC’s management in the conference call last week clarified that both the regulators—RBI and Sebi — had already inspected the matter.

“We will have to look into the actions by ED, though presently there seems to be no fundamental risk associated with the company. However, if it escalates, these developments may affect their ability to raise funds… Until things are resolved, we can expect a lot of uncertainty in the stock,” Charly said.

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Shares of the NBFC have taken a beating following the raids. From trading at nearly Rs 130 apiece on the BSE on May 2, the stock closed at Rs 115.50 on Thursday.

Further, as per a senior analyst at a rating agency, the ED’s raids come at already challenging times for Manappuram Finance, when it is unable to grow its core business of gold loans in FY23, mainly on account of stiff competition from banks. According to its Q3 investor presentation, the NBFC’s total gold AUM moderated to Rs 18,600 crore as on December 31, lower 9% YoY and 3% on a sequential basis. The NBFC is scheduled to announce its Q4FY23 earnings results on Friday.

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