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March 24, 2024

RBI Initiates Special Audit to Investigate Regulatory Breaches by IIFL Finance and JMFPL

The Reserve Bank of India (RBI) is set to conduct a comprehensive investigation into the regulatory breaches of IIFL Finance Ltd and JM Financial Products Ltd (JMFPL), with a special audit slated to commence from April 12, 2024.

In an effort to delve deeper into the regulatory infractions, the RBI has taken decisive action against both entities. IIFL Finance finds itself prohibited from extending gold loans, while JMFPL faces a ban on financing shares or debentures. These restrictions were imposed by the RBI pending the completion of a special audit and subsequent rectification of identified deficiencies to the satisfaction of the regulatory authority.

Recently, concerns surrounding IIFL Finance prompted the RBI to prohibit the sanctioning and disbursing of fresh gold loans on March 4, 2024. This move was made to address significant supervisory concerns and safeguard customer interests promptly. Notably, gold loans constituted a substantial portion of IIFL Finance’s consolidated assets under management (AUM), accounting for 32% (Rs 24,692 crore) of the total as of December 31, 2023. Operating across 25 states and Union Territories with over 2,721 dedicated branches and approximately 15,000 employees, IIFL Finance’s gold loan segment is a vital component of its operations.

Similarly, JM Financial Products encountered regulatory scrutiny when the RBI barred it from providing any form of financing against shares and debentures, including loans against initial public offerings (IPOs), effective March 5, 2024. The central bank identified serious deficiencies in loans extended by the company for IPO financing and Non-Convertible Debentures (NCDs) subscriptions. This action followed a limited review of the company’s books based on information shared by the Securities and Exchange Board of India (SEBI). According to JM Financial’s FY23 annual report, the net assets of JM Financial Products stood at Rs 1,942.86 crore, representing 17.32% of the group’s consolidated net assets.

To facilitate the audit process, the RBI has issued an e-tender inviting audit firms to express interest in conducting a special audit of these non-banking finance companies. Eligible audit firms, including those empanelled by SEBI for forensic audits, are encouraged to participate in the tendering process. The RBI’s communication on its website indicates that the selected firms will be entrusted with the audit responsibilities starting April 12, 2024.

The commencement of this special audit underscores the RBI’s commitment to upholding regulatory compliance and ensuring the stability and integrity of the financial sector. As stakeholders await the findings of the audit, the outcome is poised to have significant implications for the future operations and regulatory standing of IIFL Finance and JM Financial Products within the Indian financial landscape.

Jhumpa Lahiri

Jhumpa Lahiri

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