Two days after the Reserve Bank of India asked JM Financial Products to stop financing against shares and debentures, the capital markets regulator SEBI on Thursday barred the parent company JM Financial from acting as the lead manager for any new debt public issue.

As per the order, JM Financial will no longer be able to act as a lead manager for any public debt issue. However, it has been allowed to continue as lead manager for existing debt public issue mandates for another 60 days.

JM Financial will have 21 days to file its reply or objections, if any, including the option of a personal hearing. Further, SEBI will undertake an investigation into these issues, to be completed within six months.

Routine examination

A “routine examination” of public NCD (non-convertible debentures) issued during 2023, led SEBI to discover discrepancies and inter-Group transactions in a November 2023 issue where JM Financial Ltd (JMFL-MB) was a lead banker, wholly-owned subsidiary JM Financial Services was the broker, and another subsidiary JM Financial Products (JMFPL-NBFC) was the funding arm which also accounted for over half the transaction volume on listing day.

“The involvement of JM Group entities were observed at multiple instances starting with JMFL-MB acting as the lead manager to the issue and ending with JMFPL-NBFC playing the role of an ‘exit provider’,” SEBI said, adding that the NBFC not only funded investors but also acquired the entire allotment and later offloaded it on the same day at a loss in a “synchronised manner”.

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The RBI on Tuesday directed JMFPL to cease and desist, with immediate effect, from doing any form of financing against shares and debentures

RBI directs JM Financial Products to halt financing against shares and debentures

Data provided by JM Financial in its replies do not match exchange data, the regulator said, adding that the company’s replies were “perplexing” as trading decisions were made without regard for trading loss or gain given that the loss amount is significantly higher than the interest income earned.

“The arguments raised by JMFL-MB, has been to contend that the companies – individually –complied with the letter of the law. However, once their actions are aggregated, what comes out is a complete disregard for restrictions imposed by SEBI on providing incentives to investors for subscribing to debt securities. The attempt has been to wrap their actions with the cloak of formal legality,” SEBI said. “The series of transactions appear to have been planned and executed meticulously.”

Further, investor bank statements revealed that this practice is followed in most public issues and is not isolated. This included issues such as loans being extended disproportionate to declared income, date mismatches, lack of receipt of upfront margin from certain applicants, and negative carry to investors.

Given that JM Financial Products is an NBFC, the matter was flagged to RBI, whose March 5 restrictions included a ban on sanctioning and disbursal of loans against IPOs and debenture subscriptions. The company has been allowed to continue to service its existing loan accounts through usual collection and recovery processes.

SEBI said it is also separately examining an issue in the SME segment of NSE, where certain entities placed huge bids under HNI category and subsequently under the retail category, which led to the issue being oversubscribed. However, the bids were later rejected as multiple applications were made from the same PAN and trades was executed in favour of the JM Group. “This matter has also been referred to RBI,” it said.

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