JM Financial tanks 19% as RBI bars it from lending against shares, bonds

RBI barred JMFPL from financing of share of shares or debentures owing to violations and lapses

Shares of JM Financial tanked 19 per cent to Rs 77.10 on the BSE in Wednesday’s intra-day trade after the Reserve Bank of India (RBI) barred its subsidiary JM Financial Products (JMFPL) from providing any form of financing against shares and debentures, including sanction and disbursal of loans against IPOs, with immediate effect.

JMFPL is a subsidiary of JM Financial with assets under management (AUM) of Rs 7,197 crore. The company is focused on offering a broad suite of loan products, which are customised to suit the needs of corporates, institutions, SMEs and individuals.

It broadly operates under the lending verticals viz bespoke financing, real estate financing, capital market financing, retail mortgage financing and financial institution financing. JM Financial holds 99.71 per cent equity stake in JMFPL.

RBI barred JMFPL from financing of shares or debentures owing to violations and lapses. While JM Financial has refuted RBI's claims saying it has adhered to regulations.

As per analysts at ICICI Securities, uncertainty due to the regulatory ban is expected to out pressure on valuations in near term. 

At 09:25 am; JM Financial was trading 13 per cent lower at Rs 82.73, as compared to a 0.13 per cent decline in the S&P BSE Sensex.

The average trading volumes on the counter jumped over seven-fold. A combined 23.13 million shares had changed hands on the NSE and BSE, at press time. 

In its clarification, JM Financial said it that after a careful review of the RBI order, it belives there have been no material deficiencies in the company's loan sanctioning process.

It claimed to not have violated applicable regulations. “We wish to reaffirm that there have been no governance issues whatsoever and we conduct all our business and operational affairs in a bonafide manner,” it said.

RBI had reportedly carried out a limited review of the books of the company on the basis of information shared by Sebi that led to this action.

During the review, RBI said 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 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.

JM Financial clarified that 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. This practice is prevalent across the industry and is perfectly legal, it added.

The company will fully cooperate with RBI in their special audit initiative and explain its position to RBI.