Detailed Rationale

Crisil Ratings has reaffirmed its 'Crisil AA-/Stable/Crisil A1+' ratings on the debt instruments and bank facilities of JM Financial Asset Reconstruction Company Ltd (JMFARC).

 

The overall rating of JMFARC continues to centrally factor in the expectation of support from the JM Financial group, both on an ongoing basis and during challenging times, and takes note of the capital support being provided in this current event as well. Crisil Ratings believes the substantial loss reported by the company does not impact the group’s credit risk profile. The group’s networth (including minority interest) was Rs 11,420 crore as on December 31, 2024, with a gearing 1.1 times. Also, the group continues to have comfortable liquidity, with cash and cash equivalents and liquid investments aggregated Rs 5,840 crore against debt obligation (including interest) of Rs 2,889 crore coming up for maturity till June 30, 2025.

 

The ratings continue to reflect the reasonable track record of recoveries from the acquisitions and comfortable market position. These strengths are partly offset by the company’s exposure to asset-quality challenges inherent in the industry it operates in, and volatility in earnings profile.

 

Crisil Ratings has taken note of the consolidation of stake done in the JM group. On March 18, 2025, transfer of 57,09,32,034 equity shares of JMFARC (representing 71.79% of total paid up capital) by JM Financial Limited (JMFL) to JM Financial Credit Solutions Limited (JMFCSL) was concluded for a cash consideration of Rs. 856 crore. Post the transfer, JMFCSL now holds 81.77% in JMFARC, with the group continuing to hold 81.77%.

 

Further, JMFCSL has now become the sponsor for JMFARC. In addition, JMFL has also acquired equity shares in JMFCSL from INH Mauritius 1 and Aparna Aiyar Family Trust increasing the shareholding of the group in JMFCSL from 46.68% to 97.02% as on March 25, 2025. JMFL will continue to have 81.77% shareholding in JMFARC through JMFCSL going ahead.

Analytical Approach

Crisil Ratings has assessed the standalone credit risk profile of JMFARC and continues to factor in the strong managerial and financial support from the JM Financial group. Crisil Ratings believes JMFARC will, in case of exigencies, receive distress support from its parent for timely repayment of debt, considering the strategic importance of the entity and also high moral obligation on account of majority shareholding and shared brand.

Key Rating Drivers & Detailed Description

Strengths:

Strong support from, and operational synergies with, the JM Financial group

JMFARC is strategically important to the group given that the latter has identified asset reconstruction as one of the focus areas for its private credit syndication business vertical going ahead. JMFARC also has operational synergies with other businesses of the group, such as investment banking and corporate lending. The JM Financial group extends financial, operational, and management support to the company.

The group held 81.77% in JMFARC through JMFCSL as on March 18, 2025.

 

Capitalisation is also supported by timely capital infusion from the group. The group infused around Rs 595 crore in the first-half of fiscal 2025 by subscribing to the Equity Shares pursuant to rights offer made by JMFARC and is willing to extend additional capital (subject to board approval) to support the company, if and when needed.

 

As of December 31, 2024, JMFARC had networth of Rs 1,144 crore (Rs 592 crore as on March 31, 2024). While gearing was 1.4 times, it is expected to remain under 2.0 times on a steady state basis over the medium term, with support from the group. The company reported the capital adequacy ratio of 29.2% as on December 31, 2024.

 

The group also provides debt funding support to the company and will continue to do so in the future as well. JMFL group has representation on JMFARC’s board by nomination of two directors. JMFL group is the single-largest shareholder of JMFARC and shared brand lead to high moral obligation on the group to support JMFARC. The company is expected to continue to receive strong support from its ultimate parent over the medium term.

 

Reasonable recovery track record

JMFARC has also demonstrated a robust recovery track record from the stressed assets. While the overall SR (security receipts) redemption ratio was 47% as on December 31, 2024, it was due to the fact that substantial acquisitions have been done in last two fiscals. The SR redemption ratio on lagged basis, for assets acquired till March 31, 2023, would be higher at 50%. Recovery track record is also supported by the relatively high discount at which most assets have been acquired, at around 69% as on December 31, 2024. The company will remain selective in pricing future deals as well, which will enable it to maintain its recovery track record over the medium term.

 

Comfortable market position

JMFARC is among the leading asset reconstruction companies in India with outstanding SRs (both owned and managed) of Rs 12,842 crore as on December 31, 2024 (Rs 14,500 crore as on March 31, 2024). The reduction in the AUM for the company was on account of  higher recoveries in recent years and strategy of the Company to do selective acquisitions. The company is acquiring assets based on opportunity while also focusing on recoveries of existing assets. While the company has been focused on corporate asset acquisition in the past, it has also recently acquired retail asset pools, and plans to increase this diversification in the portfolio.

 

Weakness:

Recovery challenges inherent in the industry

Despite having adequate asset acquisition and resolution policy framework, JMFARC will continue to face challenges, given the inherent nature of the asset reconstruction business and the ARC industry as a whole. As the assets under management (AUM) has grown primarily in the past few years and is corporate heavy, it takes 4-5 years to resolve an asset and recover dues. Furthermore, the performance of the recently acquired portfolio remains to be seen.

 

Volatility in earnings

Given the inherent nature of the business, earnings profile can tend to be volatile because of uncertain and erratic recoveries. This is evident from the losses reported over the last two fiscals – Rs 942 crore for fiscal 2024 and Rs 155 crore for fiscal 2023 – after reporting profits for fiscals before this. These losses are primarily linked to provisioning requirements due to lower fair valuation of assets. For nine months of fiscal 2025, the company reported a loss of Rs 45 crore. Apart from provisioning, lower management fee on account of decrease in AUM and end of fee accrual from few larger assets which moved to beyond eight years from acquisition date.

