Market regulator Securities and Exchange Board of India (SEBI) on Wednesday censured Axis Capital Limited for providing guarantee-like credit support to investors in non-convertible debentures (NCDs) issued by Sojo Infotel Pvt Ltd. SEBI held that, the arrangement went beyond the permissible role of a merchant banker and did not qualify as underwriting.
In its order, SEBI said the transaction structure, fees linked to debt yields and Axis Capital's obligation to step in when the issuer failed to meet its repayment obligations indicated that the investment bank had effectively assumed credit risk. The regulator also flagged continuing liabilities from such transactions that exceeded Axis Capital's net worth in several financial years.
Under the arrangement involving Sojo Infotel, Axis Capital acted as an arranger for the NCD issuance and provided support linked to the sale of shares pledged in connection with the debt. Under specified circumstances, including the issuer's inability to redeem the NCDs, Axis Capital was required to step in if the pledged shares could not be sold to a third party.
SEBI's key concern was that the obligation was triggered by Sojo Infotel's repayment difficulties rather than simply weak market demand for securities. The purchase price was linked to the outstanding principal and interest on the NCDs, rather than the market value of the pledged shares.
“The structure of the transactions, the fee linked to the yield spread, the continuing payment obligations over the tenure of the NCDs, the obligation to step in for repayment upon default, and the right to recover the amounts so paid with interest show that the Noticee had, in substance, assumed credit risk and provided support akin to a ‘guarantee’,” the order by Quasi-Judicial Authority Biju S, said.