The Securities and Exchange Board of India (SEBI) has issued a regulatory censure against Axis Capital Limited for violating the merchant banking regulations in connection with non-convertible debentures (NCDs) worth Rs 260 crore issued by Sojo Infotel Private Limited, Live Law Business reported. The order, passed on October 28 by quasi-judicial authority Biju S., held that a merchant banker cannot take on a repayment obligation that effectively guarantees debt repayment under the guise of a securities transaction.
Sojo Infotel issued the NCDs in March 2021, with Axis Capital acting as the sale arranger and Axis Trustee Services Limited serving as the debenture trustee. The repayment was secured, among other things, by a pledge of 26 per cent of the shares of Lava International Limited held by Sojo's promoters.
After Sojo failed to fully honour a call option exercised in September 2023, Rs 174 crore remained outstanding. Following an event of default, Axis Capital deposited Rs 166.84 crore into the NCD escrow account in March 2024, and the amount was used to repay the outstanding debentures and interest. Axis Capital earned approximately Rs 33 crore in fees from the transaction, according to the order.
Source: Live Law Business
Substance over form, SEBI held
Axis Capital denied that it had provided a guarantee, arguing that its obligation was limited to arranging a purchaser for the pledged shares or acquiring them if no buyer was found. SEBI rejected the argument, holding that the substance of the arrangement mattered more than its description. The order noted that the share agreement required Axis Capital to pay the debenture holders even if it could not acquire the pledged shares, that the payments were non-refundable and recoverable only from the promoters, and that rating agency CRISIL's rationale had applied its criteria for instruments backed by guarantees.
"The fact that the Noticee's obligation would be triggered upon failure to find a buyer for the 'Pledged Shares' does not change the 'guarantee' like nature of the arrangement, because the ultimate obligation remained on the Noticee that it had to step in to ensure repayment of the NCDs," the order said. SEBI also noted that the fee structure reflected compensation for the credit risk Axis Capital had assumed, while its cumulative year-wise liability under the arrangement exceeded its net worth.
The censure closes proceedings that began after a SEBI inspection alleged violations of the SEBI (Merchant Bankers) Regulations, 1992; the Designated Authority had concluded that Axis Capital's commitment effectively guaranteed repayment rather than constituting genuine underwriting, and recommended a regulatory censure. SEBI had earlier, through an interim order in the same matter, restrained Axis Capital from taking up new assignments as a merchant banker for debt securities, holding that the guarantee-like commitment went beyond the activities permitted under Regulation 13A of the Merchant Bankers Regulations.
Source: SEBI interim order (sebi.gov.in)
Regulation 13A confines merchant bankers to securities-market-related activities, and Regulation 22 permits underwriting. SEBI held that arranging subscriptions to the NCDs was issue management, but the obligation to step in on a repayment default was credit risk, not underwriting — a line merchant bankers cannot cross by relabelling a guarantee as a securities transaction.