Background
JM Financial Products Ltd acts as Debt Issue Lead Manager in various public issues of shares and Debentures. JM Financial was among the leading investment banks in 2023 for equity-related issuance. However, for the debt-related issuance, its name didn’t rank among the top 5.
There was a public issue of non-convertible debentures (NCDs) during the year 2023.
SEBI undertook a routine examination of the public issues of non-convertible debentures after the Reserve Bank of India barred a company’s unit from extending loans against shares and bonds after an inspection revealed serious deficiencies in loans sanctioned for the financing of initial public offerings (IPO) and bond issuances.
Shares of JM Financial tanked by 20 per cent following the RBI order. Later, the stock recouped the bulk of the losses.
J M Financial reiterated that it has done a “careful and detailed review” and that there was “no material deficiencies” in its loan-sanctioning process after the RBI Move.
What happened in the case
SEBI undertook a routine examination of the public issues of non-convertible debentures and observed that the manner in which subscriptions have been managed in this public issue of debt instruments is shocking. The transactions at every stage of this public issue appear to have been done in a per-determined and premeditated manner and executed clinically to ensure subscription and success.
A.K. Capital Services Ltd., JM Financial Limited (JMFL-MB/Noticee), Nuvama Wealth Management Limited and Trust Investment Advisors Private Limited were the Lead Managers to the issue.
Further, it was observed that a significant number of investors in non-convertible debentures (NCDs) sold their securities allotted to them on the day of listing. The holding pattern of the securities showed that a very large percentage of securities issued changed hands on the day of listing as a result of which retail ownership came down sharply which was unusual.
On further examination of the transactions on the day of listing of the said issue, it was observed that JM Financial Products Limited (JMFPL-NBFC), a Non-Banking Finance Company (NBFC) and a subsidiary of the JM Financial Products Ltd, 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-NBFC, subsequently, on the very same day, offloaded at a loss, a significant portion of the securities that it had acquired from these investors to corporate investors. The examination also revealed that these investors had submitted Interim Ex Parte Order in the matter of JM Financial Limited their applications in the public issue through the stock broker JM Financial Services Ltd (JMFSL-Broker), another subsidiary of the Noticee.
SEBI also stated that “the scheme, it is prima facie noted, involved getting individual investors, who would otherwise not have participated in the issue, to make applications not just by providing funds to them but also by assuring them an exit at a profit on the listing day.”
Also, an investor seeking funding to apply in a public issue of securities is looking to make trading gains by virtue of the movement in the price of the security post-listing. However, given the interest charged by the lender on such loans, there needs to be a jump in the price of the security post-listing for such trades to be profitable.
The pattern of transactions seen in the bank statements suggests that this is not an isolated incident.
Action taken by SEBI
SEBI prohibited JM Financial Ltd from taking on new mandates to serve as a lead manager for the public issuance of debt instruments for flouting regulatory norms. In the case of existing assignments, the firm can, however, continue to act as a lead manager for the public issue of debt securities for a period of 60 days as informed by SEBI.
SEBI will undertake an investigation and the investigation so undertaken shall be completed within a period of six months.
Time period given to JM Financial to file reply/Objections
JM Financial will have 21 days to file its reply or objections, if any, including the option of a personal hearing.
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