SEBI Issues Administrative Warning to JM Financial over Discrepancies in NCD Issuance
Moneylife Digital Team 17 June 2024
Market regulator Securities and Exchange Board of India (SEBI) has issued an administrative warning letter to JM Financial Ltd as a merchant banker of certain past public issuances of non-convertible debentures (NCDs).
In a regulatory filing, JM Financial says, "The SEBI letter is pursuant to an inspection conducted by SEBI, wherein it observed few discrepancies or deficiencies in due-diligence, recording documents and disclosures in relation to certain past public issuances of NCDs, for which the Company was acting as one of the lead managers."
"Accordingly, SEBI has, inter-alia, advised the Company to take appropriate corrective steps, place the findings of the inspection along with the copy of SEBI letter before its board of directors and submit an action taken report to SEBI. There is no impact on financial, operations or other activities of the Company pursuant to the SEBI letter," it added.
Earlier in March this year, SEBI prohibited JM Financial from taking on new mandates to serve as a lead manager for the public. 
During 2023, SEBI conducted a routine examination of NCDs. In a particular issue, it observed a significant number of individual investors sold the securities allotted to them on the day of listing itself. "The holding pattern of the securities showed that a very large percentage of securities issued changed hands on the day of listing as a result, retail ownership came down sharply. This was unusual."
On further examination of the transactions on the day of listing of the issue, SEBI observed that JM Financial Products Ltd (JMFPL), a non-banking finance company (NBFC) and a subsidiary of JM Financial, acted as a counterparty to the trades of these individuals’ investors and had also provided the funds deployed by these investors for subscribing to the issue. 
"JMFPL, subsequently, on the very same day, offloaded at a loss, a significant portion of the securities that it had acquired from these investors to corporate investors. The examination also revealed that these investors had submitted their applications in the public issue through the stock broker JM Financial Services Ltd (JMFSL), another subsidiary of JM Financial," SEBI says.
In its ex-parte order, Ashwani Bhatia, whole-time member (WTM) of SEBI says, "It is noted from the reply furnished by JMFL that the actions detailed in this order were considered by it to be part of its ordinary course of business. It was also stated that a similar approach had been adopted in many other issues where it was the lead manager. Such practices have detrimental effects on the orderly functioning of the market and harm the interest of ordinary investors. They also distort the functioning of the price discovery mechanism in the securities market. Given the same, there is an urgent need for the regulator to step in and pass interim directions, pending investigation, to prevent further erosion in market integrity by virtue of such practices." (Read: JM Financial Barred by SEBI from Taking New Mandate as Lead Manager for Issues)
On 5 March 2024, the Reserve Bank of India (RBI) directed JMFPL to cease and desist from doing any form of financing against shares and debentures, including sanction and disbursal of loans against initial public offering (IPO) as well as against subscription to debentures. 
In a release, the central bank says, this action is necessitated due to certain serious deficiencies observed regarding loans sanctioned by the company for IPO financing as well as NCD subscriptions. RBI carried out a limited review of the books of the company on the basis of the information shared by SEBI.
During the limited review, RBI says it observed that JMFPL repeatedly helped a group of its customers bid for various IPO and NCD offerings 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." (Read: JM Financial Products Barred from Financing against Shares and Debentures, Loans against IPOs)
Kamal Garg
4 weeks ago
This modus operandi is adopted to pump up the subscription done by a sister company which is wrong in law also.
4 weeks ago
This should be an opener for all companies issuing NCD;s sebi and rbi need to see how they are using the money taken by retail investors and these companies should give them an update either every 3 or 6 months
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