Tuesday, July 30, 2013

‘Marketable Securities’ and ‘Spot Delivery Contracts’: The Supreme Court’s Analysis of the SCRA

In its recent judgment in Bhagwati Developers v Peerless General Finance, the Supreme Court has considered some important questions relating to the interpretation of the Securities Contract (Regulation) Act, 1956 [“SCRA”]. There were principally two questions before the Court: (i) the applicability of the SCRA to public unlisted companies and (ii) the construction of a settlement agreement to ascertain whether a prior agreement was a ‘spot delivery contract’ as defined in section 2(i) of the SCRA. With respect, it appears that the answer the Supreme Court gave to the second question is clearly incorrect. The answer it gave to the first is correct as a matter of precedent but, as Professor Umakanth has powerfully argued, the reasoning in those cases highlights the need for a Bench of appropriate strength to review this area of the law.

The facts are of some importance and must be analysed with care. In July 1986, Bhagwati Developers Pvt Ltd [“BDPL”] advanced a sum of Rs. 38 lakhs to Mr Tuhin Kanti Ghosh [“TKG”] to be used by him to acquire 3,530 equity shares of Peerless General Finance and Investment Co [“Peerless”]. TKG bought the shares and was to repay the loan by December 1991. On October 30, 1987, TKG—for what reason it is not stated—agreed to transfer this block of 3,530 shares to BDPL in full repayment of the loan. He handed over the transfer deeds (which, it was later alleged, were not properly executed) and stated in a letter of even date that all dividends, bonus shares and other benefits attached to the block of 3,530 shares would be payable to BDPL. Soon after, Peerless declared an issue of bonus shares in the ratio 1:1. As the registered holder, TKG got a further 3,530 shares. BDPL wrote to him in December 1987 asking for fresh transfer deeds for the block of (now) 7,060 shares. TKG did not do so. In 1991, a further bonus issue in the same proportion was announced, and TKG now had 14,120 shares.

In May 1991, BDPL instituted a suit in the Civil Court in Allahabad to restrain TKG from claiming any right in the 14,120 shares and obtained an interim injunction. On 21.11.1994, the parties arrived at a settlement, under which TKG recognised that he had sold the 3,530 shares to BDPL in October 1987 but, in consideration of not contesting the suit, was to be paid a further sum of Rs. 10 lakhs, and allowed to retain the amounts received by way of dividend until October 1989. For his part, TKG gave up his claim to the 14,120 shares, which BDPL now sought to register with Peerless. Peerless refused registration on the ground (inter alia) that the transfer of shares from TKG to BDPL was not a ‘spot delivery contract’ as defined in section 2(i) and therefore a nullity. The Company Law Board agreed, and dismissed BDPL’s petition challenging the refusal. A single judge of the Calcutta High Court dismissed the appeal, which was challenged in the Supreme Court.

The first issue was whether the SCRA applies to public, unlisted companies. This depends on whether the shares of such a company can be described as “…other marketable securities of a like nature…” for the purposes of s 2(h) of the SCRA. The correct view (although not the view accepted by the courts) is that it cannot. The reasons are set out persuasively in Professor Umakanth’s article and I will here summarise the two that seem to me to be the most powerful: (i) the legislative history of the SCRA—notably the Bombay Securities Contract Control Act, the Gorwalla Committee Report and the speech of Finance Minister CD Deshmukh on November 28, 1955 establish clearly that the object of the SCRA is to curb speculation, which presupposes the existence of a market price; and (ii) ‘Stock exchange’ is defined in s 2(j) as a body constituted for the purpose of… “dealing in securities. Since the word ‘securities’ in that section must be given the meaning assigned to it in s 2(h), it would be most surprising if a public unlisted company is part of s 2(h)—for it would follow that its shares (without the company being listed) should be dealt with in a stock exchange. However, the courts, with a few exceptions, have rejected this analysis, and generally equated ‘marketable’ with ‘freely transferable’, heavily influenced by the definition of ‘marketable’ that appears in the Oxford Dictionary and Black’s Law. In Bhagwati v Peerless, the Supreme Court has endorsed this: “the size of the market is of no consequence… the number of persons willing to purchase such shares would not be decisive”. To the Court, the only reason the shares of a private company are not marketable (for there are persons willing to purchase those shares too) is that they are not ‘freely transferable’. In other words, any security that is ‘freely transferable’ is ‘marketable’. The Court goes on to say:

