 "Sebi bars Axis Capital from acting as merchant banker in debt segment")
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 guarantee or indemnity towards redemption of non-convertible debentures (NCDs) in the guise of underwriting, which it is not permitted under the regulations.
“Such activity poses risk to the financial system as it can potentially disrupt the orderly functioning of the market. 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 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. The market regulator 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 sale of shares of Lava by promoters through an initial public offering (IPO) or a secondary sale. Lava in 2021 filed offer documents with Sebi, which were 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 pledge over 26 per cent shares of Lava that had been pledged by the promoters of Sojo as security cover for NCDs.
As Axis Capital was unable to find a purchaser for pledged shares, it had to fulfil its underwriting commitment by depositing Rs 167 crore to the escrow account of Sojo.
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“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 pledge of shares of Sojo and Lava International, personal guarantees of promoters of Sojo, lien over 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 21 days for filing its reply and objections and to seek an opportunity for personal hearing.
Keeping a check
Keeping a check
According to Sebi, ACL provided guarantee or indemnity towards redemption of NCDs in the guise of underwriting
It is not permitted under the regulations
Such activity poses risk to financial system by disrupting the orderly functioning of the market, Sebi said
Market regulator has forwarded its order to RBI to examine ACL’s activities as a subsidiary of a banking company