PE-backed Muthoot Finance seeks to raise $218m

The NCDs would be listed on both the National Stock Exchange of India and the Bangalore Stock Exchange, with a yield of up to 12.25% per annum. Muthoot will use the proceeds for debt repayment and increasing its market share - it added 250 branches in the first quarter of 2011 and wants to add another 650 branches by the end of the year. The company is expecting loan book growth of INR80 billion for the current fiscal year.

Muthoot is expected to sell another 5% equity stake in the next two years to meet domestic regulatory requirements that the promoters of a listed company offload at least 25% in the open market. It has already raised INR9 billion this year by selling a 13% stake through an IPO. Abu Dhabi Investment Authority, Matrix Partners, Kotak Private Equity and Baring India Private Equity came on board as pre-IPO investors, taking a 7% holding.

NBFCs have become popular among private equity firms. Goldman Sachs Private Equity, Ashmore Group and Everstone Capital teamed up to create Indostar Capital Finance. In July, it was reported that Apollo Global Management and ICICI Venture would launch a joint venture NBFC that will specialize in mezzanine financing, lending money for asset purchases through a combination of debt and equity components.

KKR set up a NBFC in 2009 and plans to use it as a platform to expand its operations beyond private equity. Sanjay Nayar, country head for KKR India, told Livemint: "The idea behind setting up the NBFC business was if we only do private equity then there are not going to be enough deals. "The long-term plan is to build an asset management company, of which the NBFC will just be a part and over a period of time we could even set up a mezzanine fund."

NBFCs are seen as attractive for several reasons: they fill a lending gap left by India's banks; investment in standard banks is capped at 5%; and the Reserve Bank of India has said that, by March next year, NBFCs must hold INR15 ($0.33) in capital for every INR100 ($2.25) they lend out, up from INR12 ($0.27), prompting an equity-raising drive.

Furthermore, NBFCs must rely on financial institutions to raise money rather than use customers' deposits, and access to capital has been tightened in recent months.

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• Topics
• South Asia
• Financials
• Financing
• Matrix Partners
• Kotak Investment Advisors
• Baring Private Equity Partners India
• Goldman Sachs
• Everstone Capital
• KKR