However,   when   the   statute   prohibits   or   limits transfer   of   shares   to   a specified   category   of people   with   onerous   conditions   or   restrictions, right   of   shareholders   to   transfer   or   the   free transferability is jeopardized and in that case those shares with these limitations cannot be said to be marketable    
It is not quite clear from where the Court derived the proposition that restrictions must be ‘onerous’. Quite apart from that, it is also not clear why the shares of a public company are freely transferable, if the Bombay High Court is right that private agreements are outside the ambit of s 111A (which, we have argued it is, although not for the reasons it gave). The Supreme Court also observes that section 13 may apply even if s 2(h) does not (at p 16). In the ultimate analysis, the conclusion that the SCRA applies to public unlisted companies is consistent with existing law: indeed, it is surprising that Sahara was not cited.  

It is in its resolution of the second issue that the Court, with respect, erred. A ‘spot delivery contract’ is defined in s 2(i) as a “contract which provides for actual delivery of securities and the payment of price either on the same day as the contract or on the next day”. Peerless’ case was that the sum of Rs. 10 lakhs paid by BDPL to TKG in November 1994 as consideration for settling the suit was actually the price paid for the shares transferred by TKG to BDPL in October 1987; since some seven years elapsed between the contract and payment, it was not a spot delivery contract. It is, with respect, extraordinary that this contention was successful before the Company Law Board, the Calcutta High Court and the Supreme Court. There are three fundamental objections to it:

(1)   Unless TKG and BDPL were clairvoyant, neither could have known in 1987 that a dispute would arise and that BDPL would pay TKG Rs. 10 lakhs some seven years later. Yet, both plainly intended to transfer the shares in October 1987, for which the consideration was that the loan would be discharged. The discharge of a debt in kind (through shares, rather than money) is not open to the objection in Pinnel’s case, for that rule does not apply to payment in kind, and was in any event specifically abolished in Indian law (see ss 41 and 63 and Kapur Chand Godha’s case). It is axiomatic that there can be no consideration for a contract that is already concluded: in the famous case of Roscorla v Thomas (1842) 114 ER 496, a warranty given by a seller of a horse was held to be void for want of consideration because he had already sold the horse (for consideration—the price). Likewise here—nothing BDPL promised or paid after October 1987 could possibly have been consideration for the sale of shares because that was concluded, and BDPL had acquired title: it could not have paid TKG anything to sell something he had already sold, and which it had already bought. This should have led to the conclusion that Rs. 10 lakhs was consideration for a separate agreement—to settle the suit.

(2)  The Supreme Court appears to have been influenced by the fact that the settlement agreement stated that Rs. 10 lakhs was paid as consideration for the shares. Even if it did, it is irrelevant because it cannot furnish consideration for a contract concluded in 1987. In any case, the Settlement Agreement did not. The text of the Settlement Agreement is reproduced in in the judgment of the High Court under appeal, reported in 128 CompCas 444 and records that: (i)TKG has lawfully sold the original shares…on 30th October 1987…and thereupon TKG ceased to have any beneficial interest”; (ii) TKG shall co-operate with BDPL in having BDPL registered, by executing fresh transfer deeds if necessary, and relinquish all its right, title and interest, for which Rs. 10 lakhs is paid. It is apparent that Rs. 10 lakhs is consideration for the fresh agreement to settle TKG’s claims (ie, his defences to the suit instituted by BDPL).

(3)   It may be asked what the purpose of paying Rs. 10 lakhs was. The answer is that a compromise agreement generates its own consideration, provided the parties believe bona fide that they have a claim (even if the belief is subsequently shown to be mistaken) (see Treitel on Contract, Chapter 3 and Wade v Simeon (1846) 2 CB 548). Here both parties plainly did: BDPL instituted the suit, and TKG presumably defended it. Rs. 10 lakhs (and the agreement to allow TKG to retain the amount received as dividend) was consideration for the settlement, not the transfer of shares. It was, therefore, a spot delivery contract.

