Impact of RBI action: JM Financial falters 20%, while IIFL shares plunge 40% in two days

The stock markets have seen a sharp decline in the shares of IIFL Finance and JM Financial Products Ltd, after the Reserve Bank of India’s (RBI) strict actions against them.

Following a 20% decline on Tuesday, shares of IIFL fell 20% further on Wednesday (lower circuit) to a new 52-week low of Rs 382 per share. Following the RBI’s directive to the NBFC to stop authorizing and disbursing gold loans, as well as from assigning, securitizing, and selling any of its gold loans, shares of IIFL have dropped by 40% overall in just two sessions.

The RBI’s examination of the business as of March 31, 2023, which found disparities in the way the business operated in several areas, led to the conclusion.

“Certain material supervisory concerns were observed in the gold loan portfolio of the company, including serious deviations in assaying and certifying purity and net weight of gold at the time of loan sanctions, breaches of loan-to-value ratio, and significant disbursal and collection of loan amount in cash far in excess of the statutory limit,” according to the filing.

International brokerage firm Jefferies reduced the target price for IIFL shares from Rs 765 to Rs 435 and downgraded the company from a “buy” to a “hold.”

Jefferies predicted that IIFL’s earnings will suffer as a result of the gold loan prohibition. “The quick unwinding of the lucrative gold loan book might hurt profitability as a result of the RBI’s decision. We anticipate assets under management (AUM) to decline 1% YoY and 51% YoY in gold AUM in FY25, the brokerage business said, given the unknown timing of the ban’s removal and our assumption that it would be in place for nine months.

Gold loans are the Non-Banking Financial Company’s (NBFC) second-largest business segment. As of December 31, 2023, IIFL has a gold loan portfolio at Rs 24,692 crore, or 32% of its entire loan portfolio valued at Rs 77,444 crore.

Investors have been convinced by IIFL’s managing director, Nirmal Jain, that the business has no ethical or governance problems. “We shall give these operational concerns our whole attention and honesty. Speaking to analysts on Tuesday, Jain said, “We are taking immediate and comprehensive steps to address the concerns made by RBI.”

As of 2:00 pm on Wednesday, JM Financial’s shares had dropped by 20% intraday, to a low of Rs 76.40, after an RBI request that the investment banking company cease all financing against shares and debentures immediately. This crackdown involves the approval and disbursement of loans secured by debenture subscriptions and initial public offerings (IPOs) of shares.

According to the RBI, the move was made necessary because of certain significant flaws found in loans approved by the business for IPO funding and NCD subscriptions. Based on information given by the Securities and Exchange Board of India (SEBI), the capital market regulator, the RBI conducted a restricted inspection of the company’s records. During the restricted examination, the RBI noted that JMFPL often used borrowed money to assist a group of its clients in placing bids on different IPOs and NCD issues.

On Wednesday, JM Financial said that there were no significant flaws in the way it approved loans after carefully and thoroughly reviewing the Reserve Bank’s decision placing limitations on the company’s financing operations.

“We firmly think that there have been no substantial flaws in our loan approval procedure after carefully and thoroughly reviewing the ruling issued by the RBI on the action against JM Financial Products Ltd. Furthermore, there have been no regulatory infractions by the firm. We also want to reiterate that we handle all of our commercial and operational matters in a bona fide way and that there have been no governance difficulties at all. According to RBI advice, the business will keep providing services to its current clients, a JM Financial representative said in a statement.

The representative went on to say that JM Financial has been providing finance for initial public offerings (IPOs) for the last 20 years, and that their “IPO financing product is short term and self-liquidating in nature”.

“The Power of Attorney (POA) is seen exclusively as a risk containment mechanism in the context of IPO fundraising. The representative said, “Taking POA is a common procedure in the sector and is entirely legal. They will provide the RBI with an explanation of their stance.