Mumbai: The Securities and Exchange Board of India (Sebi) Thursday barred JM Financial from taking new mandates as a merchant banker for debt public issues due to alleged rule violations. The latest curbs follow those ordered this week by the banking regulator, which barred the company from either financing the purchase of shares and bonds or providing loans against such securities.

JM Financial could, however, continue to act as a lead manager for its existing mandates on the public issue of debt securities for the next 60 days. Shares of JM Financial, with a market value of about Rs 8,400 crore, have lost more than 10% since the first set of curbs was announced.

Sebi’s action follows a routine probe it had conducted into public issues of non-convertible debentures (NCD) last year. During the examination of a particular issue, the market regulator noticed that a significant number of individual investors sold the securities allotted to them on the day of listing itself. That brought down retail ownership sharply.

“This was unusual,” Sebi’s whole-time member Ashwani Bhatia said in his order that barred JM Financial from taking up fresh debt merchant-banking mandates. “The arguments raised by JMFL-MB, on behalf of itself and the other two group companies, has been an attempt to contend that the companies — individually — have complied with the letter of the law. However, once their actions are aggregated, what comes out is a complete disregard for restrictions imposed by Sebi on providing incentives to investors for subscribing to debt securities,” Bhatia wrote in the order.

The Sebi member went on to add that the company sought to “wrap actions with the cloak of formal legality.” JM Financial officials could not be immediately reached for comment.

Financing Purchases

The regulator observed that JM Financial Products Limited (JMFPL), a non- banking finance company (NBFC) and a subsidiary of holding company JM Financial, acted as counterparty to the trades of these individual investors and had also provided the funds deployed by these investors for subscribing to the issue.JMFPL, subsequently, on the very same day, offloaded at a loss, a significant portion of the securities it had acquired from these investors to corporate investors.
Sebi’s investigation also revealed that these investors had submitted their applications in the public issue through the stock broker JM Financial Services Ltd (JMFSL), another subsidiary of JM Financial.

The bank accounts linked to 920 of the 1,748 applicants who had applied through stock broker JMFSL were held at the Nariman Point branch of ICICI Bank, Sebi said.
Sample bank statements of 90 of these 920 applicants were examined and it was observed that JMFPL, the NBFC, had transferred funds to these bank accounts on November 1, 2023. The funds were utilized for subscribing to the NCDs in the debt issue, said the Sebi order.

JM Financial, in its submission to Sebi, said that JMFPL, the NBFC, had provided funding in the form of loans to a total of 1,016 applicants, amounting to Rs 121.40 crore, to subscribe to the issue.

Unlike equity markets where all trade transactions on the exchange have a single counterparty which is the exchange and there is anonymity in the trading, in the debt markets the transactions are mostly bilateral and done over the counter and reported to the exchanges after the deal has been completed.

Sebi alleged that in this case, JMFPL-NBFC was able to purchase all bonds from investors it had funded. All this would have been decided in advance. The transactions were settled on T+0 basis i.e. on the very day the transaction occurred.

Income Profile, Funding Mismatch

It also alleged that 47 applicants who had declared an annual income less than Rs 5 lakh were sanctioned loans of Rs 9,80,000 each and another 10 investors falling in the same category, less than Rs 5 lakh, were granted loans of Rs 98,00,000 each.

Sebi examination also noted that on the listing day, i.e. November 7, 2023, the 1,016 applicants who had availed funding from JMFPL-NBFC not only sold the securities back to JMFPL-NBFC, but also transferred the entire amount including the principal amount, accrued interest and trading gains to JMFPL- NBFC.

The regulator is also separately examining how certain entities placed huge bids under the HNI (high net worth individuals) category and subsequently also placed bids under the retail category.

This resulted in the issue being oversubscribed but the bids were rejected as multiple applications were made from the same PAN, Sebi said. It has referred this matter also to the Reserve Bank of India (RBI).