The scrutiny originated with the Insurance Regulatory and Development Authority of India (IRDAI). In November 2022, IRDAI informed SEBI that MFSL and Axis Bank had entered into a series of buy-and-sell transactions involving unlisted equity shares of Max Life.
IRDAI had earlier imposed penalties of Rs 2 crore on Axis Bank and Rs 3 crore on Max Life, concluding that the entities had circumvented maximum commission limits by structuring equity transfers as investments.
Mumbai:In a major reprieve for Max Financial Services Ltd. (MFSL) and Axis Bank Ltd., the Securities and Exchange Board of India (SEBI) has dismissed a sweeping set of allegations accusing the financial groups of orchestrating a Rs 3,912-crore fraudulent scheme.
The markets regulator has disposed of proceedings against MFSL, Axis Bank, Max Life Insurance Company (MLIC), Axis Capital, Axis Securities and several key managerial personnel, holding that regulatory arbitrage under insurance laws does not, by itself, amount to securities fraud.
The case, spanning more than a decade of corporate transactions, examined whether a series of structured equity deals between 2010 and 2021 were designed to circumvent insurance commission caps and thereby cause losses to MFSL shareholders.
The scrutiny originated with the Insurance Regulatory and Development Authority of India (IRDAI). In November 2022, IRDAI informed SEBI that MFSL and Axis Bank had entered into a series of buy-and-sell transactions involving unlisted equity shares of Max Life.
IRDAI had earlier imposed penalties of Rs 2 crore on Axis Bank and Rs 3 crore on Max Life, concluding that the entities had circumvented maximum commission limits by structuring equity transfers as investments.
Under the arrangement, Axis Bank was repeatedly allotted Max Life shares at a par value of Rs 10 per share, which MFSL and its partners subsequently purchased at substantially higher prices ranging from Rs 54 to Rs 166 per share, linked to fair market value.
SEBI’s subsequent Show Cause Notice (SCN) alleged that the transactions formed part of a consolidated scheme to illegally compensate Axis Bank for its bancassurance relationship with Max Life. The regulator estimated the alleged loss to MFSL at Rs 3,911.95 crore, with a corresponding benefit accruing to Axis Group entities.
SEBI also alleged that MFSL had made incomplete and misleading disclosures to the stock exchanges by failing to disclose the underlying put and call options associated with the transactions.
However, in his final order, SEBI Whole Time Member Amarjeet Singh rejected the SCN’s central premise that a violation of insurance regulations automatically constitutes a violation of the SEBI Act and the Prevention of Fraudulent and Unfair Trade Practices (PFUTP) Regulations.
The order effectively separates the question of compliance with insurance-sector commission norms from the question of whether the transactions amounted to securities fraud, providing significant relief to MFSL, Axis Bank and the other entities named in the proceedings.