The Reserve Bank of India (RBI) is concerned about serious irregularities including violations of Know Your Customer (KYC) and Anti-money laundering (AML) norms and sharing, usage of customer data across group entities by JM Financial Products Limited (JMFPL) which prompted the action on the firm, according to people familiar with the development.
Besides, the regulator found significant deviations in the loan sanctioning process of the company during its review, said the person quoted above requesting anonymity. “There are serious violation of KYC and AML guidelines, deviations in the loan sanction process and also sharing and usage of customer data across the group entities,” said a person.
An email sent to JMFPL seeking specific responses to a set of questions remained unanswered till the time of filing the copy.
RBI action
On March 5, the RBI barred JMFPL from giving loans against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares, with immediate effect.
Announcing the decision, the RBI said the action has been taken after observing certain serious deficiencies in the financial services firm's loan process. More importantly, the central bank highlighted that there are serious concerns on the governance issues in the company, apart from violation of regulatory guidelines.
"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," RBI said. The banking regulator had 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) that eventually led to this action, RBI said.
Other charges
During the review, it was found out 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, RBI said on March 5.
RBI further said that 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," RBI said. Further, the company also acted as the arranger of bank account opening as well as operator of the said bank accounts using the POA, the central bank added.
According to RBI, the business restrictions now imposed will be reviewed upon the completion of a third-party audit to be instituted by the RBI and after rectification of the deficiencies to the satisfaction of RBI. The central bank said the company can continue to service its existing loan accounts through the usual collection and recovery process.
Reacting to the announcement, JM Financial said in a statement: "After 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 will fully cooperate with RBI in their special audit initiative and explain our position to RBI," the company added.
Other actions
This is the third such announcement by the RBI in recent weeks.
On March 4, the central bank asked IIFL Finance to stop sanctioning or disbursing gold loans with immediate effect after observing certain material supervisory concerns in the company's gold loan portfolio.
The central bank said an inspection of the IIFL Finance was carried out by the RBI with reference to its financial position as of March 31, 2023 which revealed certain material supervisory concerns were observed in the gold loan portfolio of the company.
Before that, on January 31, the RBI had imposed business restrictions on PPBL, including a ban on accepting fresh deposits and undertaking credit transactions after February 29. On February 16, it extended the deadline to March 15. The regulator found major irregularities in KYC, which exposed the customers, depositors and wallet holders to serious risks.
On March 6, JM Financial's scrip on the BSE closed at Rs 85.28, down 10.73 percent from previous close.
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