Ironically, while this judgment will be cited for its conclusion that the SCRA applies to public unlisted companies, it is the analysis of the second that is likely to be more controversial. It is not just a matter of construction of this particular agreement: it is difficult to see how any agreement to settle a suit filed for a declaration of title to the shares of a public unlisted company will not be governed by this judgment. Indeed, the somewhat odd result is this: a contract for the sale of shares is a spot delivery contract if it is performed in accordance with its terms, but is not a spot delivery contract if one of the parties is in breach, and the buyer settles the dispute by paying the seller a fresh sum of money.

Saturday, July 27, 2013

Securities Laws (Amendment) Ordinance, 2013 gives more teeth to SEBI


[The following post is contributed by Nivedita Shankar, who is a Senior Associate at Vinod Kothari & Co. She can be reached at nivedita@vinodkothari.com

In an earlier post, we had provided an overview of the Ordinance and the possible rationale behind it. This post provides more specific details]

The President of India promulgated The Securities Laws (Amendment) Ordinance, 2013 (“Ordinance, 2013”) to bring amendments to:

1. Securities and Exchange Board of India, 1992 (“SEBI”)
2. Securities Contracts (Regulation) Act, 1956 (“SCRA”)
3. Depositories Act, 1996 (“Act, 1996”)

What sets the Ordinance, 2013 apart is that it has given SEBI a lot of powers when it comes to bringing to book violators. Further, by proposing to set up Special Courts, speedy trails of offences have also been attempted.

Listed below are the major amendments to all the three acts.

1. Scope of calling for information

Section 11(2) (ia) of SEBI Act has been inserted to empower SEBI to call for any information or records from any person including bank or any other authority or board or corporation, which shall be required in respect of any investigation or inquiry by SEBI.

2. Power to SEBI with retrospective effect

The Ordinance, 2013 has empowered SEBI to call for information in matters relating to violations in respect of securities laws, from authorities whether within India or outside. This shall be with retrospective effect from March 6, 1998[1]. To further this power, SEBI in order to furnish information to any outside authority, can also enter into an arrangement or agreement, with the prior approval of Central Government.

3. Transfer to IEPF

Any amount disgorged prior to directions issued by SEBI u/s 11B and 12A shall be credited to IEPF, for utilization as set out in SEBI Act.

4. Scope of classifying as Collective Investment Scheme broadened

Section 11AA of SEBI Act laid down qualifying criteria to be a CIS for schemes or arrangements, which pooled funds from public.

In addition to this, a deeming provision has been added whereby any pooling of funds under any scheme of arrangement involving a corpus of Rs. 100 crore or more and not registered with SEBI, shall also be taken to be a CIS. This will bring chit funds having corpus of more than Rs. 100 crores under the purview of SEBI also, which according to section 11AA are exempt from SEBI exercising its jurisdiction. Presently, such schemes of pooling of money with corpus of more than Rs. 20 crores have to be registered as an Alternate Investment Fund.

Further, such schemes or arrangements could qualify as an CIS only if they were offered by any company. With Ordinance, 2013, even schemes or arrangement offered by persons can qualify as a CIS. This is to say, any company or even an LLP which offers such schemes can qualify as a CIS and be regulated by SEBI.

5. Explanation inserted to provisions pertaining to SEBI’s powers to issue directions

Section 11B of SEBI Act, Section 12A of SCRA and Section 19 of Act, 1996 pertain to powers of SEBI to issue directions. By Ordinance, 2013, an explanation to all these sections has been inserted to mean that powers so vested with SEBI is to include and shall be deemed to  have included power to direct any person to pay back the amount equivalent to the profit made or loss averted to any wrongful gain or loss averted by any contravention.

6. Search and seizure powers to SEBI

With the advancement of technology, SEBI required additional powers to bring perpetrators to book. In keeping with this, SEBI has been given power to search any building, vessel, aircraft or break open the lock of any door, safe. Additionally, SEBI can also seize any books or accounts, place marks of identification and record on oath the statement of any person. Such powers have been granted after amending Section 11(c)(8) of SEBI Act which pertains to any person or enterprise who, during the course of investigation, has omitted to provide information, would not provide information or would destroy, mutilate information or documents.

