The Reserve bank of India (RBI) has barred JM Financial Products from advancing loans against shares and debentures after finding that the company indulged in various manipulations.

The regulatory and governance lapses include helping a group of JM Financial’s customers to bid for various IPOs by using loaned funds.

The systemically important non-deposit-taking NBFC is barred from sanctioning and disbursing loans against initial public offering (IPO) of shares as well as against subscription to debentures.

The restrictions are with immediate effect.

Besides directing the entity from “cease and desist” from financing activities, the RBI said it is separately examining any possible regulatory violations and deficiencies on the part of the banks concerned.

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

The RBI said the actions were “necessitated due to certain serious deficiencies observed in respect of loans sanctioned by the company for IPO financing as well as NCD (non-convertible debenture) subscriptions”.

“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," it added.

The regulator said it had conducted a limited review of JM Financial’s books on the basis of 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 RBI said.

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 said.

Further, the central bank said JM Financial Products also acted as the arranger of bank account opening as well as the 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,” it said in the statement.

The regulator said it will review its business restrictions on JM Financial upon the completion of a special audit and after the company rectifies lapses in its operations. 

JM Financial, meanwhile, can continue to service its existing loan accounts through the usual collection and recovery process.

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

JM Financial Products offers a broad suite of loan products. Broadly, it operates under five verticals — capital market financing, retail mortgage financing, bespoke financing, financial institution financing, and real estate financing, as per its website. 

JM Financial’s capital market loan book was worth Rs 978 crore at the end of December, which is about 6% of its overall loan book that’s worth Rs 15,111 crore.

The action against JM Financial comes a day after the RBI slapped several curbs on IIFL Finance, including barring it from disbursing gold loans, following supervisory concerns.

Earlier, on 31 January, RBI imposed business restrictions on Paytm Payments Bank, including a ban on accepting fresh deposits and undertaking credit transactions after 29 February. On 16 February, it extended the deadline to 15 March.