The Securities and Exchange Board of India (SEBI) alongside the Reserve Bank of India (RBI) have imposed prohibitions on JM Financial Products, specifically restricting them from accepting fresh commitments as a lead manager in relation to public debt security offerings.
Bengaluru’s Financial Update: Piramal Enterprises’ NCD Fundraising and JM Financial’s Unusual Transaction
Piramal Enterprises Secures Funding through NCDs
In the bustling financial landscape of Bengaluru, October of the previous year marked a significant fundraising event for Piramal Enterprises Ltd. The company succeeded in mobilizing a hefty sum of approximately ₹533 crore by issuing non-convertible debentures (NCDs). Notably, JM Financial Products Ltd, an affiliate of the esteemed JM Financial Ltd, played a major role in this venture, injecting a sizeable 26% of the funds.
ICICI Bank Leads Investor Participation
It’s remarkable that a majority of the investment crowd was channeled through a single ICICI Bank outlet, specifically at the Free Press Journal Marg at Mumbai’s distinguished Nariman Point. This detail signals a notable concentration of financial activity within a distinct node of the banking network.
JM Financial’s Trading Maneuver Sparks Probe
The trading saga unfolded on November 7, upon the NCDs taking their place in the market. In a swift turnaround, JM Financial Products reacquired the entirety of these securities from the 1,016 participating investors. Subsequently, these securities were sold off to a trio of entities—a pair of corporates along with a brokerage firm. This succession of trades, however, culminated in an unfortunate loss of ₹90 lakh for JM Financial Services Ltd.
The Securities and Exchange Board of India (SEBI) embarked on an in-depth examination of these transactions, encountering a series of events that seemingly defied commercial logic. The Sebi investigation culminated in an early March order, raising critical concerns over the rationale of engaging in successive loss-making trades by a profit-oriented entity.
Joint Regulatory Scrutiny by RBI and SEBI
In a recent joint analytical session, both the Reserve Bank of India and SEBI discerned that there were underlying complexities to this transaction that were not immediately apparent. As a consequence of these findings, JM Financial Products faced a significant directive: they were restricted from accepting new appointments as a leading manager for public issuances of debt securities.
Record High NCD Fundraising in 2023
In an overarching review of the fundraising landscape, 2023 emerged as a record-setting year for NCD financings, with 44 companies opting to raise funds through this route. This figure not only surpasses the 30 entities of 2022 but also eclipses previous years, radiating increased confidence and reliance on NCDs as a financing instrument.
Piramal Enterprises’ Strategic Financial Planning
Piramal Enterprises, a giant within the non-banking finance sector and part of the Piramal Group, had set an ambitious target: raising ₹1,000 crore through NCDs in the month cited earlier. The NCD issue was strategized with an initial offer (the base size) of ₹200 crore and an additional option, commonly referred to as the greenshoe option, to escalate the size by a further ₹800 crore as per the demand fulfillment.
Non-Convertible Debentures at a Glance
For those new to financial jargon, NCDs are a type of fixed-income financial instrument listed on stock exchanges akin to shares. They are commonly pursued as an investment option at the time when they are publicly issued. Interested investors secure these debentures through brokerage services, with the NCDs often having specified allotments for various investor classes including individual investors, high net-worth individuals, and institutional entities.
Piramal Enterprises’ NCD Draws Strong Retail and HNI Interest
Piramal Enterprises’ non-convertible debenture (NCD) emerged as one of the substantial fixed-income opportunities last year, with a total issue size of ₹1,000 crore. This significant sum was strategically divided among various investor classes, with retail individual investors and high-net-worth individuals (HNIs) each having a dedicated portion of ₹300 crore. The remaining ₹400 crore was equally divided, with ₹200 crore apportioned for non-institutional investors and another ₹200 crore for institutional investors.
Impressive Subscription Rates Despite Uneven Investor Participation
Remarkably, Piramal Enterprises succeeded in accumulating ₹533 crore through this issue. The retail segment displayed robust participation, applying for securities worth ₹256 crore, which signifies an impressive 85.3% subscription relative to the reserved amount. Meanwhile, HNIs showed considerable interest, contributing bids worth ₹146 crore. In the non-institutional category, applications totaled ₹131 crore, suggesting a 65.5% subscription rate. Institutional investors, however, did not participate in the bidding process.
JM Financial Services Leads Brokerage Performance
Among the 54 brokers that facilitated the debt issue, JM Financial Services Ltd stood out, securing the most subscribers — a total of 1,748. This figure eclipsed the subscription numbers achieved by A.K. Stockmart Pvt. Ltd and Nuvama Wealth and Investment Ltd, which attracted 1,658 and 1,120 applicants respectively. Investors associated with JM Financial Services snapped up securities valued at ₹199.46 crore, constituting a substantial 37.4% of the total funds raised by Piramal Enterprises.
