More than half of the investors participated through the ICICI Bank branch located at the Free Press Journal branch at Nariman Point in Mumbai.
On the day of the NCD listing (November 7), JM Financial Products bought back all the securities of all 1,016 investors only to later sell those securities to two corporations and a brokerage firm, resulting in a loss of ₹90 lakhs for JM Financial Services Ltd.
This complex transaction, revealed in an investigation by the Securities and Exchange Board of India, has left the regulators scratching their heads. “It does not make commercial sense for a company driven by a profit motive to enter into transactions that have resulted in consequential losses,” concluded a Sebi order dated March 7.
The Reserve Bank of India and Sebi concluded last week that this transaction is more than meets the eye. The two regulators prohibited JM Financial Products from taking any new mandate to act as lead manager to any public issue of debt securities.
According to a review by Mint, the year 2023 saw 44 firms raise funds through NCDs, which is the highest number in a year. In comparison, 30 companies raised money through NCDs in 2022, 28 in 2021, 21 in 2020, and 36 in 2019.
Piramal Enterprises, a non-banking financial company of Piramal Group, planned to raise ₹1,000 crore through NCDs in October last year. The NCD had a base size of ₹200 crores with an option to increase it by ₹800 crore (green shoe option).
Non-convertible debentures (NCDs) are fixed-income securities that are listed on the stock exchanges. The process for issuing these securities to the public is similar to how companies offer shares at the time of going public. Potential investors apply for NCD through a broker, and a portion of NCD is reserved for individuals, high net worth investors and institutions.
In the case of Piramal Enterprises’ NCD, which was one of the five fixed income securities of the size of ₹1,000 crore last year, ₹300 crore each has been reserved for retail individual iInvestors and high-net-worth individuals, while ₹200 crore each was earmarked for non-institutional and institutional investors.
Piramal Enterprises managed to raise ₹533 crores. The issue saw retail investors bid ₹256 crore of securities, translating to 85.3% of the allotment. HNIs offer ₹146 crore and non-institutional investors bid ₹131 crores, which implies that 48.7% and 65.5% of subscriptions of the two categories, respectively. Not one institutional investor bid for the offer.
JM Financial Services Ltd was one of the 54 brokers that acted as banker to the debt issue. JM Financial Services managed to get 1,748 the highest number of subscribers for the debt issue, more than 1,658 and 1,120 applicants of the AK Stockmart Pvt. Ltd and Nuvama Wealth and Investment Ltd, respectively.
It is important to mention that 1,748 investors bought ₹199.46 crore worth of securities or approximately 37.4% of the ₹533 crores raised by Piramal Enterprises.
But before we delve into this, let’s first take a look at JM Financial Group, which is among the oldest brokerage and finance groups in the country.
JM Financial was founded in 1973 by cousins Mahendra Kampani and Nimesh Kampani. Later, Mahendra parted ways and took control of Jamnadas Morarjee Securities Ltd. Last year, the group celebrated 50 years. But financially it wasn’t a great year because income added up ₹3,343 crore in the year ended March 2023, an 11.2% decline from the ₹3,763.2 crore in the previous year. 19% reduction in fees and commission. However, a 69% drop in fair value of assets to ₹183.42 crore hurt the group’s revenue. Profit fell 22.7% from ₹773.16 crore to ₹597.29 crores.
Nimesh Kampani serves as non-executive chairman, while his son Vishal is the non-executive vice-chairman. Vishal Kampani is the managing director of JM Financial Products Ltd, which is one of the 15 subsidiaries of the listed entity. Established in 1984, JM Financial Products offers real estate financing, fixed income division (structured financing), SME financing, and capital market financing. JM Financial Products is the mainstay of the group as it accounted for a quarter or ₹858 crore of parental income and 44.2% or ₹313.36 crore profit last year.
JM Financial Group coming under the scrutiny of regulators has caught the attention of boardrooms across India. JM Financial is known for being a fundraiser and go-to investment bank for blue-chip companies and distressed businesses. Their clientele includes prestigious names such as the Tatas, SP Group, Ambanis, and Adanis.
“JM Financial has been synonymous with the Indian financial market development. I appreciate and respect JM Financial’s ability to deliver fast, reliable and uncomplicated advice. With JM Financial, you can envision innovative ideas and implement them in an easy and flawless manner,” said Gautam Adani, founder and chairman of Adani Group, in JM Financial’s annual report for 2022-23.
Nimesh Kampani, 77, the chairman, is known for his financial acumen, brave negotiation and conflict resolution skills, which involve bringing in clients who otherwise never see eye-to-eye. It is a “pedigreed company” and may be “not guilty” if Sebi’s record of its orders being overturned by the Securities Appellate Tribunal, is anything to go by, said a senior NBFC executive.
“Nobody lost money, so what’s the crime,” he asked, asking not to be quoted.
