Share sale by large investors in Paytm, IIFL and Edelweiss before regulatory rap

Between January and May, the Reserve Bank of India (RBI) slapped business curbs on the three financial companies after spotting various malpractices, including evergreening of loans, inadequate KYC checks and governance issues. Ahead of the regulatory action, Mohnish Pabrai, Prem Watsa and Softbank sold a significant percentage of shares in Edelweiss, IIFL and Paytm respectively.

While there is no clear link between the regulatory action and the share sales, one proxy advisor termed it as "odd", and another said the market regulator should find out why they sold their shares.

Pabrai, a seasoned India-born American investor, owned 7.08% stake in Edelweiss at the end of December 2023. Between 8 February and 3 April, he sold 3.83% at an average price of ₹72.03 a share for ₹261 crore, according to a Mint analysis.

Less than seven weeks after Pabrai cut his Edelweiss holding by half, RBI on 29 May restricted businesses of its lending and asset reconstruction arms, citing concerns about its lending and accounting practices.

Also read: Paytm: Loan distribution business needs to hold the fort

Edelweiss shares plunged 11.8% to close at ₹68.35 on 30 May, a day after the regulatory action. The shares are down 10.34% as of 7 June.

Pabrai, who now owns 3.24% of Edelweiss, said he was unaware of any regulatory action before undertaking the transaction.

“We were not aware of the RBI action until we read it in the media, and we have no further comment," said a spokesperson for Pabrai, when asked if he anticipated any regulatory challenges.

RBI's action

The sale of IIFL shares by Prem Watsa, founder of Fairfax Financial Holdings, the Toronto-based financial services firm, and whose net worth is pegged at $1.9 billion by Forbes, also coincided with the regulatory action.

Fairfax India Holding’s wholly owned subsidiary FIH Mauritius Investment owned 20.18% of IIFL Finance until 21 December 2023. On 22 December, FIH Mauritius sold 5.66% shares at an average price of ₹554.6 a share, translating to about ₹1,200 crore, according to an analysis by Mint.

On 4 March, RBI barred IIFL Finance from sanctioning and disbursing gold loans, after its audit found material concerns in the non-banking finance firm’s gold loan lending business.

The next day, shares of IIFL Finance tumbled 20%. From the end of trading on 4 March and 7 June, IIFL shares are down 18.5%.

An email sent to Watsa, who owns 15.12% in IIFL Finance, went unanswered.

To be sure, immediately after the RBI action, Watsa had announced that he would invest up to $200 million in the company, as the largest investor tried to assuage investor concerns on liquidity concerns.

In addition to IIFL and Edelweiss, One97 Communications Ltd, which runs Paytm, and JM Financial Ltd have faced RBI’s ire in 2024.

Read this: Evergreening, circumventing: Why RBI slapped curbs on Edelweiss firms

Paytm fiasco 

On 31 January, RBI directed Paytm Payments Bank, the wholly-owned subsidiary of One97 Communications, to stop all forms of banking services within a month.

Between 19 December and 20 January, Softbank, the third-largest investor in One97, sold 2% of its holding, at an average price of ₹680.38, with the Japanese tech investor earning ₹865 crore. Softbank sold another 2.17% worth ₹1085 crore between 23 January and 26 February.

Shares of Paytm are down 49.9% since the regulatory action on 31 January.

Softbank declined to offer a comment. However, an executive privy to its decision said on condition of anonymity that the investor's approach is to sell shares within three years of a company going public, and its stake sale in Paytm over the last few months was not triggered by regulatory action.

At least two proxy advisory firms find the share sale by the largest investors in three of the four companies odd.

“Is it odd? Sure. But let's understand it better. All communication RBI has with these companies is confidential. It's only when RBI discloses the regulatory action it has taken that the investors get to know. That leads to volatility and there is a sharp drop in share price. This entire thing can be avoided if there is a communication or disclosure made the first time a regulator starts communicating with a company," said Amit Tandon, founder and managing director at proxy advisory firm Institutional Investor Advisory Services India Ltd (IiAS).

Also read: SoftBank’s $118 Billion Arm Problem

“A parallel is what happens between the pharma companies and the US Food and Drug Administration (FDA). That allows shareholders to factor in all the risks," said Tandon.

"RBI was in discussions with all the companies for many months before the disclosures were finally made. For now, it is difficult to say that any of these investors had any insider information that made them cut their holdings," said Shriram Subramanian, founder and managing director of proxy advisory firm InGovern Research. "Nonetheless, the market regulator Sebi should engage with these investors and ask what triggered these investors to sell their stake."