IIFL Finance, JM Financial shares fall up to 5% after recent RBI action on audit

Shares of IIFL Finance fell as much as 5.5% on Tuesday, while those of JM Financial fell over 4% after the Reserve Bank of India announced that it will conduct a special audit of both these companies.

The RBI has called for two separate tenders for the appointment of auditors to conduct the special audits. Last date to submit the bids is April 8, while the selected firms will be awarded work on April 12, 2024.

Earlier this month, India’s central bank had raised material supervisory concerns in the gold loan portfolio of IIFL Finance and barred the company from sanctioning or disbursing gold loans or assigning, securitising, and selling gold loans with immediate effect.

A day later, JM Financial was barred by the RBI from financing against shares and debentures and disbursal of loans against IPO or subscription to debentures with immediate effect.

Since March 4, until Friday’s close, IIFL Finance’s shares declined over 45%, while those of JM Financial are down nearly 25% since March 5.

Brokerage firm Motilal Oswal said that a sharper run-down in the gold loan portfolio and employee attrition is likely if the ban remains in force for longer. This may also cause reputational damage for IIFL Finance, which may have to renew investments in building trust in its brand again.

Sanjay Doshi of KPMG India told CNBC-TV18 in an interaction that RBI’s special audit may take four to six weeks and that one of the outcomes could be tightening of the processes. The RBI wants to ensure that the gold loans are clean, wants to prevent overleverage and ever greening of loans, he added.

Abizer Diwanji of EY India also anticipates some joint regulatory action to some extent to determine the use of end money, adding that the larger issue is the way credit is flowing where the end use cannot be determined.

Shares of IIFL Finance are trading 4.5% lower at ₹319.30 and have declined 55% from their recent peak of ₹703.4. On the other hand, those of JM Financial are trading 2.8% lower at ₹72.05.