Analysis Of SEBI Order On JM Financial | NDTV Profit
After #RBI, #SEBI cracks down on #JMFinancial group, bars the firm from acting as lead manager for public debt securities.
Payaswini Upadhyay, Vishwanath Nair, Sajeet Manghat discuss the nuts and bolts of the SEBI order.
Payaswini Upadhyay, Vishwanath Nair, Sajeet Manghat discuss the nuts and bolts of the SEBI order.
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00:00 for any public debt issue. Now before I come to the alleged wrongdoing that SEBI has pointed out
00:06 in its order, I want to go to the specific regulations under which the SEBI order has
00:11 been passed and that is the NCD regulations. In short, SEBI has alleged that JM Financial,
00:17 along with its group entities, gave an assured exit to certain investors at a profit. The NCD
00:23 regulations prohibit payment of any incentive for making an application but according to SEBI,
00:30 JM Financial allegedly violated this very provision. I'm joined by my colleagues,
00:35 Sajit Mangat and Vishwanath Nair to discuss the SEBI order and the coordinated action of the
00:40 markets and banking regulator. Sajit, Vishwanath, thank you for joining me here. Sajit, before we
00:48 come to the details and the nuts and bolts of the SEBI order, do you want to hazard a guess on which
00:52 specific NCD listing SEBI is alluding to because SEBI, maybe for the right reasons, has not named
01:01 the company in its order? So, JM has been very active in many of the debt issuances but
01:08 as per the data which we have seen, it seems to be the Primal NCD which is in question here
01:15 because that's the only NCD which is open between October 19th and the closing October 30th. Now,
01:23 it is most likely this is the NCD in question where SEBI has investigated the investments
01:31 that went into the NCDs and subsequent the transactions undertaken by JM Financial's
01:38 product and JM Financial's broking as well as the merchant banking because all three entities were
01:45 involved in the sale and marketing of this entity along with their other bankers as well, the Wama
01:52 Trust, AK Capital. These are their four merchant bankers and all these four merchant bankers were
02:00 of, it seems, you know, Primal NCD which was in play at that time. Okay, so this is of course
02:08 that you have just gleaned into from a quick dive into SEBI's data. I mean, SEBI has not named it,
02:14 so we'll not belabor on it any longer but I do want to come to what the regulator has said in
02:21 this ex parte interim order. Remember, JM Financial will now get an opportunity to present its case
02:27 and based on the evidence, the regulator will pass a final order which then will, I suppose,
02:35 go through the regular appellate process. Now, SEBI has said that the manner in which subscriptions
02:41 in this particular NCD listing and issuance was managed was shocking. It has said that the scheme
02:48 involved getting individual investors to make applications and investors were not only provided
02:53 funds but also assured an exit at a profit on the listing date. Transactions, SEBI says, at every
03:00 stage appear to have been predetermined and premeditated. Sajid, you want to take us through,
03:07 you know, the steps that SEBI has laid out and where exactly it has found the alleged manipulation?
03:14 You know, it all starts from the subscription part of it. You know, it seems from what SEBI has,
03:23 you know, articulated in its interim ex parte interim order that, you know, JM Financial's
03:30 product which is an NBFC had lent to certain investors and then they had an arrangement
03:40 wherein they bought back those NCDs at a loss and subsequently they sold it to corporate bodies
03:46 later on. In the whole process, the subscription of the NCDs has happened. There is a list of
03:56 clients who are not eligible or didn't have that kind of money to buy these kind of NCDs but they
04:04 were financed at 10% interest rate while the, you know, the NCD cost or the interest borne by
04:13 NCDs were at max 9.35% or so. So, it is basically, you know, you created an artificial market
04:22 or artificial demand for the NCD by funding clients who participated in it and then there
04:31 was an exit provided to them at a profit so that they earned between 1500 to 2000 rupees per,
04:40 you know, per subscription and it seems that that was a fee that was given to them. And in the
04:48 process, what it has, what Sebi has said is that, you know, they have gone ahead and resold the
04:57 entire thing to other corporate bodies. Okay, Sachit, also take us through because these are,
05:05 I am guessing, individual investors not known to each other, right? Sebi has also mentioned that,
05:10 you know, the moment investors who applied through JM Financial, the broker, it was submitted by
05:17 JM Financial, the merchant banking entity and this broker, whenever this broker required funding for
05:23 subscribing to securities in a public issue, these clients were then referred to JM Financial NBFC.
