Exclusive: Markets regulator has been investigating IPO financiers for over a year, say sources

Securities and Exchange Board of India

The markets regulator has been scrutinising lenders, including JM Financial, involved in IPO financing for over a year now, people familiar with the development said.

The scrutiny follows massive subscriptions seen in many IPOs, particularly those of small and midcap firms, and heightened participation by high net-worth individuals (HNIs) leveraging borrowed funds for quick gains through IPO share purchases.

The Securities and Exchange Board of India (SEBI) also suspects that many NBFCs are routinely circumventing the RBI's Rs 1 crore funding limit for a single customer.

The practices around IPO financing have drawn increased scrutiny following three circulars issued by the securities and banking regulators, the people cited above said. The circulars were about using one client's securities to raise money for another client or even the brokerage and about setting a limit for loans that can be issued for IPO financing.

Sebi issued two circulars in 2016 and 2019 to prevent stockbrokers from misusing client funds and securities. The 2016 circular, titled Enhanced Supervision of Stockbrokers/Depository Participants, included guidelines on monitoring clients' funds lying with the stockbroker by the stock exchanges. The 2019 circular restrained brokers from pledging clients' securities to banks/NBFCs for raising funds, even with the client's authorisation.

The Reserve Bank of India (RBI) had issued one in 2021 setting a Rs 1 crore limit per borrower for financing subscriptions to IPOs, the people added. This was believed to have sounded a death knell to various NBFCs that earn by lending heavily to HNIs for IPO subscriptions.

Spokespeople for Sebi, Reserve Bank of India, and JM Financial did not immediately respond to emails seeking comment.

On March 5, the RBI barred JM Financial Products from giving loans against shares and debentures, including sanction and disbursal of loans against shares, with immediate effect.

In response, JM Financial said, "After a careful and detailed review of the order issued by the RBI on the action against JM Financial Products, 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 bona fide manner."