Edelweiss, IIFL, Paytm Hit by RBI: Big Investors Pabrai, Watsa, SoftBank Sold Shares Just Before Crackdown

Between January and May, the Reserve Bank of India (RBI) imposed business restrictions on three financial companies—Paytm, IIFL, and Edelweiss—due to issues like loan evergreening, poor KYC checks, and governance problems. Before these regulatory actions, major investors Mohnish Pabrai, Prem Watsa, and SoftBank sold significant shares in these companies.

While there’s no direct evidence linking the share sales to the regulatory actions, some experts find it suspicious and believe the market regulator should investigate.

Mohnish Pabrai and Edelweiss

Mohnish Pabrai, a seasoned investor, held a 7.08% stake in Edelweiss at the end of December 2023. Between February 8 and April 3, he sold 3.83% of his shares at an average price of ₹72.03 per share, amounting to ₹261 crore. Less than seven weeks after Pabrai reduced his stake by half, the RBI restricted Edelweiss’s lending and asset reconstruction businesses on May 29, citing concerns about its lending and accounting practices.

Edelweiss shares dropped 11.8% to ₹68.35 on May 30, the day after the regulatory action, and have fallen 10.34% as of June 7. Pabrai, now holding 3.24% of Edelweiss, stated he was unaware of any impending regulatory action at the time of the sale.

Prem Watsa and IIFL

Prem Watsa, founder of Fairfax Financial Holdings, sold shares in IIFL Finance through Fairfax India Holding’s subsidiary, FIH Mauritius Investment. FIH owned 20.18% of IIFL Finance until December 21, 2023. On December 22, it sold 5.66% of its shares at an average price of ₹554.6 per share, amounting to ₹1,200 crore.

On March 4, the RBI barred IIFL Finance from issuing new gold loans due to issues found in an audit. The following day, IIFL Finance shares plunged 20%. From March 4 to June 7, the shares have dropped 18.5%. Watsa, who now owns 15.12% of IIFL Finance, did not respond to inquiries. However, after the RBI action, he announced plans to invest up to $200 million in the company to reassure investors.

SoftBank and Paytm

On January 31, the RBI ordered Paytm Payments Bank, a subsidiary of One97 Communications, to cease all banking services within a month. Between December 19 and January 20, SoftBank, the third-largest investor in One97, sold 2% of its shares at an average price of ₹680.38 per share, making ₹865 crore. SoftBank sold another 2.17% of shares worth ₹1,085 crore between January 23 and February 26. Paytm shares have dropped 49.9% since the regulatory action on January 31.

SoftBank did not comment, but an insider claimed the sale was part of a strategy to sell shares within three years of a company going public and not related to regulatory actions.

Market Concerns and Expert Opinions

Two proxy advisory firms find the timing of these sales unusual. Amit Tandon, founder of Institutional Investor Advisory Services India Ltd (IiAS), suggested better communication from the RBI to avoid market volatility. He compared the situation to how pharma companies interact with the US FDA, allowing shareholders to understand risks better.

Shriram Subramanian, founder of InGovern Research, pointed out that the RBI had been in discussions with these companies for months before the public disclosures. While it’s unclear if investors had insider information, he believes the market regulator SEBI should investigate why these investors decided to sell their shares.