So what happened?
Remember, investors applying through JM Financial Services offer ₹199.46 crore from the ₹533 crores raised by Piramal Enterprises. This was more than three times the ₹65.53 crore and ₹64.40 crores placed by subscribers of AK Stockmart and Nuvama Wealth and Investment Ltd.
JM Financial Products provided loans with value ₹141.40 crore to 1,016 investors who applied through JM Financial Services. But it was not only this scheme of offering loans that made the two regulators uncomfortable. A Sebi survey found that 47 investors who declared annual income less than ₹5 lakh, got a loan of ₹9,80,000 from JM Financial Products. Additionally, 10 investors who also earned less than ₹5 lakh per annum, each got a loan of ₹98 thousand.
Sebi found that of the 1,013 retail investors who received loans from JM Financial Products, 772 submitted their bids.t 4:47:35 on 19 October, the day the NCD issue opened.
On 7 November, within two hours of listing the NCD, JM Financial Products bought back securities from 993 investors, value ₹100 crores at an average price of ₹1,002.5. Then, an hour later, JM Financial Products sold ₹80 crore of debt securities to two companies, Cyient Ltd and Chaitanya India Fin Credit Pvt Ltd, and to Om Scrip Trading Pvt Ltd, a broker, at an average price of ₹994.
Sebi found that on the day of the listing, an overwhelming majority of the investors who exited on the listing day applied through JM Financial Services.
It thus concluded that JM Financial Group obtained individual investors, who otherwise would not have participated in the matter, to make applications not only by providing them with funds but also by assuring them an exit at a profit in the listing.
“This action is necessitated in view of some serious deficiencies observed in respect of loans sanctioned by the company for IPO financing and also for NCD subscriptions,” RBI said in a March 5 press release.
“Some of these practices are egregious to be sure, but not illegal per se,” said Chirag M. Shah, attorney – Securities Law, Arbitrator. “They will continue unless these regulatory loopholes are tightly plugged and they are legally declared illegal. RBI and SEBI working in tandem and cooperating is a good sign, the Financial Stability and Development Committee seems to be working at last. It will be a dampener for sure, in the short term, but no one can wish to eliminate Regulatory Arbitration or sharp trading practices”
“You have outlawed some of them, new ones will emerge,” Shah said.
RBI, based on Sebi’s inquiry said that JM Financial Products has repeatedly helped a group of its clients bid for various IPOs and NCD offerings using borrowed funds.
“The credit underwriting was found to be over sourced, and funding was done against marginal margins. The subscription application, the demat accounts and the bank accounts, were all operated by the company using a power of attorney (POA) and Master Agreement obtained from these clients without their involvement, of any kind, in the subsequent operations. Consequently, the company could effectively act as a lender as well as a borrower,” RBI said.
“The company also acted as the arranger of bank account opening as well as operator of the said bank accounts using the POA. Apart from violation of regulatory guidelines, there are serious concerns regarding management issues in the company which in our opinion are detrimental to the interest of the customers . Regulatory violations and deficiencies, if any, by the bank(s) in this regard are being examined separately,” RBI said.
“The development of technology has made it much easier to ascertain violation of regulations, be it of RBI, Sebi or ED regulations,” said corporate lawyer HP Ranina. “You can’t work that everybody is doing it so I can get away with it. Because if you’re caught violating or falling short of regulatory compliance, you’re going to have to face the music.”
Sebi believes that “market integrity” and “fair price discovery” were the causality and that this episode was not an isolated incident.
“Investors’ applications were sanctioned on the same day, the loans were disbursed on the same day (November 1, 2023), the exits were made available on the first day of listing, the exit price for most of their clients was common and the counterparty in all transactions of funded investors was the JM Group company itself,” the Sebi order said. “Such synchronization cannot happen by chance. The series of transactions appears to have been planned and executed meticulously.”
JM Financial Services disagrees with the conclusion made by the two regulators.
“JMFPL believes that there were no material lapses in their loan sanctioning process and did not violate the applicable regulations,” JM Financial told the exchanges in a filing on 6 March.
“JMFPL further reaffirms that there are no management issues at all and the conduct of all its business and operational affairs is in a bona fide manner and continue to serve its existing customers as advised by the RBI. JMFPL will fully cooperate with RBI in their special audit initiative and also explain its position to RBI,” JM Financial said.
“JMFPL has been involved in financing IPOs for the last two decades. In the context of IPO financing, the power of attorney (POA) is taken as a risk retention measure only. The practice of taking POA is prevalent across the industry and is completely legal.
The net total revenue of the IPO Funding business for the 9M FY 23-24 is around Rs. 7 crores which constitutes ~1.5% of JMFPL’s net total revenue and ~0.3% of the company’s consolidated net total revenue. Therefore, the impact of the above RBI order on the company in monetary terms is not expected to be material.”