IIFL Finance Shares Drop on RBI Ban and Jefferies Downgrade

In a significant move that rattled investors, IIFL Finance's stock plummeted by 20% to hit a yearly low of Rs 382.80. This sharp decline was set off by the Reserve Bank of India (RBI) imposing a ban on the company, preventing it from issuing or disbursing gold loans, as well as restricting the sale or securitization of its existing gold loan assets.

The drastic fall in share price was witnessed on Wednesday, March 6, when the stock hit the lower circuit in the stock market, preventing it from falling further within the trading session. The sell-off was accompanied by a significant increase in trading volumes, substantially higher than the bi-weekly average.

As a consequence, IIFL Finance's market value on the Bombay Stock Exchange (BSE) sharply decreased, with its market capitalization observed at Rs 14,603.17 crore.

Impact of the RBI Ban and Jefferies' Assessment

IIFL Finance faced a 'double downgrade' from global brokerage firm Jefferies, which shifted the stock's status to 'hold' from 'buy.' Jefferies also slashed the target price for IIFL Finance by a notable margin, suggesting a downside potential that worried investors.

The RBI's strictures, according to Jefferies, are expected to severely dent the NBFC's profitability due to their profitable gold loan segment taking a hit. The uncertainty surrounding the duration of the ban only adds to investor apprehensions, with earnings projections indicating significant declines.

Company's Response to the RBI's Actions

IIFL Finance's management has responded to the RBI ban, ensuring investors that the concerns raised were procedural and operational rather than ethical or governance-related. The company plans to engage in discussions with the RBI and conduct a special audit to address the issues raised. The management emphasizes that while there is currently no direct impact on their loan book, unresolved issues might have future implications.

No fines have been levied on IIFL Finance, which the management was quick to point out, seeking to assuage the concerns of stakeholders and investors alike.

The Reason Behind RBI's Restrictive Measures

The RBI's actions came as a result of identified discrepancies in IIFL's gold loan operations, which included deviations from standard procedures for ensuring the purity and weight of gold, breaches in loan-to-value ratios, irregularities in cash disbursals and collections, and opaque charges on customer accounts. These findings highlight significant regulatory breaches and their adverse effects on customer interests. The ban set by the RBI was instated with immediate effect, although IIFL Finance is permitted to maintain its existing gold loan operations.

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