RBI Bars JM Financial Products From Financing Against Shares And Debentures

The decision, effective immediately, follows the RBI's observation of serious deficiencies in the loan process

The RBI conducted a limited review of JMFPL's books based on information provided by the SEBI.

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The Reserve Bank of India (RBI) has taken action against JM Financial Products Ltd (JMFPL), prohibiting the company from providing loans against shares and debentures, including those for Initial Public Offerings (IPOs). The decision, effective immediately, follows the RBI's observation of serious deficiencies in the loan process.  Under Section 45L(1)(b) of the Reserve Bank of India Act, 1934, the central bank announced its decision in a release issued on Tuesday.

According to the RBI, JMFPL will still be allowed to service its existing loan accounts through standard collection and recovery processes. However, the RBI highlighted that the action was necessary due to serious deficiencies observed in the company's sanctioning of loans for IPO financing and Non-Convertible Debenture (NCD) subscriptions.

The RBI conducted a limited review of JMFPL's books based on information provided by the Securities and Exchange Board of India (SEBI). During this review, it was discovered that JMFPL had repeatedly assisted a group of customers in bidding for various IPOs and NCD offerings using loaned funds. Moreover, the credit underwriting process was found to be inadequate, with financing being granted against minimal margins.

One concerning practice identified by the RBI was JMFPL's operation of application subscriptions, Demat accounts, and bank accounts through a Power of Attorney (POA) and Master Agreement obtained from customers without their involvement in subsequent operations. This enabled JMFPL to function effectively as both lender and borrower.

Furthermore, the central bank revealed that JMFPL facilitated the opening and operation of bank accounts by acting as an arranger, using the POA.

On the BSE, JM Financial's share price closed 2 per cent lower at Rs 95.53 on Tuesday following the announcement.

The RBI expressed serious concerns regarding governance issues within JMFPL, in addition to regulatory guideline violations. It stated that the imposed business restrictions would only be reconsidered upon completion of a special audit initiated by the RBI and upon the rectification of deficiencies to the satisfaction of the central bank.

On Monday, the RBI announced an immediate prohibition on the sanctioning or disbursing of gold loans by IIFL Finance. This move comes in response to significant supervisory concerns identified in IIFL Finance's gold loan portfolio.