The Reserve Bank of India (RBI) on Tuesday ordered mortgage lender JM Financial Products Ltd (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) of shares as well as against subscription to debentures.

The banking regulator says that "apart from being in violation of regulatory guidelines", there are serious concerns about governance issues in JM Financial Products, which are detrimental to the interest of the customers.

The banking regulator says this action is necessitated due to certain serious deficiencies observed regarding loans sanctioned by the company for IPO financing as well as NCD (non-convertible debentures) 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 central bank says in its order against the mortgage lender.

"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 RBI order explains.

The company also acted as the arranger of bank account opening as well as operator of the said bank accounts using the power of attorney, the RBI notes.

The central bank says regulatory violations and deficiencies, if any, on the part of the bank 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,” the RBI says.

JM Financial, however, has been allowed to continue to service its existing loan accounts through the usual collection and recovery process.

JM Financial, founded by investment banking veteran Nimesh Kampani, has diversified into mortgage lending, asset management, distressed debt and private equity.

IPO financing

RBI orders JM Financial to stop financing against shares, debentures