SEBI Censures Axis Capital Over Disguised Guarantee in ₹260 Crore Sojo Infotel NCD Deal

The Securities and Exchange Board of India (SEBI) has officially censured merchant banker Axis Capital Limited (ACL) for executing a guarantee-like repayment arrangement disguised as an underwriting commitment during a ₹260 crore non-convertible debenture (NCD) issue by Sojo Infotel Private Limited.

The quasi-judicial order, passed by SEBI Chief General Manager Biju S, concluded that while Axis Capital stepped beyond the boundaries of permitted merchant banking activities, an ongoing prohibition or suspension of its business activities would be disproportionate and counterproductive to the securities ecosystem.

Anatomy of the Sojo Infotel Transaction

The case originates from March 2021, when tech entity Sojo Infotel sought to raise capital by issuing NCDs valued at ₹260 crore. The issuance was subscribed to by major institutional investors, including Aditya Birla Finance (₹150 crore) and Sun TV Network (₹100 crore), alongside Shriram entities. Axis Trustee Services Limited served as the debenture trustee, while Axis Capital was appointed as the arranger and underwriter.

To secure the debt, Sojo pledged shares of its associate firm, mobile phone manufacturer Lava International Limited. Under the debenture trustee deed, if Sojo defaulted on repayment, the debenture trustee was required to enforce the share pledge.

Crucially, the agreement stipulated that if Axis Capital failed to locate third-party buyers for the pledged Lava International shares upon default, the investment bank was obligated to meet its "underwriting commitment" by either purchasing the shares itself or funding their purchase.

Credit Risk vs Market Risk

SEBI's scrutiny began after research reports and subsequent regulatory inspections revealed that the arrangement blurred the statutory lines between market risk and balance-sheet credit risk.

Under Regulation 13A of the SEBI (Merchant Bankers) Regulations, 1992, registered merchant bankers—barring commercial banks and public financial institutions—are barred from carrying on non-securities business activities. While merchant bankers are legally permitted to underwrite issuances against market risk (such as unsubscribed portions during an initial offering), they are strictly prohibited from offering default indemnities, credit guarantees, or repayment backstops.

The regulator observed that:

• Credit rating agencies assigned ratings to Sojo's NCDs based on Axis Capital's redemption backstop, misleading debt investors about the true standalone credit risk of the issuer.
• Axis Capital received structured fees spread over time rather than a standard one-time underwriting commission, mimicking commercial lending arrangements.
• As a subsidiary of Axis Bank, Axis Capital’s assumption of direct default exposure potentially bypassed prudential lending norms and subjected the financial group to systemic credit risks.

When Sojo Infotel faced repayment strains following delays in Lava International's proposed public listing, Axis Capital was forced to step in and fund the redemption obligations to bondholders, cementing the transaction as a credit indemnity rather than market issue management.

Path to Regulatory Resolution

The issue had prompted SEBI to issue an ex-parte interim order in September 2024, barring Axis Capital from undertaking new assignments as an arranger, merchant banker, or underwriter in the debt segment. In November 2024, SEBI Whole-Time Member Ashwani Bhatia partially modified the interim direction, narrowing the ban to transactions involving credit risk covers, guarantees, or structured secured debt credit.

In the final order, the quasi-judicial authority acknowledged Axis Capital's formal undertaking that it had halted offering such repayment guarantees to debenture holders since April 2023.

SEBI noted that no evidence showed Axis Capital had engaged in similar transactions since the initial inquiry. The regulator held that stalling the operational machinery of an active merchant bank several years after the violation would cause collateral damage to ongoing market operations, listed issuers, and institutional investors relying on the intermediary. Consequently, SEBI adopted the designated authority’s recommendation to conclude the matter with a formal regulatory censure.