SEBI Upholds Restrictions on Axis Capital Over Alleged NCD Underwriting Violations

The Securities and Exchange Board of India on Tuesday issued a confirmatory order against Axis Capital Ltd. regarding allegations concerning the underwriting of non-convertible debentures issued by Sojo Infotel Pvt. 

The order follows an interim decision taken by SEBI on Sept. 19, 2024, which put forth concerns over ACL’s role in the transaction, particularly its involvement in providing guarantees and indemnities about NCDs. 

The market regulator's investigation found that ACL's actions went beyond the permissible scope of underwriting as defined by the SEBI (Merchant Bankers) Regulations, 1992, and could be seen as taking on credit risks rather than simply market risks.

The interim order raised concerns that ACL’s involvement in the NCDs issued by Sojo was like a banking activity. In the issue at hand, ACL essentially acted as a credit guarantor, which is not allowed under current regulations. 

ACL's underwriting commitment, which was a guarantee toward the redemption of NCDs in case of default, was like a form of credit enhancement, leading to concerns that ACL was engaging in a structured credit transaction rather than a traditional market-based underwriting role.

After this order was issued to ACL, it denied all allegations, saying that it had not violated any regulations and had adhered to the highest standards of integrity in its role as a merchant banker.

ACL also argued that the interim order was disproportionate and unjustified, maintaining that the activities it undertook during the Sojo Infotel NCD issue were consistent with market practices and were not in violation of the regulations.

The company requested SEBI to revoke the earlier order or, limit its debarment to the specific activities that were under scrutiny, rather than extending it to the entire debt segment. ACL further stated that it had voluntarily ceased engaging in such transactions since April 2023.

SEBI, however, has decided to maintain its previous position on restrictions on ACL's ability to engage in new assignments related to debt securities until the ongoing inspection and investigation are completed. 

The regulatory authority, while observing ACL's willingness to voluntarily refrain from the disputed activities, emphasised the importance of protecting market integrity.

SEBI confirmed the earlier restrictions, limiting the debarment to activities that involve providing credit risk cover, guarantees, or structured credit transactions, as outlined in the interim order.