INDIA’S markets regulator on Thursday (Sep 19) barred investment bank Axis Capital from acting as a merchant banker for new debt issues for allegedly violating rules, according to an order on the regulator’s website.
According to the Securities and Exchange Board of India (SEBI), Axis Capital provided a repayment guarantee to bonds issued by Sojo Infotel, which is not a permitted activity under existing regulations.
SEBI has sent the findings of its preliminary investigation to India’s central bank, saying that Axis Capital’s guarantee exposed its parent Axis Bank to default risk.
A spokesperson for Axis Capital declined to comment. Axis Bank did not immediately respond to Reuters’ request for comments.
Sojo Infotel, a holding company floated by the majority shareholders of Indian phone manufacturing firm Lava Group, issued bonds worth 2.6 billion rupees (S$40.2 million) in March 2021.
However, the company was unable to pay the bondholders at the time of redemption in March 2024, with Axis Capital stepping in to pay the dues on outstanding bonds.
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Axis Capital’s guarantee was to “redeem the non-convertible debentures in the event of default on maturity,” said SEBI, and so it could not be “termed as permitted underwriting activity”.
According to SEBI, Axis Capital was taking credit risk exposure, rather than market risk, thereby entering the ‘realm of banking’.
Under regulations, merchant bankers are allowed to take market risk – they can subscribe to the unsubscribed portion of the issue. However, they are not permitted to take on the risk of repayment when an issuer defaults.
While the ban will remain in effect till further orders, SEBI has granted the investment bank 21 days to present its defence. REUTERS
