The Reserve Bank of India has directed regulated entity JM Financial Products Ltd. (JMFPL) 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 as the entity has been found violating regulatory guidelines.
Action has been initiated based on information shared by market regulator Securities & Exchange Board of India (SEBI).
However, it had been allowed to continue to service its existing loan accounts through the usual collection and recovery process.
“This action is necessitated due to certain serious deficiencies observed in respect of loans sanctioned by the company for IPO financing as well as NCD subscriptions. The RBI carried out a limited review of the books of the company on the basis of the information shared by SEBI,” RBI said in the order.
“During the limited review it was 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 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,” it added.
“Consequently, 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. 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,” the RBI further said.
The central bank said regulatory violations and deficiencies, if any, on the part of the bank(s) in this regard is being examined separately.
“The business restrictions now being imposed, will be reviewed upon the completion of a special audit to be instituted by the RBI and after rectification of the deficiencies to the satisfaction of RBI,” it said.
JM Financial responds
“JM Financial Group has been in the business of financial services over the last five decades. We take pride in our reputation in the financial services industry.
“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.
“We will fully cooperate with RBI in their special audit initiative and explain our position to RBI.”
