The Securities and Exchange Board of India (Sebi) on Thursday restrained Axis Capital (ACL)—a wholly-owned subsidiary of Axis Bank—from taking any new assignment as a merchant banker, arranger, or underwriter in the debt segment for alleged violation of the norms.
The market regulator alleged that ACL provided a guarantee or indemnity towards the redemption of non-convertible debentures (NCDs) in the guise of underwriting, which is not permitted under the regulations.
“Such activity poses a risk to the financial system as it can potentially disrupt the orderly functioning of the market. The credit rating agencies construed such guarantee/indemnity as credit enhancement and rated the instruments accordingly, which the investors relied upon,” said Sebi in its interim order following its probe into the NCDs issued by Sojo Infotel, for which ACL was the merchant banker.
Sebi has also forwarded its order to the Reserve Bank of India (RBI) for examining Axis Capital’s activities as a subsidiary of a banking company.
Sebi carried out an inspection after a Sebi-registered research analyst flagged concerns.
Sojo had raised funds to purchase shares in Lava International. The repayment of the NCDs of Sojo was planned through the sale of shares of Lava by promoters through an initial public offering or a secondary sale. Lava filed offer documents with Sebi in 2021, but the document was returned by the regulator. ACL was also the lead manager for Lava’s IPO.
As Sojo failed to redeem the NCDs, Axis Debenture Trustee invoked a pledge over 26 per cent of shares of Lava that had been pledged by the promoters of Sojo as security cover for the NCDs.
As Axis Capital was unable to find a purchaser for the pledged shares, it had to fulfil its underwriting commitment by depositing Rs 167 crore into the escrow account of Sojo.
“The whole transaction was, in substance, a structured secured credit transaction in the cloak of a capital market instrument (bonds) designed to finance an acquisition, which had adequate collateral/guarantees in the form of a pledge of shares of Sojo and Lava International, personal guarantees of promoters of Sojo, a lien over the escrow account, and hypothecation of assets of Sojo,” noted Sebi whole-time member Ashwani Bhatia in the order.
The market regulator has provided the merchant banker with 21 days for filing its reply and objections and to seek an opportunity for a personal hearing.
First Published: Sep 19 2024 | 8:27 PM IST
