Markets regulator Sebi on Thursday restrained Axis Capital from taking up new assignments as a merchant banker for debt securities until further notice — in a case of providing guarantees for the redemption of non-convertible debentures (NCDs) of Sojo Infotel.
In its interim order, Sebi said: “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 poses risk to the financial system as it can potentially disrupt the orderly functioning of the market.”
After an inspection by the regulator, it was found that Axis Capital had provided guarantees for the redemption of NCDs of Sojo Infotel Pvt. Ltd, which is not permitted for merchant bankers.
This guarantee, which should have been limited to underwriting the issue at the time of subscription, was seen as a form of credit risk rather than market risk, an activity more suited for banks.
The Credit Rating Agencies (CRAs) rated these NCDs based on Axis Capital’s guarantees, which investors relied on. This raised concerns as Axis Capital Ltd (ACL) was acting more like a bank, taking on credit risk.
As Axis Capital continued to support these NCDs, it earned fees over time instead of receiving a one-time payment, which violated the rules for merchant bankers.