7. Powers to make regulations

Section 11(c)(9) has been substituted to empower SEBI to make regulations, to lay down the procedure to be followed by any authorized officer:

(i) For obtaining ingress into any building, place, vessel, aircraft to be searched where free ingress is not available

(ii) For ensuring safe custody of any books of accounts or documents seized.

Further, section 11(c)(10) of SEBI Act has also been amended to allow the investigating authority to return the documents or records seized without intimation to Magistrate of such return.

8. Settlement of administrative and civil proceedings

Section 15JB of SEBI Act, Section 23JA of SCRA and 19-IA of Act, 1996 have been inserted allowing any person against whom any proceeding has been initiated or may be initiated to file an application to SEBI proposing to settle the proceedings initiated or to be initiated for alleged defaults. These sections have been inserted with retrospective effect from April 20, 2007[2].

9. Omission of provisions relating to appeal of consent orders to Securities Appellate Tribunal

Section 15T(2) of SEBI Act has been omitted which prohibited any appeal from being made to SAT of any consent order.

10. Amendment to provisions pertaining to “cognizance of offence by courts”

Section 26(2) of SEBI Act and SCRA and Section 22(2) of Act, 1996 has been omitted by the Ordinance, 2013. These sections prohibited any court inferior to that of a Court of Session to try offence punishable under these acts.

11. Establishment of Special Courts

Section 26A in SEBI Act and SCRA and Section 19-IA of Act, 1996 has been inserted to allow constitution of Special Courts for speedy trial of offences. A Special Court shall consist of a single judge who shall be appointed by Central Government with the concurrence of Chief Justice of the High Court within whose jurisdiction the judge to be appointed is working. Further, any offence shall be tried by a Court of Session until the Special Court is established.        

It has also been inserted that the provisions of Code of Civil Procedure, 1973 shall be applicable to the proceedings before a Special Court.

Analysis

In what has been a long wait for the officials of SEBI, sweeping powers have been given to SEBI being perpetrators to book by allowing it to also search and sieze documents. Such powers were with limited number of authorities presently. Further, by giving retrospective effect to ask for information on old cases from foreign regulators, SEBI has been given more teeth in relation to cases pending for more than 15 years. It remains to be seen as to how will SEBI utilize the additional rights vested on it going forward.

- Nivedita Shankar


[1] On March 6, 1998, SEBI had entered into a Bilateral MoU with Securities and Exchange Commission, USA. All other bilateral MoU signed by SEBI with other regulators of other countries were after this date.
[2] On April 20, 2007 SEBI issued Circular No. EFD/ED/Cir-1/2007 dated April 20, 2007 on consent orders and compounding of offences

Thursday, July 25, 2013

Constitutional Validity of Regulatory Regime for CIS Upheld

Earlier this week, a single judge of the Calcutta High Court in Rose Valley Real Estate & Construction Ltd v. Union of India upheld the constitutional validity of certain sections of the SEBI Act (including section 11AA) and certain provisions of the SEBI (Collective Investment Scheme) Regulations, 1999 (the CIS Regulations). Specifically, a challenge was mounted to amendments to the SEBI Act and the Securities Contracts (Regulation) Act (SCRA) in 1999 when the definition of “securities” was expanded to include units of a collective investment scheme (CIS).

The judgment of the Calcutta High Court considers in detail various precedents where constitutional validity of legislation has been challenged. Ultimately, it found that the policy behind the legislative enactment was intended to achieve its stated objective. The court found:

A case of the present nature, in my view, should not be approached with a narrow legalistic view. Alleviation of human predicament arising out of craftily carved systems with sinister motives and aimed at swindling people, and exercise of regulatory control over companies attracting and inviting deposits from the public being the predominant considerations in introducing the provisions that have been impugned herein, the focus should be on the larger public interest that is sought to be advanced. Whenever a statutory provision providing for economic measures is challenged on the ground that it is not constitutionally valid, the Court ought to examine the policy leading to the impugned legislation and then to ascertain whether implementation of the policy is directed towards achieving social justice and to protect and develop national economy or not. If examination of the impugned provisions reveals an intention of the legislature to protect the rights of the aam aadmi and is based on reasons, which are shown to be coherent and justifiable, the policy has to be allowed to have full play and the Courts ought to keep its hands off unless it is permissible to judicially review the policy through the windows of “manifest unreasonableness” or “patent arbitrariness”. If a rational nexus between the policy and the object it seeks to achieve is discernible, the Court would unhesitatingly guard against substituting its view for the legislative judgment.

