Sebi bars Axis Capital from acting as debt merchant banker till further orders

The Securities and Exchange Board of India (Sebi) on Thursday restrained Axis Capital Ltd (ACL) from taking up new assignments as a debt merchant banker till further orders.

The Sebi’s interim order came amid allegations of ACL extending itself beyond the permissible activities as a merchant banker while dealing with the issue of listed non-convertible debentures (NCDs) of Sojo Infotel. 

Sebi noted that ACL provided guarantee/indemnity towards redemption of NCDs in the guise of underwriting, which it was not permitted to do under the existing regulatory framework. Such activity posed a risk to the financial system as it could potentially disrupt the orderly functioning of the market.

“It was thus noted that in the instant case, ACL went beyond the mandate of issue management, as the activity undertaken by ACL was in contravention of the definition of underwriting and role of merchant banker as defined in MB Regulations, 1992,” Sebi noted in its order.

“There is a potential risk of ACL continuing to undertake activities as a registered merchant banker beyond the realm of permitted activities. As an interim measure pending inspection of ACL by Sebi, hereby restrain ACL from taking up new assignments in the capacity of a merchant banker, arranger or underwriter for any issue / offer for sale of securities in the debt segment, till further order,” the order, authored by whole time member Ashwani Bhatia, said.

Sebi initiated action into ACL after publication of a report titled ‘Is Axis Capital an Investment Bank or a Hedge Fund?’ authored by a research analyst. The regulator was examining the transaction undertaken by ACL in respect of listed NCDs of Sojo Infotel Pvt. Ltd, a high technology consultancy service provider.

The facts behind the matter

The matter arose when Sojo issued NCDs worth ₹260 crore in March 2021 with Axis Debenture Trustee Services as the trustee and ACL as the arranger of the issue.

ACL had given underwriting commitment for the NCDs, which was factored by Crisil while giving its ratings.

The NCDs were listed on BSE with a coupon rate of ₹8.48% per annum payable quarterly. The redemption date was 25 March 2024.

Sojo utilized the funds raised through the NCDs to purchase shares of Lava International Ltd (LIL) from Unic Memory Technology Hong Kong and for subscribing to a rights issue of LIL. The planned repayment of NCDs of Sojo was through selling LIL shares during IPO or pre-IPO. Accordingly, a draft red herring prospectus (DRHP) of LIL was filed after 6 months of issuance of NCDs and ACL was the lead managers of the IPO.

Sebi returned the DRHP, advising LIL to file a revised DRHP.

On 13 September, Sojo issued the call option exercise notice but failed to redeem the remaining NCDs in entirety. The outstanding NCDs got reduced to ₹174 crore, plus interest.

In October 2023, Axis Debenture Trustee invoked pledge over 26 % shares of LIL held by its promoters, which were pledged by the promoters of Sojo as security cover for NCDs issued by Sojo. As ACL was unable to find a purchaser for the pledged shares, it led to triggering of asset purchase event on 15 March 2024, which required ACL to fulfil its “underwriting commitment”.

On 19 March 2024, ACL fulfilled its “underwriting commitment” by depositing Rs.166.84 crore in the NCD escrow account of Sojo. The said amount along with the amounts already lying in the escrow account was utilised to fully repay outstanding NCDs of 174 crore plus interest. 

ACL has been directed to reply within 21 days.

“While ACL had to bear the cost of its transgressions in the form of fulfilling its indemnity obligations by making payments for redemption of NCDs, ACL should not have ventured into the banking space in the first place, that risked its credit profile,” the order said.