RBI bars JM Financial from financing against debentures and shares

The Reserve Bank of India (RBI) on Tuesday prohibited JM Financial Products from financing against shares and debentures, including sanctioning and disbursing loans against initial public offerings (IPOs) of shares and subscriptions to debentures. The RBI cited serious governance concerns as the reason for this action.

The RBI will institute a special audit and review the restrictions after its completion. JM Financial Products, however, will continue to service its existing loan accounts through the usual collection and recovery process.

The regulator said that the action was necessitated due to serious deficiencies observed with respect to loans sanctioned by the company for IPO financing and subscriptions of non-convertible debentures.

The company, once a major player in the IPO financing segment, saw its market fizzle out after the RBI capped such financing at Rs 1 crore two years ago.

According to JM Financial’s annual report for FY23, JM Financial Products’ net assets were worth Rs 1942.86 crore, or 17.32 per cent of the consolidated net assets of the group. JM Financial, the holding company of other operating subsidiaries, holds a 99.71 per cent stake in JM Financial Products, classified as a non-banking financial company.

The RBI carried out a limited review of the company’s books based on information shared by the Securities and Exchange Board of India (Sebi). It was observed that the company repeatedly helped a group of its customers bid for various IPO and NCD offerings using loaned funds.

“The credit underwriting was found to be perfunctory, and financing was done against meagre margins. 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,” the RBI said.

Consequently, the regulator said, the company was able to effectively act as both lender and borrower. It was observed that JM Financial Products also acted as the arranger of bank account opening, as well as 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, the RBI said, adding such issues are detrimental to the interest of customers. The RBI will also examine if there are any regulatory violations and deficiencies on part of banks in this regard.

JM Financial Product, which has been classified as part of the group’s investment banking activities, had a net worth of Rs 2934 crore as on December 31, 2023. Its net profit for the nine-month period ended December 31, 2023, was Rs 248 crore while revenue was Rs 799 crore. The company’s loan book at the end of the December quarter was Rs 4,743 crore while total assets were Rs 6,661 crore.

After careful and detailed review of the order issued by the RBI on the action against JM Financial Products Ltd, we strongly believe that there have been no material deficiencies in our loan sanctioning process. Further, the Company has not violated applicable regulations. We also wish to reaffirm that there have been no governance issues whatsoever and we conduct all our business and operational affairs in a bonafide manner. The company shall continue to service its existing customers as advised by the RBI.

We have been in the business of funding IPOs over the last two decades. The IPO financing product is short term and self-liquidating in nature. In the context of IPO funding, the Power of Attorney (POA) is taken as a risk containment measure only. The practice of taking POA is prevalent across the industry and is perfectly legal.