In this case, the justification was found based on the objective of the 1999 amendments:

A conjoint reading of the relevant Acts, viz. the SEBI Act and the SCR Act together with the objects and reasons of the 1999 Amending Act would leave no manner of doubt that protection of the investors in securities and the manner of ensuring such protection in fullest measure is the heart and soul of the SEBI Act. … I shall assume that the legislation is open-ended, but one has to pose a question here as to whether there was any valid reason for such open-ended legislation? To my mind, it would be quite reasonable to presume that the legislature deliberately intended the legislation to be open-ended to ensure that people with limited financial means are not ruined in the process of trying to get rich quickly and at the same time, no company would have the freedom to fleece. This being the object of the 1999 Amending Act, I feel it is not only the duty of the judiciary to show deference to the legislative judgment but to zealously thwart any attempt by any company to wriggle out of the regulatory mechanism by ingenious legal
arguments …

This result would operate to bolster SEBI’s efforts to rein in Ponzi schemes and similar arrangements that may fall within the CIS Regulations, which in any case have now been widened (as discussed here).

Wednesday, July 24, 2013

Fresenius Kabi: SEBI Order on Delisting


[The following post is contributed by Yogesh Chande, who is a Consultant with Economic Laws Practice, Advocates & Solicitors. Views of the author are personal]

It may be recalled that, pursuant to an announcement issued by Fresenius Kabi Oncology Limited (target company) on 30 May 2012, the stock exchanges were informed that its promoter shareholders have notified the target company of their intention to undertake one or more “offer for sale” on the stock exchanges (OFS), in one or more tranches and thereby increase the public shareholding of the Company. Accordingly, pursuant to an OFS in October 2012, the promoters had divested 9% and as a result the promoter shareholding came down to 81%.

In view of certain developments, the promoters of the target company proposed a voluntary delisting of the target company. However, the target company was found to be non-compliant with the minimum public shareholding norms as on the date of the interim order dated 4 June 2013 (interim order) that was issued to a number of companies who had failed to comply with those norms (discussed here). Pursuant to the interim order, the target company had filed an appeal challenging the interim order before the Securities Appellate Tribunal (SAT). SAT directed the target company to approach SEBI and SEBI was directed to take the decision within a period of four weeks.

SEBI’s whole time member, pursuant to an order dated 22 July 2013 (Order), has now permitted the promoters of the target company to proceed with the delisting, subject to the condition that, the pre-OFS promoter shareholding [90% and not 81%] be considered for computing the percentages under regulation 17 of the SEBI (Delisting of Equity Shares) Regulations, 2009 (Delisting Regulations) to determine whether the delisting is successful.

In view of the above, the promoters of the target company will have to thus acquire 50% of 10% [based on pre-OFS shareholding of 90%] to delist the target company, which will increase the promoter shareholding post delisting to 86% i.e. 81% plus 5%, but excluding the 9% shares which were diluted in the OFS. To put it in simple terms, but for the Allegations [mentioned below in the subsequent paragraph], at 81% promoter shareholding [post OFS], to delist the target company the promoter should have otherwise acquired additional 9.5% [50% of 19% public shareholding] and reached up to 90.50%, including the shares which were sold in the OFS.

The rationale to not delist the target company based on the promoter shareholding [after OFS] at 81% i.e. to exclude those shares which have been sold by the promoters in the OFS as per para 11 of the Order is that SEBI had received complaints from investors alleging that the entities who purchased shares in the OFS may have participated in the OFS with an intent to subsequently tender their shares at an artificial price in the bids for the delisting offer, which will be in collusion with the promoters of the target company, and thus enable the promoters to successfully delist the target company (Allegations). The Order, however does not go into the analysis of whether the Allegations referred to in para 11 of the Order were merely allegations or otherwise. The Order also does not appear to contain any directive to investigate the Allegations. In this regard, it may be noted that, in terms of regulation 4(5) of the Delisting Regulations, a promoter or a person is, inter alia, prohibited from employing any device, scheme etc. to defraud any shareholder or other person or engage in any act or practice that is fraudulent, deceptive or manipulative in connection with any delisting sought.

