SEBI has censured Axis Capital for providing unauthorized credit guarantees in debenture deals, highlighted by a Rs 166.84 crore payout in the Sojo Infotel case. The regulator ruled that the firm acted as a lender rather than a merchant banker.
The Securities and Exchange Board of India (SEBI) has issued a censure against Axis Capital Limited for operating outside its permitted scope as a merchant banker. The regulator found that the firm provided credit guarantees to investors in non-convertible debenture (NCD) issuances, a practice that essentially transformed the merchant banker into a lender, creating credit risks that typically fall outside the domain of investment banking.
At the center of the regulatory review was a specific arrangement involving Sojo Infotel Pvt Ltd. SEBI observed that Axis Capital structured the deal with support mechanisms that required the firm to step in if the issuer failed to repay the investors. When the issuer ultimately defaulted on its obligations, Axis Capital made a payment of Rs 166.84 crore to honor the credit support commitment. The regulator concluded that this payout proved the firm was effectively guaranteeing the debt, rather than merely arranging the issuance as a service provider.
Financial records examined by the regulator indicated that this business model generated significant revenue for Axis Capital. The firm reportedly earned approximately Rs 299 crore from similar structured financial arrangements. While Axis Capital defended its approach by pointing to the presence of underlying asset hypothecation, the regulator maintained that these structures shifted the credit risk from the investors to the merchant banker. Under existing market regulations, merchant bankers are authorized to arrange and manage securities issues but are not expected to underwrite credit risk in this capacity, as such activities often require the capital and regulatory oversight associated with lending institutions.
This regulatory action serves as a reminder of the strict boundaries maintained by market regulators regarding the roles of intermediaries. For investors and market participants, the case highlights the importance of transparency in how financial instruments are structured and who bears the ultimate risk of default. While the specific practices flagged by SEBI in this case were discontinued by Axis Capital in April 2023, the order reinforces the regulatory stance that investment banks must remain within their authorized roles. Market participants will continue to track how firms adapt their fee-based models to ensure full compliance with regulatory norms regarding risk-taking and financial guarantees.