India roils market with new crackdowns on booming IPO financing, gold

It’s been another heart-stopping week for financial firms caught up in India’s widening crackdown on the sector.Regulators are imposing new restrictions that may curb lending and put a damper on the booming market for initial public offerings, in order to keep risks in check.

Shadow banks have become the latest target, after the Reserve Bank of India this week limited lending by firms including JM Financial Products Ltd. The measures come after the banking regulator barred an affiliate of fintech giant Paytm from accepting fresh deposits, while the capital markets watchdog urged mutual fund sellers to safeguard investors against excessive froth in small-cap stocks.

More such moves may be on the cards as the RBI completes inspections of some major non-banks engaged in equity markets financing, according to people familiar with the regulator’s thinking. The central bank had set up a separate team of professionals for bank supervision, which has become more detailed and comprehensive, said the people, who asked not to be identified discussing private matters.

“We expect more such steps in other parts of the credit funnel,” said Pranav Bhavsar of India Independent Insight, who publishes on Smartkarma. He said the recent crackdown and hit to some shadow bank stocks “is here to stay and possibly intensify.”More such moves may be on the cards as the RBI completes inspections of some major non-banks engaged in equity markets financing, according to people familiar with the regulator’s thinking. The central bank had set up a separate team of professionals for bank supervision, which has become more detailed and comprehensive, said the people, who asked not to be identified discussing private matters.

“We expect more such steps in other parts of the credit funnel,” said Pranav Bhavsar of India Independent Insight, who publishes on Smartkarma. He said the recent crackdown and hit to some shadow bank stocks “is here to stay and possibly intensify.”In January, the Securities and Exchange Board of India Chairwoman Madhabi Puri Buch spoke about her concerns. “We are unhappy about some of the malpractices that we see,” she said, referring to mule accounts and inflation of IPO application numbers. “We now have the data and we will act.”
Banks, shadow lenders and fintech players are all feeling the heat.

JM Financial’s shares tumbled as much as 20% on Wednesday — the limit imposed by the exchange — and the biggest intraday slide in four years, dragging down other financial stocks. Shares in IIFL Finance Ltd., another shadow lender facing RBI scrutiny, plunged by the 20% limit in each of the last two sessions. Both stocks have since recovered some losses.

Paytm is still down more than 40% since its banking affiliate was barred from adding deposits after people familiar with the matter said it failed to properly vet hundreds of thousands of clients.“More instances of such actions could create an overhang” on shadow bank stocks, Morgan Stanley analysts wrote in a report.