RBI Directs JM Financial to Halt Financing Against Shares and Debentures

The Reserve Bank of India (RBI) on Tuesday directed JM Financial Products Limited to cease all financing against shares and debentures, effective immediately. This includes sanctioning and disbursing loans for initial public offerings (IPOs) and subscriptions to debentures.

The company can continue servicing existing loans through its usual collection and recovery process, the central bank said. This action follows the RBI barring IIFL Finance from disbursing gold loans on Monday.

The RBI took action after detecting "serious deficiencies" in JM Financial's IPO financing and non-convertible debenture (NCD) subscriptions. A limited review of the company's books, based on information from the Securities and Exchange Board of India (SEBI), revealed concerning practices.

The review found JM Financial repeatedly helped a group of customers bid for IPOs and NCDs using loaned funds. The company allegedly conducted perfunctory credit underwriting and financed purchases with minimal margins.

According to the RBI, JM Financial used power of attorney (POA) agreements and master agreements to operate customer demat and bank accounts for subscription applications, without their involvement in subsequent transactions. This allowed the company to essentially act as both lender and borrower.

"The company also arranged for and operated these bank accounts using POA," the RBI said. "These practices violate regulatory guidelines and raise serious concerns about the company's governance, which could harm customer interests."

On Monday, the RBI stopped IIFL Finance from sanctioning or disbursing new gold loans due to concerns about "serious deviations" in gold assaying and certification practices.

IIFL Finance Managing Director Nirmal Jain downplayed the RBI's action, calling it due to "operational issues" and not governance or ethical problems. Jain expressed gratitude to the regulator despite the "harsh" directive.