05:30 Can you take us through the steps that, you know, Sebi has detailed? Yeah, it seems that, you know,
05:36 the clients who, this is as per the, you know, order which has been brought up by Sebi that
05:43 JM has submitted to Sebi that the entire role of the broker is to pass on the clients to
05:52 JM Financial NBFC so that they can finance the public issue and that, you know, and it's,
06:01 as per Sebi or the, you know, or the reply which has been given by JM to Sebi, you know,
06:11 the broker only had, you know, given them the references to the NBFC so that it can be financed
06:19 and thereafter the broker has, you know, subscribed to the NBFC, to the NCD because all clients,
06:31 it seems, you know, there is this, you know, there's a patent which has been brought in by,
06:36 or which Sebi is showing in his order saying that all of them got money at the same time,
06:43 then all of them, you know, subscribed at the same time and then all of them exited at the same time
06:49 and that, you know, is something which Sebi is pointing out in his order saying that, you know,
06:54 it is something very, you know, suspicious and, you know, and while it is just entering order,
07:03 it's Sebi suspecting that it is going to be a further investigation into the functioning of
07:10 this entire market because that's how it seems that many of the subscriptions are going through
07:19 in the market, not just for JM but we have been talking about how some of the small issues are
07:24 getting 100 times subscribed or 200 times subscribed and this is what it seems the pattern is.
07:33 And it seems that Sebi is alarmed at the significant quote-unquote pop-in price of
07:38 the security on the listing day because it says that while it's common for equity IPOs to see
07:45 premium, for NCDs it's usually not the norm and typically investors hold such instruments to
07:53 maturity and the large number of investors exiting these NCDs on the day of listing is unusual.
08:00 Is there, where did it all start from Vishal coming here? Do you think it is first the RBI
08:07 that noticed the anomalies in JM Financial Products and then let, that led Sebi to
08:13 sort of dive into the actions or of other entities?
08:18 Yeah, so just we know that a couple of days ago JM Financial Products received this order from
08:30 the Reserve Bank of India where they talked about certain discrepancies in the way or lapses in the
08:36 way that they were doing the IPO financing and the venture financing business. Now,
08:40 JM Financial Products is the NBFC arm of the JM Financial Group. Having said that,
08:44 RBI mentioned in its statement that it started its action after Sebi highlighted the problem to
08:52 RBI. So, this seems like a bit of a coordinated sort of action between the two regulators.
08:58 You know, with respect to what RBI did with JM Financial Products, what it saw,
09:02 notice is linked to what Sebi has detailed in its order today, which is that JM Financial
09:08 Products was lending money to certain people, taking a power of attorney from them to operate
09:16 their trading accounts and then essentially dealing with the security. So, in that manner,
09:21 it was acting as a lender as well as a borrower because whatever that money led to, whatever they
09:26 were purchasing was entirely being done by JM Financial Products. So, that NBFC element, the
09:33 RBI has handled. We have seen this action on at least on the debt issuances side of the business
09:40 of financial. As Adithya was pointing out earlier, there is likely going to be more action on the
09:45 equity listing of the IPO market as well. Let's take a deeper look into what exactly is happening
09:52 here because Sebi and RBI have sort of coordinated back in December as well when they came out with
09:58 an order against AIFs, bank investment in certain AIFs were in exchange lending to borrower companies.
10:06 That action as well was largely because Sebi was highlighting this problem for a while to the RBI
10:12 and then finally the RBI acted. And this seems to now be percolated to entity-specific action as
10:17 well where they're coming after JM Financial Products because of the lapses that they have
10:21 in portfolio pricing. Sure. We're going to take a quick break here and come back to what JM
10:28 Financial and it's probably the initial responses that it gave to Sebi said in its defense. We'll
10:34 be right back after a quick break.
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13:27 We're discussing market regulators.
13:29 Sebi's interim order against GM Financial.
13:32 I do want to point out what GM Financial said to Sebi in perhaps its initial responses.
13:39 They've said that, you know, that all the entities put together have complied with the letter of the law.
13:47 But Sebi has countered in its order to say that, you know, while it seems like everybody has benefited,
13:54 the company who was issuing these entities, the investors who were subscribing to it,
13:59 GM Financial, the merchant banking entity, and its group entities,
14:02 but once you start seeing these transactions, you know, as individual steps,
14:07 you will figure out how all this got manipulated.
14:11 Sajid, it is, you know, since we've had the new Sebi chairman,
14:17 she's been repeatedly saying that we're not just going to pull market participants for violation of the letter of the law,
14:25 but also the spirit of the law.
14:27 This order seems to be in line with that message.
14:30 You wrote a couple of days ago, you know, on this very issue.
14:34 How sort of solid do you think here the argument is?
14:39 Because it seems like everybody in the ecosystem, you know, it was a win-win for everybody.
14:45 There was no complainant at the end of it,
14:47 given that the investors also made a cool profit on an instrument,
14:51 which, you know, they would have typically held for a longer maturity,
14:55 but to get a profitable exit on the listing day, which investor won't be happy?
14:59 You know, my sense is that there was a regulatory arbitrage which is available
15:05 because all regulators were in silos working for their own product,
15:11 or as I say, you know, segments of the financial markets.
15:17 The moment you integrate the markets, you bring in multiple agencies who are governing various things.
15:23 It just shows up that there is some lack of knowledge in the system,
15:26 because you may be right from the Sebi's point of view, but from the banking point of view, you are wrong.
15:33 And then if you look at some of the Sebi's arguments which have been made here,
15:39 you know, incentives have been provided for NCDs, which is not allowed.
15:43 So, you know, you have to link multiple regulations and multiple regulators,
15:49 rules and regulations to see whether there is a violation or not.
