RBI Bars JM Financial from Share, Debenture Financing: Check Impact & Forecast

RBI restricts JM Financial from loan activities against shares, debentures due to regulatory violations. Explore the consequences.

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In a significant regulatory move, the Reserve Bank of India (RBI) on Tuesday, 5th March, announced a stern measure against JM Financial Products Ltd (JMFPL), a leading financial services firm, by restricting its loan disbursement activities, particularly against shares and debentures. 

Regulatory Crackdown

The RBI's directive prohibits JMFPL from issuing loans against shares and debentures, including the sanction and disbursal of loans for Initial Public Offerings (IPOs). This decision follows a detailed review by the RBI, which unveiled serious deficiencies and governance issues in JMFPL's loan processes, along with violations of regulatory guidelines.

The core issues identified by the RBI include inadequate loan sanctioning processes for IPO financing and subscription to Non-Convertible Debentures (NCDs). The RBI's scrutiny revealed that JMFPL had facilitated a group of customers in bidding for various IPOs and NCDs through loaned funds. Alarmingly, these transactions were managed with minimal customer involvement, leveraging Powers of Attorney (POA) and Master Agreements to operate applications, demat, and bank accounts on behalf of these clients. This practice essentially positioned the company as both the lender and borrower, raising significant regulatory concerns.

Implications and Next Steps

Despite these restrictions, JMFPL is permitted to continue servicing its existing loan accounts through standard collection and recovery processes. The RBI has also indicated that a special audit will be conducted to review these deficiencies further. The lifting of these business restrictions will be contingent upon the satisfactory rectification of identified issues.

JM Financial’s Response to RBI Action

In response to the RBI's directive, 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.

JM Financial Stock Price 

On Tuesday, before the announcement, JM Financial's share price fell by 2%, finishing the day at Rs 95.45 on the National Stock Exchange (NSE). The consequence of this announcement indicates potential continued downtrend in Wednesday’s trading session amid investors' growing apprehension regarding the possible repercussions of the RBI's recent decision, as well as the challenges the company may face in the near future.The outcome of the special audit and subsequent actions by JMFPL will be closely watched by stakeholders across the financial services industry.

Broader Regulatory Context

The RBI's stringent action against JMFPL is part of a larger regulatory initiative aimed at ensuring adherence to compliance standards and safeguarding investor and public interests. This incident marks the third such regulatory announcement by the RBI in recent weeks. On March 4, IIFL Finance was instructed to halt the sanctioning and disbursement of gold loans immediately, following the discovery of significant supervisory concerns within its gold loan portfolio. 

On January 31, the RBI implemented operational restrictions on Paytm Payments Bank Ltd (PPBL), restricting it from accepting new deposits and conducting credit transactions, with an extension granted until March 15, in light of severe KYC irregularities.


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