Be that as it may, the Order and more particularly the observations made in para 10 of the Order[1] may bring some relief also for other companies which have been found to be non-compliant with the minimum public shareholding norms as on the date of the interim order, provided those companies have also taken steps which demonstrates their intention to comply with the minimum public shareholding requirement prior to the date of the interim order, subject to them having made representation and filed their replies within a period of twenty one days as prescribed in para 21 of the interim order.

- Yogesh Chande


[1] QUOTE -- …….including the OFS made in October 2012 which clearly shows the intention of the Company was to comply with the MPS requirement. -- UNQUOTE

Monday, July 22, 2013

Supreme Court on Jurisdiction Clauses

A recent decision of the Supreme Court, Swastik Gases v. Indian Oil Corp. (Civil Appeal 5086 of 2013, decision dated July, 3, 2013), examines the position of Indian law dealing with exclusive jurisdiction clauses.

The Court was concerned with a case where an agreement was executed in Kolkata, while all the other elements of the cause of action had taken place in Jaipur.  The agreement provided for arbitration (clause 17) in accordance with the 1996 Act, without specifying any seat.  A separate jurisdiction clause (clause 18) stated, “The Agreement shall be subject to jurisdiction of the Courts at Kolkata”.  The appellant had filed a petition u/s.11 in the Rajasthan High Court, on the basis that a substantial part of the cause of action arose in Jaipur.  The Respondent’s resisted the jurisdiction of the Rajasthan High Court, on the strength of clause 18.

The fulcrum of the Appellant’s case was the decision in ABC Laminart v AP Agencies (1989, Supreme Court), where the Court had held:

As regards construction of the ouster clause when words like ‘alone’, ‘only’, ‘exclusive’ and the like have been used there may be no difficulty. Even without such words in appropriate cases the maxim ‘expressio unius est exclusio alterius’ — expression of one is the exclusion of another — may be applied. What is an appropriate case shall depend on the facts of the case

If out of the two jurisdictions one was excluded by clause 11 it would not absolutely oust the jurisdiction of the court and, therefore, would not be void against public policy and would not violate Sections 23 and 28 of the Contract Act. The question then is whether it can be construed to have excluded the jurisdiction of the court at Salem. In the clause ‘any dispute arising out of this sale shall be subject to Kaira jurisdiction’ ex facie we do not find exclusionary words like ‘exclusive’, ‘alone’, ‘only’ and the like. Can the maxim ‘expressio unius est exclusio alterius’ be applied under the facts and circumstances of the case? The order of confirmation is of no assistance. The other general terms and conditions are also not indicative of exclusion of other jurisdictions. Under the facts and circumstances of the case we hold that while connecting factor with Kaira jurisdiction was ensured by fixing the situs of the contract within Kaira, other jurisdictions having connecting factors were not clearly, unambiguously and explicitly excluded. That being the position it could not be said that the jurisdiction of the court at Salem which court otherwise had jurisdiction under law through connecting factor of delivery of goods thereat was expressly excluded……”

The extracts above would indicate that ABC Laminart did not absolutely rule out an ouster of jurisdiction in the absence of express words like ‘alone’ or ‘only’.  In RSDV Finance v. Vallabh Glass Works (1993 SC), the Supreme Court held, purporting to rely on ABC Laminart:

The endorsement ‘Subject to Anand jurisdiction’ does not contain the ouster clause using the words like ‘alone’, ‘only’, ‘exclusive’ and the like. Thus the maxim ‘expressio unius est exclusio alterius’ cannot be applied under the facts and circumstances of the case and it cannot be held that merely because the deposit receipt contained the endorsement ‘Subject to Anand jurisdiction’ it excluded the jurisdiction of all other courts who were otherwise competent to entertain the suit.

