RBI Bars JM Financial From Lending Against Shares, Bonds

The Reserve Bank of India directed JM Financial Products Ltd. on Tuesday to stop any form of financing against shares and debentures with immediate effect.

This includes the sanction and disbursal of loans against the initial public offer of shares as well as against subscriptions to debentures. The central bank observed serious deficiencies regarding loans sanctioned by the company for IPO financing, as well as subscriptions to non-convertible debentures, according to a release by the RBI.

The central bank, however, clarified that JM Financial will "continue to service its existing loan accounts through the usual collection and recovery process."

The supervisory action comes just a day after the regulator barred IIFL Finance Ltd. from sanctioning and disbursement of gold loans, citing "material supervisory concerns", observed in the non-bank financier's gold loan portfolio.

In JM Financial's case, the RBI carried out a limited review of the company's books on the basis of information shared by the Securities and Exchange Board of India, the central bank said.

In the review, the company was found to have repeatedly pushed some customers to bid for various IPOs and NCD issuances by using loaned funds. "The credit underwriting was found to be perfunctory, and financing was done against meagre margins," the RBI said.

Customers' applications for subscribing to debentures, their Demat accounts and the bank accounts were operated by the company, using power of attorney and a master agreement "obtained from these customers without their involvement, whatsoever, in the subsequent operations", according to the release. As a result, the company effectively acted as both lender and borrower.

The RBI also highlighted serious governance issues in the company apart from violating the regulatory norms. Henceforth, the central bank is examining any regulatory violations on the part of banks related to JM Financial's operations, the central bank said.

"The business restrictions now being 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," it said.