JM Financial tanks 19% as RBI restricts lending against shares, debentures

The stock of JM Financial crashed 19 percent on March 6, a day after the Reserve Bank of India (RBI) imposed restrictions on the company on loan disbursements.

On March 5, the regulator barred JM Financial Products Ltd (JMFPL) from giving loans against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares, with immediate effect.

At 9.18am, the company’s shares were quoting Rs 79.7 on the NSE, lower by 16.5 percent, compared to the previous session’s closing price.

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“After careful and detailed review of the order issued by the RBI on the action against JM Financial Products, 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,” said JM Financial in a statement.

“We have been in the business of funding IPOs over the last two decades. The 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.”

The company shall continue to service its existing customers as advised by the RBI. It will also fully cooperate with RBI in their special audit initiative and explain our position to RBI.

In an interview with CNBC-TV18, Saswata Guha, senior director, Fitch Ratings noted that the RBI is finally taking action, instead of having internal dialogues.

The regulator has shown it is not shy in taking actions, as shown by its action enforced on HDFC Bank, Bank of Baroda, Paytm, IIFL and now JM Financial. Guha added that the RBI is trying to contain specific business segments risk.

Announcing the decision, the RBI said the action has been taken after observing certain serious deficiencies in the financial services firm’s loan process. More importantly, the central bank highlighted that there are serious concerns on the governance issues in the company, apart from violation of regulatory guidelines.

“This 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,” RBI said.

During the review, it was found out that the company repeatedly helped a group of its customers to bid for various IPOs and NCDs by using loaned funds. The credit underwriting was found to be perfunctory, and financing was done against meagre margins, RBI said on Tuesday.

On March 5, shares of the firm settled at Rs 95.5 per share, lower by 2 percent. Over the past six months, JM Financial shares have traded sideways, rising 1.7 percent. In comparison, the benchmark index Nifty 50 has gained around 14 percent during the same time.

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