15:55 Because if you look at in silos, it may not look as a violation,
16:02 but when you bring in everything together, you find that, you know,
16:05 there is issues with respect to the way you know, IPOs are getting marketed,
16:11 the way it is getting funded, the way it is getting, exits have been given,
16:16 and the way again it's getting resold.
16:19 So, artificial market is getting created.
16:23 And this is something which Sebi has been trying to grapple with for a long time,
16:28 because, you know, it has always been the case of Sebi saying that retail investors
16:34 should buy from the secondary market, they should not buy from the primary market,
16:38 let the price settle and then you go and invest in the secondary market.
16:43 But what happens is that because of the kind of over-subscription that comes in,
16:48 there is a listing pop that gets created and that's agreed that lowering all the retail investors
16:54 into this market.
16:55 And that's why they are, you know, there is an attempt to ensure that either liquidity is gone
17:01 or these practices which have been created is gone.
17:05 Now, it is a common knowledge in the market that there are pool of investors
17:10 and with genuine bankers and genuine Demat accounts and genuine bank accounts,
17:17 all, you know, all working in tandem to ensure that IPOs can get through,
17:25 especially HNI kind of HNI investments.
17:30 But it is very difficult to prove unless you bring everything together.
17:34 And that's I think this is happening for the first time where you're getting
17:38 a concerted effort by multiple regulators coming together and making that effort.
17:46 Sure. And perhaps, you know, that is the necessity of the market currently.
17:52 Vishy, I'll come to you very quickly on where the, let's say, RBI leg of the order is,
18:02 where GM Financial has come out with a rather strong statement to say that we've not done anything wrong.
18:09 Yeah. So the statement that followed the RBI's press release was quite strong.
18:14 They said that they have not noted any deficiencies in whatever they did.
18:18 They've been following industry practices. They've been following regular sort of business practices.
18:24 They seem to be saying that they're in the clear and that they will engage with RBI
18:29 on fixing whatever is worrying the regulator.
18:32 But at this point in time, remember that the RBI has completely stopped this IPO financing
18:36 and debt securities financing business for GM Financial products.
18:40 They have said that we'll do a special audit and then you'll have to rectify the problems.
18:45 Another angle to this, another way to look at this is also the fact that debt securities are now the primary order
18:51 for the NVFC as well as smaller lending industry because the RBI has been raising concerns about
18:58 excessive bank lending to these entities and they have to end up borrowing from the debt securities market
19:03 to continue providing the loans that they provide.
19:06 And if there is going to be any kind of a negative impact of these orders on the debt securities market,
19:13 then that puts NVFCs also under stress because they will not be able to tap the only other source available to them
19:19 because overall there's a negative view in the market against such issuances.
19:25 Okay, we're running out of time. There's one thing quickly that, Sajid, that I want to come to you with.
19:30 In light of what SEBI and maybe RBI have found, do you anticipate that SEBI might at some point say
19:37 because here what they've repeatedly said in the interim order is, look, everything got managed within the JM chain.
19:44 Is there a possibility for the regulator to say, because how many such cases SEBI is going to take enforcement action against?
19:51 So typically we found regulators find a fix in the regulations to say that where, let's say, JM is the merchant banker,
19:59 no funding can happen through a group entity. I mean, is there any sort of possibility of that happening?
20:09 I think there are multiple probes which have now been opened as per SEBI's interim order.
20:13 If you look at the last page or second last page of SEBI's order, they made it very clear that there are multiple issues
20:20 of public debt issuances which will be under investigation.
20:24 They've also referred to the SME platform where they have seen multiple subscriptions which are mind boggling subscriptions,
20:35 which is there. So it's not just going to be, it's a probe which has just begun.
20:41 And it will take, I think, a couple of weeks or months before SEBI can come out and bring in more bankers or something in the thing,
20:55 because this is a very bad practice which is there in the market today.
20:59 And SME is something which we've been also highlighting to the market regulators,
21:05 saying that the kind of fraud which is coming in with respect to our 20 crore issue gets 40,000, 50,000 crores worth of demand
21:13 from the market and how it's getting, no one knows, and where the money coming from, no one knows.
21:18 So this investigation is just starting. And JM being the first one, I don't know how many more will be there,
21:26 but there are many players who are in the market who do a lot of marketing and this kind of fraud will be dealt by the regulator
21:36 as and when the regulator, they bring in. I don't know what kind of regulation can come in.
21:41 There is enough regulation in place. It's a question of market players agreeing or following the spirit of the law,
21:48 which the SEBI chairperson has been pushing. It's not the letter, but the spirit of the law
21:54 that needs to be put in place. And that's what I think SEBI's action reflects.
22:00 Okay. All right. SEBI will sort of stay on top of such practices, obviously, and with RBI's help,
22:07 I think the regulators' investigations will only solidify in weeks and months to come.
22:14 Of course, JM Financial will present its case before the regulator.
22:18 And perhaps at some point we might see some action before the securities appellate tribunal as well.
22:24 We'll obviously stay on top of this story. Thank you for joining us here on NDTV Profit.
22:29 Have a good evening.
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