The Reserve Bank of India (RBI) on March 5 barred JM Financial Products Ltd (JMFPL) from giving loans against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares, with immediate effect.
Announcing the decision, the RBI said the action has been taken after observing certain serious deficiencies in the financial services firm's loan process. More importantly, the central bank highlighted that there are serious concerns on the governance issues in the company, apart from violation of regulatory guidelines.
"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," RBI said.
RBI review shows irregularities
The banking regulator had 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) that eventually led to this action, RBI said.
During the review, it was found out 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, RBI said on Tuesday.
RBI further said that 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," RBI said.
Further, the company also acted as the arranger of bank account opening as well as operator of the said bank accounts using the POA, central bank added.
RBI audit to follow
According to RBI, the business restrictions now 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. The central bank said the company can continue to service its existing loan accounts through the usual collection and recovery process.
Reacting to the announcement, JM Financial said in a statement: "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 will fully cooperate with RBI in their special audit initiative and explain our position to RBI," the company added.
This is the third such announcement by the RBI in recent weeks.
On March 4, the central bank asked IIFL Finance to stop sanctioning or disbursing gold loans with immediate effect after observing certain material supervisory concerns in the company's gold loan portfolio.
The central bank said an inspection of the IIFL Finance was carried out by the RBI with reference to its financial position as of March 31, 2023 which revealed certain material supervisory concerns were observed in the gold loan portfolio of the company.
Before that, on January 31, the RBI had imposed business restrictions on PPBL, including a ban on accepting fresh deposits and undertaking credit transactions after February 29. On February 16, it extended the deadline to March 15. The regulator found major irregularities in KYC, which exposed the customers, depositors and wallet holders to serious risks.
On Tuesday, JM Financial's scrip on BSE closed trading 2 percent lower at Rs 95.53.
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