Following stringent action by the Reserve Bank of India (RBI) on IIFL Finance and JM Financial Products Ltd, shares of the two listed companies have nosedived on the stock exchanges.
After tanking 20% on Tuesday, shares of IIFL plummeted another 20% (lower circuit) on Wednesday to Rs 382 apiece, its new 52-week low. In total, shares of IIFL have fallen by 40% in two sessions after the RBI directed the NBFC to cease and desist from sanctioning or disbursing gold loans or assigning/securitising/selling any of its gold loans.
The decision came after an inspection of the company by the RBI as of March 31, 2023, which revealed discrepancies in the company's functioning in certain areas.
"Certain material supervisory concerns were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of gold at the time of loan sanctions, breaches of loan-to-value ratio, and significant disbursal and collection of loan amount in cash far in excess of the statutory limit," the company filing said quoting the RBI's order.
Global brokerage firm Jefferies downgraded IIFL 'hold' from 'buy' and slashed the target price to Rs 435 per share from Rs 765.
Jefferies said that the gold loan ban is expected to hurt IIFL's profit. "The RBI's order can dent earnings due to rapid unwinding of profitable gold loan book. Given the time of lifting of the ban is uncertain and we assume that the ban would stay for 9 months, we expect assets under management (AUM) to fall 1% YoY and 51% YoY fall in gold AUM in FY25," the brokerage firm noted.
For the Non-Banking Financial Company (NBFC), gold loans are their second-biggest business division. IIFL has a gold loan portfolio of Rs 24,692 crore, which is 32% of its total loan portfolio valued at Rs 77,444 crore at the end of December 31, 2023.
Nirmal Jain, managing director of IIFL has reassured investors that there are no governance or ethical issues in the company. “These are operational issues which will be addressed with all our effort and sincerity. We are taking immediate and comprehensive steps to address the concerns made by RBI,” said Jain while speaking to analysts on Tuesday.
Shares of JM Financial cracked up to 20% intraday (as of 2 pm) on Wednesday to hit a low of Rs 76.40 after the RBI asked the investment banking firm to stop any form of financing against shares and debentures with immediate effect. This crackdown includes the sanction and disbursal of loans against the initial public offer (IPO) of shares as well as against subscriptions to debentures.
The RBI said that the action is necessitated due to certain serious deficiencies observed with respect to loans sanctioned by the company for IPO financing as well as NCD subscriptions. The RBI carried out a limited review of the books of the company on the basis of the information shared by the capital market regulator- Securities and Exchange Board of India (SEBI). In the limited review, RBI observed that JMFPL repeatedly helped a group of its customers to bid for various IPO and NCD offerings by using loaned funds.
JM Financial on Wednesday said it had a careful and detailed review of the Reserve Bank's order imposing restrictions on the company's financing business and asserted that there were no material deficiencies in its loan sanctioning process.
"After a 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," a JM Financial spokesperson said in a statement.
The spokesperson added that JM Financial has been funding IPOs since over the last two decades and its "IPO financing product is short term and self-liquidating in nature".
“In the context of IPO funding, the Power of Attorney (POA) is taken as a risk containment measure only. The practice of taking POA is prevalent across the industry and is perfectly legal,” said the spokesperson, adding that they will explain their position to the RBI.