Shares of JM Financial nosedived over 19% in early trade on Wednesday after the Reserve Bank of India (RBI) barred JM Financial Products Ltd (JMFPL), a subsidiary of the company, from giving loans against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares, with immediate effect. The company, however, clarified that it has not violated any RBI regulations and there are no material deficiencies in its loan sanctioning process.
Weighed down by the RBI action, JM Financial shares opened 19.3% lower at ₹77.10 against the previous closing price of ₹95.53 on the BSE. The market capitalisation dipped to ₹7,745 crore. The smallcap stock touched its 52-week high of ₹114.95 on January 29, 2024, and 52-week low of ₹57.38 on March 29, 2023.
The RBI on Tuesday ordered mortgage lender JM Financial Products to “cease and desist” from doing any form of financing against shares and debentures, including sanction and disbursal of loans against IPO of shares as well as against subscription to debentures. JM Financial, however, has been allowed to continue to service its existing loan accounts through the usual collection and recovery process.
The banking regulator in a release said that apart from being in violation of regulatory guidelines, there are serious concerns on governance issues in JM Financial Products, which are detrimental to the interest of the customers.
As per the RBI, the action was 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 central bank carried out a limited review of the books of the company on the basis of the information shared by the Securities and Exchange Board of India (SEBI).
“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 central bank says in its order.
“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 order explains.
Meanwhile, JM Financial in its clarification said, “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,” JM Financial spokesperson says in a statement.
“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,” the spokesperson added.
The release further says that the company will fully cooperate with RBI in their special audit initiative and explain its position to the central bank.
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