CRISIL Ratings has 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 JM Financial Ltd (JMFL).

The RBI has directed 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, can continue to service its existing loan accounts. As per the RBI, their action was based on certain serious deficiencies observed in respect of loans sanctioned by JMFPL for IPO financing as well as non-convertible debenture (NCD) subscriptions. The RBI carried out a limited review of the books of JMFPL on the basis of information shared by SEBI.  As per the press release, the actions of JMFPL in respect of loans sanctioned by JMFPL for IPO financing as well as NCD subscriptions, apart from being in violation of regulatory guidelines, raised serious concerns on governance issues in JMFPL, which in RBI’s assessment was detrimental to the interest of customers. The RBI will review the business restrictions upon completion of a special audit to be instituted by it and after rectification of the deficiencies to the satisfaction of the RBI.

Furthermore, 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 may 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. The SEBI interim ex-parte order details a particular public issuance of debt wherein JMFL was one of the lead managers. The said interim ex-parte order of SEBI states that the actions of JMFL appeared to be unfair trade practice under SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulation, 2003, and were in violation of the Code of Conduct under SEBI (Merchant Bankers) Regulations, 1992. The foregoing prima facie observations contained in the interim ex-parte order are made on the basis of material available on record with SEBI. JMFL may, within 21 days from the date of the receipt of the order, file its reply / objections, if any, to this interim ex-parte order and may also seek to avail an opportunity of personal hearing. SEBI shall undertake an investigation into the issues stated under the interim ex-parte order and complete the same within six months from the date of the interim ex-parte order.

These regulatory actions by RBI will directly impact the business of JMFPL with respect to IPO financing and lending against shares and debentures and by SEBI with respect to being appointed as lead manager to the public issue of debt securities business of JMFL until the satisfactory completion of the special audit / investigation. Net Revenue from these businesses includes net interest income from IPO financing and loans against shares as well as fee income earned from lead managing public issue of debt securities. For nine months ended December 31, 2023, net revenue from these avenues stood at less than 3% of the consolidated net total income of the group. While the impacted LAS book will continue to generate revenues till it runs down, the ability to redeploy the proceeds towards other loan offerings of JMFPL including retail mortgage, financial institutions financing, bespoke lending (to the extent allowed) and real estate financing, in a timely manner remains a monitorable. At this point, CRISIL Ratings believes revenue and net profit contribution from the impacted businesses is not substantial for the group.

The leverage of the group continues to be low [1.5 times (gross) as on December 31, 2023] and liquidity profile remains comfortable. As on March 07, 2024, the group had cash and cash equivalents and liquid investments aggregating Rs 4,764 crore against debt obligation (including interest) of Rs 2,874 crore coming up for maturity till June 30, 2024. Moreover, the core businesses of the group, viz equity capital markets, lending, advisory (mergers and acquisition, private equity syndication), private wealth management, mortgage [wholesale and retail (home loans, MSME)] lending, alternative and distressed credit, and asset management, securities (institutional and non-institutional) and elite and retail wealth management are not directly impacted by these orders.

Nevertheless, the issues raised by the regulator raises questions on the operational processes and compliances and any developments will remain a key monitorable. CRISIL Ratings will continue to assess the impact of these orders and/or further developments and incremental disclosures pertaining to these orders on the credit risk profile, including fund raising ability, of the JM Financial group.

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