Introduction
The Securities and Exchange Board of India (SEBI) has taken significant action against Axis Capital (ACL) by issuing an interim order that restricts the firm from taking any new assignments as a merchant banker. The order, issued on September 19, prohibits ACL from engaging in the sale of securities in the debt segment and from providing underwriting or arranging services until further notice. This decision follows an article that highlighted irregularities in ACL’s management of a non-convertible debenture (NCD) issue.
Background of the Investigation
The investigation into Axis Capital was triggered by an article penned by Registered Research Analyst Hemindra Kishan Hazari, titled “Is Axis Capital an Investment Bank or a Hedge Fund?” published on January 16, 2024. This article caught the attention of SEBI after it went viral, prompting the market regulator to scrutinize ACL’s activities related to the NCD issue from Sojo Infotel Pvt. Ltd.
SEBI’s Findings
In its investigation, SEBI discovered that ACL had improperly guaranteed the NCDs while posing as an underwriter. Under SEBI regulations, such guarantees are prohibited because they can destabilize the financial system and disrupt normal market operations.
Hazari, who boasts over 25 years of experience in the Indian capital markets specializing in banking and macroeconomic research, played a pivotal role by raising these concerns through his article.
Details of the Debenture Trustee Deed
The NCD issue involved a Debenture Trustee Deed (DTD) executed between Sojo, Axis Debenture Trustee (ADT), and Axis Capital. The DTD outlined specific conditions, including a clause permitting the Debenture Trustee to seize pledged LIL shares in case of default. If ACL failed to find a buyer for these shares, it would be compelled to fulfill its underwriting obligations by either purchasing the shares or financing their purchase.
SEBI’s Official Order
In its order, SEBI clarified that ACL’s commitments regarding Sojo’s NCDs do not align with standard underwriting activities. Rather than merely agreeing to subscribe to any securities that remained unsubscribed, ACL essentially guaranteed the redemption of the NCDs in the event of a default at maturity. This represents a clear violation of the SEC’s underwriting definition.
Conclusion
SEBI’s recent actions against Axis Capital underscore the regulator’s commitment to ensuring transparent and accountable practices within the financial sector. As the investigation unfolds, the focus will remain on maintaining the integrity of the capital markets and protecting investors.