Insight into JM Financial’s Legacy and Recent Performance
Delving into JM Financial Group’s background reveals its status as one of India’s seasoned brokerage and financial institutions. Established in 1973 by relatives Mahendra Kampani and Nimesh Kampani, the firm observed its 50th anniversary last year. Despite this milestone, the company encountered financial headwinds, with revenue descending to ₹3,343 crore in the fiscal year ending in March 2023 — an 11.2% contraction from ₹3,763.2 crore in the preceding year. The firm’s financial struggles were exacerbated by a 19% reduction in fee and commission income and a stark 69% slump in the fair value of assets, which dwindled to ₹183.42 crore. Ultimately, these factors precipitated a 22.7% downturn in profit, dropping from ₹773.16 crore to ₹597.29 crore.
The veteran Nimesh Kampani holds the mantle of non-executive chairman, while lineage participation continues with his son Vishal Kampani serving as the non-executive vice chairman. Furthermore, Vishal is at the helm as the managing director of JM Financial Products Ltd, a significant subsidiary of the listed parent company. Since its inception in 1984, JM Financial Products has diversified into a multitude of financing sectors including real estate, structured, SME, and capital market funding. The subsidiary serves as a cornerstone for the group, contributing approximately a quarter, ₹858 crore, of the parent’s revenue and a sizeable 44.2%, equating to ₹313.36 crore, of last year’s profit.
Achieving a balance between legacy and adaptation, JM Financial Group continues to navigate the ebb and flow of fiscal tides, leveraging its extensive history and deep expertise to sustain its position in the competitive financial landscape.
JM Financial Group in Regulatory Spotlight
A Critical Player in Indian Finance
JM Financial Group has emerged as a pivotal player in India’s financial sector, offering fundraising solutions and investment banking expertise to a clientele of industry giants from the Tatas and Ambanis to the emerging Adanis. Their proficiency in aligning with both established blue-chip firms and companies in distress positions them uniquely at the heart of India’s corporate finance landscape.
Endorsement from Industry Leaders
The stature of JM Financial was highlighted in a statement from Gautam Adani, the renowned founder and leader of the Adani empire, in their 2022-23 annual report: “The alliance with JM Financial is marked by speed, dependability, and simplicity. Their insightful guidance enables the seeding and cultivation of pioneering ventures with remarkable ease and perfection.”
Nimesh Kampani: A Figure of Acumen and Diplomacy
At the helm is the 77-year-old chair, Nimesh Kampani, renowned for his sharp financial sense, fearless approach in deal negotiation, and his adroit ability to mediate among business leaders with competing interests. His leadership has solidified JM Financial’s reputation as a distinguished institution.
Resilience Amidst Scrutiny
With a track record of regulatory decisions often being overturned in favor of firms at the Securities Appellate Tribunal, a top executive from a non-banking financial company (NBFC) commented on JM Financial’s ongoing regulatory challenges. They suggested that the company’s heritage and past vindications by the Tribunal might point to a favorable outcome, hinting, “JM Financial, with its lineage and knack for emerging unscathed, could well find itself absolved yet again.”
The Crux of Controversy
The unnamed executive pondering on the pressing matter stated, “No financial losses were incurred, so where lies the infraction?” This question encapsulates the debate surrounding the group’s recent regulatory scrutiny, hinting at a nuanced financial matter that awaits a clear resolution.
Detailed Breakdown of Piramal Enterprises’ NCD Issue and JM Financial Services Involvement
Strong Retail Investor Turnout
Piramal Enterprises recently succeeded in raising ₹533 crore through a Non-Convertible Debentures (NCD) issue, witnessing robust interest from retail investors. JM Financial Services notably topped the subscription charts, bidding a substantial ₹199.46 crore. This sum dwarfed the contributions of ₹65.53 crore and ₹64.40 crore from other notable subscribers like A.K. Stockmart and Nuvama Wealth and Investment Ltd, respectively.
Financial Support to Investors
In a noteworthy move, JM Financial Products offered loans amounting to ₹141.40 crore to 1,016 investors under the umbrella of JM Financial Services. This loan scheme raised concerns with financial regulators. The Securities and Exchange Board of India (SEBI) took particular issue with the fact that 47 investors with reported annual incomes below ₹5 lakh received loans of ₹9,80,000 each from JM Financial Products. Furthermore, 10 other investors, also earning less than ₹5 lakh, were sanctioned loans of ₹98 lakh each.
Concentrated Bidding and Quick Exits
SEBI’s investigation revealed a striking pattern among retail investors who received loans from JM Financial Products; 772 of them placed their bids simultaneously at 4:47:35 PM on October 19, coinciding with the opening of the NCD issue.
