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Sebi bars JM Financial from taking up new mandates amid lapses in debt issuance
Mumbai: The Securities and Exchange Board of India (Sebi) on Thursday barred JM Financial from acting as lead manager for any new public issue of debt securities. The order came after the regulator found some serious flaws while JM Financial acted as lead manager for a particular public issue.
“With respect to the existing mandates, JM may act as lead manager for public issuance of debt securities for two months,” Sebi’s whole-time member Ashwani Bhatia said in the interim order. The committee is required to file its response/objections on the matter within 21 days.
According to the order, in 2023, the market regulator carried out a routine analysis of public issuances of Non-Convertible Debentures (NCD).
During the inspection, Sebi found that a sizeable proportion of individual investors in a particular issue sold the securities allotted to them on the day of listing. The pattern of holdings of the securities revealed that on the day of listing, a sizeable portion of the issued securities changed hands, leading to a substantial decline in retail ownership. This in itself was “unusual”, according to Sebi.
Sebi said the observations in the order were based on the material available on record and the investigation into the matter will be completed in six months.
In this particular issue, AK Capital Services Ltd., JM Financial Limited, JMFL-MB (Notified), Nuvama Wealth Management Limited and Trust Investment Advisors Private Limited were the lead managers.
Upon closer inspection of the transactions on the day the said issue was listed, it was discovered that JM Financial Products Ltd (JMFPL-NBFC), a non-banking financial company and a subsidiary JM Financial Ltd Merchant Banker (JMFL-MB) provided the funds used by these investors to subscribe to the issue and acted as counterparty in their trades. Thereafter, JMFPL-NBFC sold a considerable amount of the securities it had purchased from these individuals to corporate investors on the same day, selling them at a loss.
The regulator’s investigation also revealed that these investors had submitted their applications in the public issue through stock broker JM Financial Services Ltd (JMFSL-Broker), another subsidiary of the notified company — JMFL-MB. JM Financial Ltd, the lead manager; JM Financial Services Ltd, the stock broker; and JM Financial Products Ltdd, the NBFC, are part of the JM Financial Group.
The order stated that JM, in its response to the regulator’s observations, stated that such practices were part of the normal course of business.
“It was also stated that a similar approach was adopted in many of the other matters where he was the lead manager. Such practices, as explained above, have a detrimental effect on the orderly functioning of the market and harm the interests 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 intervene and pass interim directions, pending investigation, to prevent any further erosion in market integrity on account of such practices,” Bhatia said in a 22-page order.
The regulator’s order comes close on the heels of the Reserve Bank of India’s directions prohibiting one of its other group entities, JM Financial Products, from providing loans against shares and debentures, including sanctioning and disbursing loans against initial public offering (IPO) of shares, with immediate effect. The RBI issued the order on March 5.
Banking regulator RBI said the action was taken after observing certain serious deficiencies in the financial services company’s lending process. Most importantly, the central bank highlighted serious concerns about the company’s governance issues in addition to violating regulatory guidelines.
Reacting to the RBI’s action, JM Financial reiterated that it had conducted a “careful and detailed review” and that there were no “material deficiencies” in its loan approval process.
Sebi issued the order after market hours on Thursday. Shares of JM Financial closed at ₹87.94 each, up 3.12%.
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