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Introduction: The Reserve Bank of India (RBI) has taken decisive action against JM Financial Products Limited, invoking Section 45L(1)(b) of the RBI Act, 1934. In a press release dated March 5, 2024, the central bank directed the immediate cessation of all forms of financing against shares and debentures by JM Financial. This article delves into the details of the regulatory move and its implications for the financial landscape.

Detailed Analysis: The RBI’s intervention stems from identified deficiencies in JM Financial’s practices related to loans sanctioned for Initial Public Offering (IPO) financing and Non-Convertible Debenture (NCD) subscriptions. The central bank conducted a limited review based on information shared by the Securities and Exchange Board of India (SEBI).

During this review, alarming irregularities surfaced. JM Financial facilitated a group of customers in bidding for various IPOs and NCD offerings using borrowed funds. Credit underwriting was found to be inadequate, and financing was extended against meager margins. Particularly concerning was the company’s dual role as both lender and borrower, enabled through Power of Attorney (POA) and Master Agreements obtained from customers without their subsequent involvement.

Operational control over application submissions, demat accounts, and bank accounts further revealed governance issues. Violating regulatory guidelines, the company, acting as the arranger, opened and operated bank accounts on behalf of customers using the acquired POA. This regulatory breach raises serious concerns about governance, putting customer interests at risk. Simultaneously, any potential regulatory violations or deficiencies by the involved bank(s) are under separate scrutiny.

The imposed business restrictions will endure until a comprehensive special audit, initiated by the RBI, concludes, and the identified deficiencies are rectified to the satisfaction of the central bank. Additionally, these restrictions do not preclude the initiation of other regulatory or supervisory actions by the RBI against JM Financial.

Conclusion: The RBI’s stringent measures against JM Financial underscore the commitment to maintaining financial integrity and safeguarding customer interests. The imposed cease-and-desist order reflects the severity of observed deficiencies in the company’s operations. As the regulatory landscape evolves, ongoing scrutiny and potential further actions highlight the importance of adherence to governance and compliance standards within the financial sector.

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Reserve Bank of India

Date : Mar 05, 2024

Action against JM Financial Products Limited under Section 45L(1)(b) of the Reserve Bank of India Act, 1934

The Reserve Bank of India has today, in exercise of its powers under section 45L(1)(b) of the Reserve Bank of India Act, 1934, directed JM Financial Products Limited (JMFPL or ‘the company’) to cease and desist, with immediate effect, from doing any form of financing against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares as well as against subscription to debentures. The Company shall, however, continue to service its existing loan accounts through the usual collection and recovery process.

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. 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. 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. Regulatory violations and deficiencies, if any, on the part of the bank(s) in this regard is being examined separately.

The business restrictions now 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. Further, these business restrictions are without prejudice to any other Regulatory or Supervisory action that may be initiated by RBI, against the company.

(Yogesh Dayal)
Chief General Manager

Press Release: 2023-2024/2006

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