Will JM Financial shares go the IIFL Finance way on Wednesday?

In-line with the fate of IIFL Finance, shares of JM Financial, too, may face selling pressure on Wednesday, March 6, as the Reserve Bank of India (RBI) has barred JM Financial Products Ltd (JMFPL) from giving loans against shares and debentures, including sanction and disbursal of loans against Initial Public Offering (IPO) of shares, with immediate effect.

JM Financial is the third financing company, after Paytm Payments Bank, and IIFL Finance, that has faced the wrath of the regulator recently.

While imposing the restrictions on Tuesday, the central bank said that there were serious concerns on the governance issues in the company, apart from violation of regulatory guidelines.

"The action is necessitated due to certain serious deficiencies observed in respect of loans sanctioned by the company for IPO financing as well as NCD subscriptions," RBI said.

As per the regulator's review, JM Financial 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.

"Further, the application for subscription, the demat accounts and the bank accounts, all were operated by the company using a Power of Attorney (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," RBI said.

On its part, the company has issued a statement saying that there have been no material deficiencies in our loan sanctioning process. 

"Further, the Company has not violated applicable regulations, and there were no governance issues whatsoever. 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. We will also fully cooperate with RBI in their special audit initiative and explain our position to RBI," it added.

JM Financial's business restrictions will be reviewed upon the completion of a special audit to be instituted by the RBI and after rectification of the deficiencies to the satisfaction of the regulator.

On Tuesday, shares of the company settled 2 per cent lower on the NSE at Rs 95.5 per share. 

Over the past one month, the shares have shed over 10 per cent.