RBI bars JM Financial from financing against shares and debentures:'Serious deficiencies in loans for IPO financing'

The Reserve Bank of India (RBI) on Tuesday directed JM Financial Products Limited to stop, 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. The company shall, however, continue to service its existing loan accounts through the usual collection and recovery process, the central bank said a day after it barred IIFL Finance from disbursing any gold loans.

The action came after the banking regulator detected certain serious deficiencies 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 the Securities and Exchange Board of India (SEBI).

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 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 regulator said.

Consequently, JM Financials was able to effectively act as both lender as well as borrower, it added. "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."

On Monday, the banking regulator stopped IIFL Finance from sanctioning or disbursing gold loans. The regulator said certain concerns were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of the gold at the time of sanction of loans and at the time of auction upon default.

However, IIFL Finance MD Nirmal Jain said RBI's action on the firm's gold loan business was due to 'operational issues', and not due to governance or ethical problems. "While the directive from RBI appears a little harsh, would like to express utmost gratitude to the regulator," Jain told TV channels a day after the RBI debarred the NBFC from sanctioning and disbursing fresh gold loans following “material supervisory concerns”.