SEBI censures Axis Capital for guarantee-like support to Sojo Infotel NCDs

The regulator also flagged continuing liabilities from such transactions that exceeded Axis Capital's net worth in several financial years. Why SEBI considered the arrangement a ‘guarantee’ 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.

SEBI also cited CRISIL's rating rationale, which stated that it had applied its criteria for rating instruments backed by guarantees. The regulator said this supported its conclusion that the arrangement provided credit enhancement similar to a guarantee rather than merely an underwriting commitment. Why Axis Capital paid Rs 166.84 crore In the Sojo Infotel case, Axis Capital's obligations under the arrangement were triggered, requiring it to pay Rs 166.84 crore, representing the outstanding amount of the debentures.

SEBI cited this payment as evidence that Axis Capital's commitment extended beyond arranging or underwriting securities to ensuring repayment when the issuer failed to meet its obligations. Axis Capital argued that the NCDs were also secured by hypothecation of assets, in addition to pledged shares, and that its obligation arose only after efforts to find a purchaser for the shares failed. SEBI rejected the argument, saying additional security did not negate the separate credit support provided by Axis Capital.

SEBI also scrutinised the fee structure. The inspection and enquiry reports estimated that Axis Capital earned approximately Rs 299 crore from such structured financial transactions during the inspection period. “The substance of the fee arrangement entered into by the Noticee in such transactions is that the Noticee is entitled to an upfront fee and continuous stream of payments over the tenure of NCDs,” SEBI said.

Axis Capital argued that staggered payments were commercially justified because its responsibilities included placing the NCDs and finding purchasers for pledged shares in the event of default. SEBI said the recurring payments were linked to the tenure of the instruments and the underlying credit exposure. SEBI however, clarified that the it does not aim to regulate the manner in which fees ought to have been charged by the merchant banker.

Liabilities and net worth The regulator referred to Regulation 22B of the Merchant Bankers Regulations, which caps total underwriting obligations at 20 times a merchant banker's net worth, but clarified that the provision had not been invoked in this case. SEBI noted that Axis Capital had stopped undertaking transactions using the disputed structure in April 2023 and did not intend to resume the practice.