JM Financial shares views on violation of regulatory guidelines, governance issues post RBI order

Following the Reserve Bank of India (RBI) directives, barring JM Financial Products from financing against shares and debentures with immediate effect, JM Financial said it undertook a detailed review of the order issued by the apex bank and strongly felt that there was no material deficiencies in its loan sanctioning process.

JM Financial said it 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," it said.

A JM Financial spokesperson said that his company has been in the business of funding IPOs over the last two decades. The IPO financing product is short-term and self-liquidating in nature, he noted adding that: "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."

He said JM Financial would fully cooperate with the apex bank in its special audit initiative and explain its position. RBI barred JM Financial Products from sanctioning and disbursing of loans against initial public offering (IPO) of shares as well as against subscription to debentures.

his action is necessitated due to certain serious deficiencies observed in respect of 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 Securities and Exchange Board of India (SEBI).

"During the limited review it was observed, inter alia, 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. 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," the RBI said earlier.

"Consequently, the company was able to effectively act as both lender as well as borrower. The company also acted as the arranger of bank account opening as well as operator of the said bank accounts using the POA. Apart from being in violation of regulatory guidelines, there are serious concerns on governance issues in the company, which in our assessment are detrimental to the interest of the customers," the RBI added.

The RBI said the regulatory violations and deficiencies, if any, on the part of the banks in this regard was being examined separately.

RBI said the business restrictions 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.