On September 19, the Securities and Exchange Board of India (SEBI) issued an interim order against Axis Capital (ACL), one of India’s prominent investment banks. The order has placed strict restrictions on the firm, barring it from accepting new assignments as a merchant banker. In addition, Axis Capital will not be able to engage in offering debt securities for sale or act as an underwriter or arranger until further notice.
The regulatory action came in response to allegations of irregularities related to Axis Capital’s involvement in a Non-Convertible Debenture (NCD) issue by Sojo Infotel Pvt. Ltd. SEBI’s investigation into this matter was triggered by an article written by Hemindra Kishan Hazari, a well-known research analyst.
The Article That Brought Attention to the Case
On January 16, 2024, Hemindra Kishan Hazari published a detailed article titled “Is Axis Capital an Investment Bank or a Hedge Fund?” In this article, Hazari pointed out irregularities in how Axis Capital handled the NCD issue for Sojo Infotel Pvt. Ltd. The article gained significant attention and ultimately caught SEBI’s eye, prompting a regulatory investigation into the matter.
Hazari’s article raised concerns over whether Axis Capital was adhering to proper guidelines as a merchant banker or acting more like a hedge fund by taking risks that could jeopardize the market’s stability. With more than 25 years of experience in the Indian capital markets, Hazari specializes in banking and macroeconomic research, making his findings particularly significant.
SEBI’s Investigation and Findings on Axis Capital’s Role
Following the publication of the article, SEBI launched an investigation into Axis Capital’s involvement with the NCD issue of Sojo Infotel Pvt. Ltd. The key finding from SEBI’s inquiry was that Axis Capital had guaranteed the NCDs under the guise of underwriting. However, according to SEBI regulations, such arrangements are not allowed.
In the debenture issuance, a Debenture Trustee Deed (DTD) was created between Sojo Infotel, Axis Debenture Trustee (ADT), and Axis Capital. Shares of LIL were pledged as collateral for the NCDs, and in case of default, the Debenture Trustee had the right to take possession of these shares. The agreement included a clause stating that if Axis Capital couldn’t find a buyer for the shares, it would be required to fulfill its underwriting obligation by purchasing the shares or providing funds for their purchase.
However, SEBI’s investigation revealed that this arrangement didn’t qualify as an underwriting activity, as it wasn’t a simple agreement to subscribe to unsubscribed securities. Instead, Axis Capital guaranteed the redemption of NCDs in case of default upon maturity. This, according to SEBI, violated the core definition of underwriting, which typically doesn’t involve offering guarantees to redeem securities.
Why SEBI’s Order Is Important for the Market
SEBI’s order emphasized that Axis Capital’s actions in this case posed potential risks to the financial system and could disrupt the normal functioning of the market. By offering guarantees instead of underwriting in the traditional sense, Axis Capital was found to have violated fundamental regulatory principles.
The interim order bars Axis Capital from undertaking any new assignments or participating in various segments of the market, such as debt securities, until further notice. While SEBI continues its investigation, Axis Capital is expected to face significant scrutiny from both regulatory bodies and the market.
This case serves as a reminder that even well-established financial institutions must strictly adhere to market regulations, ensuring transparency and stability within the financial system.
