BENGALURU (Reuters) -Shares of India’s JM Financial fell 20% on Wednesday, after the central bank barred one of its units from any form of financing against shares and debentures, including loans to customers to subscribe to initial public offerings.
The diversified financial services group, with a market cap of 73 billion rupees, includes a non-bank provider of short-term uncollateralised loans for IPO subscriptions, but details of the share of such lending in its portfolio were not available.
“The credit underwriting was found to be perfunctory, and financing was done against meagre margins,” the central bank said in its order, adding that the company repeatedly helped a group of customers bid for IPO and debenture offers with loans.
In response, the company said there were no deficiencies in the loan sanctioning process of the unit, JM Financial Products.
“We strongly believe there have been no material deficiencies in our loan sanctioning process,” a company spokesperson said in a statement, responding to the Reserve Bank of India’s (RBI) action.
“Further, the company has not violated applicable regulations.”
The central bank’s action comes a day after another non-bank finance company (NBFC), IIFL Finance, was restricted from providing loans against gold.
“We believe these punitive actions will impact systemic growth for NBFCs in the near term, but will hopefully curb unethical business practices and avert systemic collapse as seen in the past,” brokerage Emkay said in a note on Wednesday.
RBI rules allow banks to lend a maximum of 1 million rupees ($12,000) to individuals to subscribe to IPOs, a limit that is not allowed to be breached even indirectly, through lending to NBFCs, which further lend to individuals.
In JM Financial’s case, the central bank also objected to a procedure in which a ‘power of attorney’ provided by the customer was used to apply for shares in an IPO and eventually sell them, although the bank does not explicitly prohibit this.
“This process of taking a power of attorney is quite common in the markets and will now stop,” said Arun Kejriwal, the founder of Kejriwal Research & Investment Services Pvt Ltd.
The RBI’s order for JM Financial to halt any form of financing against shares and debentures was specific to it and should not be seen as a signal to the market, however, Kejriwal added.
Separately, India’s market regulator had sought some information from the company “as part of a fact-gathering exercise”, a spokesperson for JM Financial said, without saying what information was sought.
The company “categorically refutes any alleged role in inflation of IPO subscription number,” the spokesperson said in response to a report in the Economic Times newspaper, without providing evidence.
($1=82.8950 Indian rupees)
(Reporting by Nandan Mandayam in Bengaluru; Additional reporting by Ira Dugal; Editing by Sonia Cheema and Clarence Fernandez)
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