 

Over the medium term, the company plans to scale up its fee income, while focusing on debt syndication by onboarding partners/investors. JMFARC's ability to scale up business and maintain profitability will remain monitorable over the medium term.

Liquidity: Strong

At a group level, as on December 31, 2024, cash and cash equivalents and liquid investments aggregated Rs 5,840 crore against debt obligation (including interest) of Rs 2,889 crore coming up for maturity till June 30, 2024.

Outlook: Stable

JMFL will continue to indirectly hold majority shareholding in JMFARC through JMFCSL and provide strong support to the company. Crisil Ratings also believes JMFARC will maintain comfortable capitalisation and adequate gearing over the medium term.

Rating Sensitivity Factors

Upward Factors

• Upward revision in the rating of the parent, JMFL
• Significant increase in the recovery by JMFARC from stressed assets, while maintaining comfortable financial risk profile with gearing staying under 2 times

 

Downward Factors

• Change in the extent of JMFL ownership of JMFARC or diminution in the expected support from the parent
• Weakening of capitalisation metrics with gearing inching beyond 3 times for an extended period

About the Company

JMFARC was incorporated in September 2007 by JMFL, which held 81.77% stake in the company through JMFCSL as on March 18, 2025, with the balance held by Mr Narotam Sekhsaria (7.15%), Valiant Mauritius Partners FDI Ltd (4.22%), and others, including three public sector banks (6.86%).

About the Group

JM Financial is an integrated and diversified financial services group. The Group’s primary businesses include (i) Integrated Investment Bank (IB) caters to Institutional, Corporate, Government and Ultra High Networth clients and includes investment banking, institutional equities and research, private equity funds, fixed income, private wealth management, PMS, syndication and finance; (ii) Mortgage Lending includes both wholesale mortgage lending (primarily catering to real estate developers) and retail mortgage lending (affordable home loans and secured MSME); (iii) Alternative and Distressed Credit includes the asset reconstruction business and alternative credit funds; and (iv) Asset management, Wealth management and Securities business (Platform AWS) provides an integrated investment platform to individual clients and includes elite and retail wealth management business, broking and mutual fund business.

 

As of December 31, 2024, the wealth management AUM stood at Rs 1,10,532 crore, mutual fund QAAUM at Rs 13,574 crore, the consolidated loan book at Rs 7,947 crore and distressed credit business AUM at Rs 12,842 crore.

 

The Group is headquartered in Mumbai and has a presence across 907 locations spread across 231 cities in India. The equity shares of JM Financial Limited are listed in India on the BSE and NSE.

Any other information

• The group announced a strategic shift post fiscal 2024 with the group pivoting its wholesale credit business (which included the real estate lending, bespoke/corporate lending, distressed credit and financial institutions funding) from an on-balance sheet business to a distribution led syndication business. The group is also looking to foray into alternative investment space for some of the businesses included in the wholesale credit business. The shift also includes increased focus on scaling the fee and commission-based businesses which include investment banking, institutional equities, retail/ high net worth investors facing businesses of asset management, mutual fund, wealth, broking, and investment advisory businesses.The retail mortgage business which focusses more on affordable housing will continue to be grown. Crisil ratings will continue to monitor any further development on the strategic front and the growth in fee-based income as a proportion of total income will remain a monitorable.

 

• Crisil Ratings had taken note of the action by the Reserve Bank of India (RBI), through press release dated March 5, 2024, against JM Financial Products Ltd (JMFPL) and an interim ex-parte order dated March 07, 2024, by the Securities and Exchange Board of India (SEBI) against JMFL.

 

Reserve Bank of India (RBI), through press release dated March 5, 2024, had directed JM Financial Products Ltd (JMFPL) to cease and desist, with immediate effect, from doing any form of financing against shares and debentures, including sanction and disbursal of loans against initial public offering (IPO) of shares as well as against subscription to debentures. JMFPL, however, could continue to service its existing loan accounts. On October 18, 2024, the restrictions were lifted by the RBI vide a letter to the company, thereby permitting JMFPL to provide financing against shares and debenture with immediate effect. The company has resumed its loan against securities (LAS) business post the receipt of the letter. However, the Board of Directors of JMFPL had decided to voluntarily discontinue the IPO financing business.

 

Furthermore, Securities and Exchange Board of India (SEBI) through its interim ex-parte order barred JMFL from taking any new mandate for acting as a lead manager for any public issue of debt securities. However, for existing mandates, JMFL was allowed to continue to act as the lead manager for public issue of debt securities for a period of 60 days from the date of the interim ex-parte order. On June 20, 2024 SEBI passed a confirmatory order barring JMFL from acting act as a lead manager in any public issue of debt securities till March 31, 2025. This was in line with the voluntary submission that JMFL had made as part of the hearings to the SEBI. The order also clarified that this is limited to the functioning of JMFL as a lead manager to public issue of debt securities and does not relate to other activities of JMFL, including acting as a lead manager to public issue of equity instruments.

 

Crisil Ratings believes revenue and net profit contribution from the businesses stopped by the group – IPO financing and DCM activities- is not substantial for the group.

 

• On March 17, 2025, the Board of Directors of JMFL also approved entering into business transfer agreement with JMFSL for the transfer of the Private Wealth business on a slump sale basis. The business transfer is effective from April 1, 2025. With this the private wealth business will now be integrated with JMFSL’s existing businesses.