The RBI statement directed JM Financial Products to “cease and desist, with immediate effect, from doing any form of financing against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares as well as against subscription to debentures.” JM Financial have strongly denied claims of lapses and violation made by the regulator.
The RBI said the company can continue to finance its existing loan accounts through collection and recovery.
JM Financial Products is a systemically important non-banking finance company registered with RBI and 99.71% is owned by stock exchange listed JM Financial Ltd. It is focused on capital market, bespoke, and real estate financing.
RBI said this action is necessitated due to certain serious deficiencies observed in loans sanctioned for IPO financing and as non-convertible debentures subscriptions.
A statement issued by JM Financial said, There have been no material deficiencies in our loan sanctioning process. The company has not violated applicable regulations…. there have been no governance issues whatsoever.”The company has a loan book of Rs 4600 crore and assets under management of Rs 7197 crore at the end of the third quarter for FY24, according to the stock exchange disclosures.While conducting the limited review, the RBI observed 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 banking regulator’s order also noted that 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 pointed out that due to this arrangement, “the company was able to effectively act as both lender as well as borrower. The company also acted as the arranger of bank account opening as well as operator of the said bank accounts using the POA.”
In response to this, JM Financial stated, “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 POA is taken as a risk containment measure only. The practice of taking POA is prevalent across the industry and is perfectly legal.”
The banking regulator stated that these are regulatory violations and raises serious concerns about governance issues, which are detrimental to customers’ interest. The RBI will review business restrictions on the completion of a special audit to be instituted by the RBI and after rectification of deficiencies to the satisfaction of the RBI.
JM Financial also stated, “All our business and operational affairs in a bonafide manner. The company shall continue to service its existing customers as advised by the RBI.”