Non-banking finance companies (NBFCs) seem to be finding themselves in the regulator’s crosshairs. A day after the Reserve Bank of India took action against IIFL Finance Ltd, it cracked the whip on JM Financial Products Ltd (JMFPL) as it came across certain serious deficiencies in respect of loans sanctioned by the company for IPO financing and NCD subscriptions.

The RBI on Tuesday directed JMFPL 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 non-convertible debentures (NCDs).

The central bank, on Monday, had asked IIFL Finance Ltd to cease and desist, with immediate effect, from sanctioning or disbursing gold loans or assigning/ securitising/ selling any of its gold loans as it came across certain material supervisory concerns in its gold loan portfolio.

Serious deficiencies

In the case of JMFPL, the RBI, in a statement, underscored that its action has been necessitated due to certain serious deficiencies observed in respect of loans sanctioned by the company for IPO financing and NCD subscriptions.

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

The central bank observed that it 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). JM Financial owns 99.71 per cent stake in JMFPL.

Co acted as lender as well as borrower

During RBI’s limited review, it was observed that the company repeatedly helped a group of its customers to bid for various IPO and NCD offerings by using loaned funds, per the statement.

“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 and borrower. The company also acted as the arranger of bank account opening as well as operator of the said bank accounts using the POA,” revealed the central bank’s review.

Governance issues

Apart from being in violation of regulatory guidelines, the RBI said there are serious concerns on governance issues in the company, which in its assessment are detrimental to the interest of the customers.

The central bank noted that the business restrictions now being imposed, will be reviewed upon the completion of a special audit to be instituted by it and after rectification of the deficiencies to its satisfaction.

Further, these business restrictions are without prejudice to any other regulatory or supervisory action that may be initiated by RBI, against the company, it added.

JMFPL reported a 9 per cent year-on-year decline in its third quarter standalone net profit at ₹86 crore against ₹95 crore in the year ago period. The NBFC has five lines of business – capital market financing; retail mortgage financing; “bespoke financing”; financial institution financing and real estate financing. It also has a subsidiary — JM Financial Home Loans Ltd, subsidiary of the company is registered with National Housing Bank (NHB) and is in the business of affordable housing and education institutions lending.

JM Financial Products responds to RBI order

“After a careful and detailed review of the order issued by the RBI on the action against JM Financial Products Ltd, 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. The company shall continue to service its existing customers as advised by the RBI.

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.

We will fully cooperate with RBI in their special audit initiative and explain our position to RBI.”