SEBI bars JM Financial from acting as lead manager for public issue of debt securities

In its interim order, SEBI said the manner in which subscriptions have been managed in this public issue of debt instruments is shocking. The transactions at every stage of this public issue appear to have been done in a pre-determined and premeditated manner; and executed clinically to ensure subscription and success.

In its interim order, SEBI said, “It was observed during the examination that in a particular issue, a significant number of individual investors sold the securities allotted to them on the day of listing itself. The holding pattern of the securities showed that a very large percentage of securities issued changed hands on the day of listing as a result of which retail ownership came down sharply. This was unusual.”

“On further examination of the transactions on the day of listing of the said issue, it was observed that JM Financial Products Limited (JMFPL-NBFC), a Non-Banking Finance Company (NBFC) and a subsidiary of the Noticee, acted as counterparty to the trades of these individual investors and had also provided the funds deployed by these investors for subscribing to the issue. JMFPL-NBFC, subsequently, on the very same day, offloaded at a loss, a significant portion of the securities that it had acquired from these investors to corporate investors. The examination also revealed that these investors had submitted Interim Ex Parte Order in the matter of JM Financial Limited their applications in the public issue through the stock broker JM Financial Services Ltd (JMFSL-Broker), another subsidiary of the Noticee JMFL-MB,” it said.

SEBI’s order stated that “the scheme, it is prima facie noted, involved getting individual investors, who would otherwise not have participated in the issue, to make applications not just by providing funds to them but also by assuring them an exit at a profit on the listing day."

It added, “An investor seeking funding to apply in a public issue of securities is looking to make trading gains by virtue of the movement in the price of the security post-listing. However, given the interest charged by the lender on such loans, there needs to be a jump in the price of the security post-listing for such trades to be profitable.”

Further, the regulator will undertake "an investigation into the issues covered under this order. The investigation so undertaken shall be completed within a period of six months."

The pattern of transactions seen in the bank statements suggests that this is not an isolated incident, SEBI said.