A swift turnaround occurred on November 7, just hours after the NCDs were listed. JM Financial Products repurchased securities totaling ₹100 crore from 993 investors at an average price of ₹1,002.5. Shortly after, the company offloaded ₹80 crore of the debt securities at an average price of ₹994 to two corporates, Cyient Ltd and Chaitanya India Fin Credit Pvt Ltd, as well as to the broker Om Scrip Trading Pvt Ltd.
Regulatory Concerns
The investigation led SEBI to conclude that these transactions were not coincidental. The majority of investors exiting on the listing day had initially applied through JM Financial Services, indicating a strategy beyond mere facilitation of funds. SEBI deduced that JM Financial Group enticed individual investors to the issue, not only by providing the necessary capital but also guaranteeing a profitable exit on the listing day itself.
In light of these findings, the practices of JM Financial Services have come under scrutiny for possibly overstepping the interests of fair market play and raising issues of regulatory concern.
Overview of Recent Regulatory Scrutiny
RBI Highlights Loan Irregularities
The Reserve Bank of India (RBI) has flagged serious concerns in a recent statement issued on March 5 concerning the JM Financial Group’s processes regarding initial public offering (IPO) financing and non-convertible debenture (NCD) subscriptions. The RBI’s examination has brought to light significant inadequacies in the loan provisions by the company.
Legal Counsel Weighs In on Practices
Chirag M. Shah, a specialized counsel in Securities Law and Arbitration, notes that while some methodologies employed by the company may be aggressive, they aren’t outright illegal under current statutes. He stresses the need for tighter regulatory frameworks to address these issues, highlighting the ongoing cooperation between the RBI and Securities and Exchange Board of India (SEBI). Shah indicates that while the immediate effect might be negative, the financial market’s adaptiveness means that new practices will emerge as old ones are regulated away.
Method of JM Financial Products Under Scrutiny
Evidence has emerged, according to the SEBI’s investigation, that JM Financial Products repeatedly assisted certain clients in participating in various IPOs and NCD issues by providing loans. Observations point to a lax credit underwriting process, with minimal margin requirements. Additionally, application submissions, management of demat and bank accounts all reportedly took place under the company’s control. Power of attorney and master agreements were used without the clients’ active participation, positioning the company uniquely as both a creditor and a borrower.
Concerns on Governance and Operations
The RBI’s statement also points to concerns regarding the company’s role in facilitating the opening and operation of bank accounts using granted powers of attorney (POA). This practice appears to breach regulatory guidelines and raises governance questions, posing a potential risk to consumer interests. Separate investigations are determining whether related banks have also fallen short of compliance standards.
Legal Perspective on Regulatory Compliance
Corporate attorney HP Ranina underlines the enhanced capacity for regulatory bodies to detect compliance violations due to technological advancements. Ranina emphasizes the misconception that widespread non-compliance in the industry provides a shield against regulatory action. He warns that violators will inevitably face significant consequences if caught.
The recent actions taken by regulatory authorities and the raised concerns reaffirm the need for robust governance and strict adherence to compliance protocols. It underscores a message to the corporate sector that vigilant regulation and ethical conduct are non-negotiable in the pursuit of strong and stable financial markets.
Scrutiny Over JM Financial Group’s Conduct in Piramal Enterprises’ NCD Issue
Regulatory Concerns
JM Financial Group’s role in the debt issuance of Piramal Enterprises raised eyebrows when regulators detected signs of impropriety. The Group’s associated entities, JM Financial Services and JM Financial Products, were particularly highlighted for engaging in worrisome practices that involved granting significant loans, preferential treatment in the pricing and selling of securities. The discovery that loans were being extended to low-income investors and that these same investors were exiting their positions immediately after the securities were listed pointed to possible market manipulation.
Regulators pointed out that the patterns observed during the offering—the timing of loan disbursement, the investor applications, and the uniform exit price for many customers on the very first day of listing—were more than coincidental. According to a Sebi ruling, these transactions seemed to be far from random, but rather “planned and executed meticulously.”
JM Financial Group’s Stance
JM Financial Services has openly disputed the regulators’ findings, insisting that no substantial flaws exist in its loan sanctioning process and denying any regulatory infringements. In a statement to the exchanges on March 6, JM Financial declared complete adherence to regulations and denied governance issues within its operations, asserting that all transactions are conducted properly. The firm also affirmed its cooperation with the Reserve Bank of India (RBI) on the ordered special audit and promised to make its case clearly to the RBI.
Highlighting its longstanding history of extending IPO funding, JM Financial underscored the use of Power of Attorney (POA) as a commonplace and legal risk mitigation tool in the industry.
Financial Impact Assessment
Despite the gravity of the allegations, the financial repercussions for JM Financial Services concerning IPO financing are minimal. The firm shared that its income from this service for 9M FY 23-24 was approximately Rs. 7 crore, representing about 1.5% of its net total income and merely 0.3% of the consolidated net total income of the entire company. Consequently, they anticipate the monetary impact of the RBI’s order to be marginal.
