SEBI has restricted Axis Capital (ACL) from taking up new assignments as a merchant banker, arranger or underwriter for any issue or offer-for-sale of securities in the debt segment.
ACL provided guarantee/indemnity towards redemption of non convertible debentures (NCDs) in the guise of underwriting, which it was not permitted to do under the existing regulatory framework.
“Such activity poses risk to the financial system as it can potentially disrupt the orderly functioning of the market. The CRAs construed such guarantee or indemnity as credit enhancement and rated the instruments accordingly, which the investors relied upon,” the regulator said in its interim order on Thursday.
Sojo Infotel issued NCDs of ₹260 crore on March 25, 2021. The issue opened on March 24 and closed on the same day. The deemed date of allotment was March 25. Axis Trustee Services was the “trustee” and ACL the “arranger”.
The role played by ACL in the transaction of Soja Infotel was not part of issue management but of security enforcement mechanism, which essentially fell in the domain of debenture trustee Axis Debenture Trustee, its sister company, the order said.
The whole transaction was a structured secured credit transaction designed to finance an acquisition, which had adequate collateral or 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, the order said.
ACL’s credit support or credit enhancement, which was a credit guarantee in the guise of underwriting, was a critical component of the structured credit transaction. The recurring fees received by ACL reflect the continuing nature of its assurance in form of guarantee/indemnity for the NCDs.
“Given that ACL is a subsidiary of a scheduled commercial bank (Axis Bank), the guarantee provided by ACL to NCD holders also exposed the bank to credit risks,” the order said.