After RBI action, SEBI bars JM Financial from acting as debt issue lead manager

Two days after the Reserve Bank of India's (RBI) action against JM Financial Products Ltd (JMFPL), market regulator Securities and Exchange Board of India (SEBI) on Thursday barred JM Financial from acting as a lead manager for any public issue of debt securities. The restrictions have been imposed after the capital market regulator observed that regulatory norms were violated in the public issues of non-convertible debentures (NCDs) during the year 2023.

In an interim order issued on March 7, the capital market regulator said that JM Financial has been stopped from taking any new mandate for acting as a lead manager for any public issue of debt securities. The company can continue to act as a lead manager for the public issue of debt securities for the existing mandates for 60 days from the date of this order.

"SEBI shall undertake an investigation into the issues covered under the said Order and complete the same within a period of six months from the date of the said Order. The Company shall fully cooperate with SEBI in this investigation," JM Financial said in an exchange filing.

SEBI in its interim order said that it undertook a routine examination of the public issues of non-convertible debentures (NCDs) during the year 2023 for which JM Financial was one of the lead managers. The regulator observed that in a particular issue, a significant number of individual investors sold the securities allotted to them on the day of listing itself. “The holding pattern of the securities showed that a very large percentage of securities issued changed hands on the day of listing as a result of which retail ownership came down sharply. This was unusual,” it noted.

On further examination of the transactions on the day of listing of the said issue, it was observed that JM Financial Products Limited (JMFPL), a subsidiary of JM Financial, acted as counterparty to the trades of these individual investors and had also provided the funds deployed by these investors for subscribing to the issue. JMFPL, subsequently, on the very same day, offloaded at a loss, a significant portion of the securities that it had acquired from these investors to corporate investors. The examination also revealed that these investors had submitted their applications in the public issue through the stock broker JM Financial Services (JMFSL), another subsidiary of JM Financial.

JM Financial Limited, the lead manager, JM Financial Services Limited, the stockbroker, and JM Financial Products Limited, the NBFC, are part of the JM Financial Group.

On March 5, the RBI barred 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 central bank ordered the 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.

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.

Following the RBI order, 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.”