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JM Financial on Wednesday said it had a "careful and detailed review" of the Reserve Bank's order imposing restrictions on the company's financing business and asserted that there was "no material deficiencies" in its loan sanctioning process.
The Reserve Bank on Tuesday imposed restrictions on JM Financial Products Ltd after it found the company indulged in various manipulations, including repeatedly helping a group of its customers to bid for various IPOs (initial public offerings) by using loaned funds.
"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," a JM Financial spokesperson said in a statement.
The spokesperson further said JM Financial has been funding IPOs since over the last two decades and its "IPO financing product is short term and self-liquidating in nature".
"In the context of IPO funding, the Power of Attorney (POA) is taken as a risk containment measure only.
"The practice of taking POA is prevalent across the industry and is perfectly legal," the spokesperson said, adding, "we will fully cooperate with RBI in their special audit initiative and explain our position to RBI."
The central bank has barred the non-deposit-taking NBFC from providing any kind of financing against shares and debentures, including sanction and disbursal of loans against IPO of shares as well as against subscription to debentures.
In a statement on Tuesday, the RBI said the actions were "necessitated due to certain serious deficiencies observed in respect of loans sanctioned by the company for IPO financing as well as NCD (Non-Convertible Debentures) subscriptions".
JM Financial Products has been allowed to continue to service its existing loan accounts through the usual collection and recovery process.
Based on information provided by markets regulator Sebi, the RBI had carried out a limited review of the books of the JM Financial Products.
"During the limited review, it was observed, inter alia, that the company repeatedly helped a group of its customers to bid for various IPO and NCD offerings by using loaned funds.
"The credit underwriting was found to be perfunctory, and financing was done against meagre margins," the RBI said.
The application for subscription, the demat accounts and the bank accounts, all were operated by the company using a POA and a Master Agreement obtained from these customers without their involvement, whatsoever, in the subsequent operations.
"Consequently, the company was able to effectively act as both lender as well as borrower," the RBI said.
Further, the central bank said JM Financial Products also acted as the arranger of bank account opening as well as the operator of the said bank accounts using the POA.
"Apart from being in violation of regulatory guidelines, there are serious concerns on governance issues in the company, which in our assessment are detrimental to the interest of the customers," the RBI statement said.
According to the RBI, the business restrictions will be reviewed upon the completion of a special audit and after rectification of the deficiencies to the satisfaction of the RBI.
Meanwhile, shares of JM Financial on Wednesday tanked over 19 per cent on leading stock exchanges.
The stock tumbled 19.29 per cent to Rs 77.10 on the BSE. At the NSE, it plummeted 18.75 per cent to Rs 77.55.
The company's market capitalisation declined by Rs 1,484.53 crore to Rs 7,643.63 crore.
JM Financial Products offers a broad suite of loan products.
Broadly, it operates under five verticals -- capital market financing, retail mortgage financing, bespoke financing, financial institution financing, and real estate financing, as per its website.