After PayTM, JM Financial faces RBI ire; barred from lending against shares, debentures

After discovering that JM Financial Products Ltd engaged in a number of manipulations, including continuously assisting a group of its own clients to bid for multiple initial public offerings (IPOs) by using loaned funds, the Reserve Bank placed restrictions on the company on Tuesday.

The systemically important non-deposit-taking NBFC has been prohibited by the central bank from offering any kind of financing against shares and debentures, including the approval and disbursement of loans against share initial public offerings (IPOs) and debenture subscriptions. This is a significant regulatory action.

The limitations are in place right now.

Besides directing the entity from “cease and desist” from financing activities, the Reserve Bank of India (RBI) said it is separately examining any possible regulatory violations and deficiencies on the part of the banks concerned.

JM Financial Products has been allowed to continue to service its existing loan accounts through the usual collection and recovery process.

In a statement, the RBI said the actions were “necessitated due to certain serious deficiencies observed in respect of loans sanctioned by the company for IPO financing as well as NCD (Non-Convertible Debentures) subscriptions”.

The regulator’s latest move also comes a day after it slapped several curbs on IIFL Finance Ltd, including barring it from disbursing gold loans, following supervisory concerns.

Based on information provided by markets regulator Sebi, the RBI had carried out a limited review of the books of the JM Financial Products.

“During the limited review, it was observed, inter alia, that the company repeatedly helped a group of its customers to bid for various IPO and NCD offerings by using loaned funds. The credit underwriting was found to be perfunctory, and financing was done against meagre margins,” the RBI said.

The application for subscription, the demat accounts and the bank accounts, all were operated by the company using a Power of Attorney (POA) and a Master Agreement obtained from these customers without their involvement, whatsoever, in the subsequent operations.

“Consequently, the company was able to effectively act as both lender as well as borrower,” the RBI said.

Further, the central bank said JM Financial Products also acted as the arranger of bank account opening as well as the operator of the said bank accounts using the POA.

“Apart from being in violation of regulatory guidelines, there are serious concerns on governance issues in the company, which in our assessment are detrimental to the interest of the customers,” it said in the statement.

According to the statement, the business restrictions will be reviewed upon the completion of a special audit and after rectification of the deficiencies to the satisfaction of the RBI.

These business restrictions are without prejudice to any other regulatory or supervisory action that may be initiated by the RBI, against the company, it added.

JM Financial Products offers a broad suite of loan products. Broadly, it operates under five verticals – capital market financing, retail mortgage financing, bespoke financing, financial institution financing, and real estate financing, as per its website.

With inputs from PTI