Regulatory probe widens into retail subscriptions for public debt issues: Report

Regulatory authorities have expanded ir investigation into management of retail subscriptions for public debt issues by merchant banks. move comes amid concerns of potential irregularities in subscription process, according to two sources familiar with matter who spoke to Reuters.

Securities and Exchange Board of India (SEBI) recently imposed restrictions on JM Financial from securing new mandates, citing findings that funds from associated entities were utilised to artificially inflate subscriptions, offering investors an assured exit. In response, JM Financial affirmed its commitment to full cooperation with SEBI's inquiries, as stated in a stock exchange filing on Thursday.

Meanwhile, Reserve Bank of India (RBI) directed JM Financial's non-banking unit to cease all forms of financing against shares and debentures, including loans extended to customers for subscribing to initial public offerings (IPOs).

ongoing investigation extends to multiple cases examining wher merchant banks facilitated exits for investors through connected non-banking finance firms, sources disclosed. Investigators are also scrutinising provision of disproportionate loans to subscribers and potential lapses in customer identification protocols.

Despite requests for comments, SEBI and RBI have yet to respond, maintaining a cautious stance on matter.

While regulations currently permit investors to leverage credit for subscribing to debt securities in public issues, assuring investors of a profitable exit violates merchant banks' code of conduct, prohibiting creation of artificial markets.

ramifications of regulatory scrutiny are reverberating across market. Companies have raised over Rs 20,000 crore through public bond issues this financial year, marking a major uptick compared to previous years, as per data from Prime Database. However, heightened scrutiny is expected to temper retail subscriptions and potentially elevate cost of funds.

According to insights from industry experts, regulatory scrutiny may particularly impact non-bank lenders seeking diversified funding sources following increased capital requirements imposed by central bank. Vinay Pai, he of fixed income at Equirus, suggests that SEBI's investigation might steer non-bank lenders towards private debt placements amid a slowdown in bank lending to NBFCs in recent months.

(With Reuters inputs)