(Bloomberg) -- India’s capital market regulator has barred Axis Capital Ltd. from acting as a manager for new offerings of debt by Indian companies, the latest crackdown in the country’s securities market.
The Securities and Exchange Board of India alleged that the Axis Bank Ltd. unit violated rules for merchant banking and acted in the domain of a debenture trustee — by effectively assuming the credit risk of the bonds — which is beyond its remit, according to an initial order published on its website Thursday. Axis Capital has 21 days to file objections to the order.
Axis Bank said its unit’s activities were “bona-fide and in compliance with all applicable regulatory provisions.” There is “no material impact” on the bank on account of the initial order by the regulator as Axis Capital contributed only 0.7% of the lender’s net income last fiscal year, the Mumbai-based bank said in a statement.
The development comes months after SEBI barred JM Financial Ltd. from undertaking merchant banking activity in the debt segment for engaging in unfair trading practices. The regulator is seeking to overhaul of its merchant banking regulations to ensure such firms don’t undertake activities that are not part of the market.
The latest order pertained to a debt offering by technology consultancy provider Sojo Infotel Pvt. in March 2021. Axis Capital acted as the arranger.
“Axis Capital provided guarantee or indemnity toward redemption of NCDs in the guise of underwriting, which it was not permitted to do under the existing regulatory framework,” SEBI member Ashwani Bhatia said in the order. An NCD refers to a non-convertible debenture.
SEBI said that activities undertaken by Axis Capital as an arranger for Sojo Infotel’s debt offering “pose risk to the financial system as it can potentially disrupt the orderly functioning of the market.”
Axis Capital was “taking credit risk exposure, rather than market risk,” Bhatia said. “By undertaking such activities, Axis Capital got into the realm of banking, as the Sojo transaction had all the ingredients of a banking transaction.”
Axis Capital has not undertaken arranging of debt offerings in India in over a year and does not see any material impact of the order, Axis Bank said. The investment arm of the lender is evaluating all available legal remedies.
Still, the regulator pointed out that since Axis Capital is a unit of Axis Bank, the guarantee provided by it to Sojo Infotel’s NCDs exposed its parent to credit risks. That necessitates further examination from the Reserve Bank of India, it said.
--With assistance from Subhadip Sircar.
(Updates with comments from Axis Bank in third and ninth paragraphs.)
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