India prohibits Axis Bank unit from handling new debt issuances

India's capital market regulator has barred Axis Capital from being the manager in new offerings of debt by Indian companies, the latest crackdown in the country's securities market, according to a report by Bloomberg.

The Securities and Exchange Board of India said the Axis Bank Ltd. unit transgressed rules for merchant banking and acted effectively in the domain of a debenture trustee - an act that is beyond its remit. Axis Capital has 21 days to contest the order.

Axis Bank said that 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 per cent of the lender's net income last fiscal year, the Mumbai-based bank said in a statement.

This comes months after SEBI barred JM Financial Ltd from undertaking merchant banking activity in the debt segment on the grounds of unfair trading practices. The regulator is looking at an overhaul of its merchant banking regulations to ensure that such firms don't undertake activities that are not part of the market.

The latest was an issue of debt by a technology consultancy provider Sojo Infotel Pvt. in March 2021. Axis Capital had arranged this issue.

“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 means 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.”

It has been a year since Axis Capital has undertaken any debt arranging of offerings in India and does not view the order as having any material impact, said Axis Bank. 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 it provided to Sojo Infotel's NCDs exposed its parent to credit risks. That necessitates further examination from the Reserve Bank of India, it said.