Sebi has banned JM Financial from acting as the lead manager for new public issues of debt securities, citing alleged fraudulent practices. The decision, made through an ex-parte interim order, accuses JM Financial of incentivizing specific investors to apply for the public issue and conducting transactions in a predetermined manner to ensure subscription and success.
This action follows the Reserve Bank of India’s (RBI) recent move to bar a unit of a company from providing loans against shares and bonds due to serious deficiencies in loans sanctioned for IPO financing and bond issuances, based on information shared by Sebi.
JM Financial’s stock plummeted by 20% after the RBI order, but later recovered most of the losses. Sebi’s investigation found that many investors in non-convertible debentures (NCDs) sold their allotted securities on the day of listing, leading to a decrease in retail holding and an increase in corporate holding. Most of these retail investors had applied through JM Group’s broker.
JM Financial Products (JMFPL), a subsidiary of JM Group and an NBFC, funded these investors and acquired their entire allotment, subsequently selling a significant portion of the securities at a loss on the same day. Sebi criticized JM Financial for its actions, describing them as a ‘complete disregard’ of the regulator’s restrictions and an attempt to justify their actions with legal formalities.
Sebi’s whole-time member, Ashwani Bhatia, noted that the losses incurred by JM Financial were significantly higher than the interest income earned, suggesting that the transactions were not financially logical for a profit-driven company. Sebi has given JM Financial 60 days to complete existing mandates.
The investigation will also look into other public issues handled by JM Financial, and the regulator aims to complete the probe within six months. JM Financial, a leading investment bank for equity-related issuance in 2023, is also under scrutiny for inflated subscriptions in SME IPOs. Sebi noted that certain entities placed large bids under the HNI category and subsequently under the retail category, leading to oversubscription but rejection due to multiple applications from the same PAN. These bids originated from accounts at the same branch of ICICI Bank and PoA were executed in favor of entities within the JM Group. Sebi has referred this matter to the RBI.
