NEW DELHI: The Reserve Bank of India has directed JM Financial Products Ltd (JMFPL) 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 has today, in exercise of its powers under section 45L(1)(b) of the Reserve Bank of India Act, 1934, directed JM Financial Products (JMFPL or ‘the company’) to cease and desist, with immediate effect, from doing financing against shares and debentures, including sanction and disbursal of loans against IPO of shares as well as against subscription to debentures,” RBI said on Tuesday.
JMFPL, however, is allowed to continue to service its existing loan accounts through usual collection and recovery process. The RBI said 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 SEBI.
In the review, RBI observed JMFPL 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 application for subscription, 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 subsequent operations. Consequently, the company was able to act as both lender and borrower. It also acted as the arranger of bank account opening as well as operator of the said bank accounts using POA,” RBI said.
When contacted, it couldn’t elicit a responses from JM Financial. “Misuse of funds for IPO financing is rampant, and this issue has been highlighted for 5-7 years now. The RBI has, of late, become strict with any form of non-compliance. They must have found serious lapses in the way things have been done by JM Financial and acted accordingly,” Says S Ravi, former Chairman of BSE, founder and managing partner of Ravi Ranjan and Co LLP.