The Supreme Court in Swastik Gases considered these, and several other cases, and held (per Lodha J; Kurian Joseph J agreeing with the judgment of Lodha J)

It is a fact that whilst providing for jurisdiction clause in the agreement the words like ‘alone’, ‘only’, ‘exclusive’ or ‘exclusive jurisdiction’ have not been used but this, in our view, is not decisive and does not make any material difference. The intention of the parties - by having clause 18 in the agreement – is clear and unambiguous that the courts at Kolkata shall have jurisdiction which means that the courts at Kolkata alone shall have jurisdiction. It is so because for construction of jurisdiction clause, like clause 18 in the agreement, the maxim expressio unius est exclusio alterius comes into play as there is nothing to indicate to the contrary. This legal maxim means that expression of one is the exclusion of another. By making a provision that the agreement is subject to the jurisdiction of the courts at Kolkata, the parties have impliedly excluded the jurisdiction of other courts. Where the contract specifies the jurisdiction of the courts at a particular place and such courts have jurisdiction to deal with the matter, we think that an inference may be drawn that parties intended to exclude all other courts.


Accordingly, the appeal was dismissed.  The Court thus seems to have affirmed that the choice of one of two jurisdictions is sufficient to (at least) raise a presumption as to valid ouster of the jurisdiction, even in the absence of specific exclusionary words.  (Lokur J. delivered a separate concurring judgment, also separately analyzing the case law.  Lokur J, conclusion was: “The absence of words like “alone”, “only”, “exclusive” or “exclusive jurisdiction” is neither decisive nor does it make any material difference in deciding the jurisdiction of a court. The very existence of a jurisdiction clause in an agreement makes the intention of the parties to an agreement quite clear and it is not advisable to read such a clause in the agreement like a statute.”)

Securities Laws Amendment Ordinance: An Overview

As some of us have observed time and again on this Blog, the substantive aspects of securities regulation have become progressively extensive and sophisticated in India. Over the last two decades of SEBI’s functioning, it has constantly updated securities laws to meet with market developments, whether it is in the primary markets (IPOs, QIPs, etc.) or in the secondary markets (insider trading, market manipulation, etc.). However, one principal quibble has often been the lack of effective enforcement of these laws by SEBI. Robust substantive laws are no good until they are effectively enforced by the regulator.

This perceptible regulatory gap is now sought to be addressed through the ordinance route. Last week, the Union Cabinet approved and the President promulgated the Securities Laws (Amendment) Ordinance, 2013 which brings about significant changes, especially on the enforcement powers and authorities of SEBI. A quick review of the Ordinance indicates that it has been primarily been driven by lessons garnered from recent episodes involving securities law matters. The key ones are the Sahara case, the Saradha group scandal and the spate of insider trading cases decided by SEBI and heard and dealt with on appeal by the Securities Appellate Tribunal (SAT). Apart from a substantive change in the Ordinance relating to the expansion of the scope of collective investment schemes (CIS), all other changes are aimed at bolstering SEBI’s investigative and enforcement powers.

The Ordinance brings about amendments to the triumvirate of securities laws in India, being (i) the SEBI Act, 1992, (ii) the Securities Contracts (Regulation) Act, 1956 and (iii) the Depositories Act, 1996. The key changes are as follows:

1.         Collective Investment Schemes

In order to obviate any doubt regarding SEBI’s domain over innovative methods of raising funds from investors, the scope of the CIS has been clarified. Under section 11AA of the SEBI Act, which details the parameters of a CIS, it is now stated that “pooling of funds under any scheme or arrangement” involving a corpus of Rs. 100 crores or more shall be deemed to be a CIS whether or not it is registered with SEBI. Hence, registration with SEBI is not a prerequisite for such scheme to fall within the regulatory purview of SEBI.

2.         Investigative Powers

Section 11C of the SEBI Act that deals with investigation by SEBI has been bolstered by conferring additional powers to SEBI, to be exercised under the authority of its Chairman. These include search and seizure, recording of statements under oath, etc. that will add to the currently available powers.

Moreover, SEBI can call for information and records relevant for information, including telephone call data records. This had become a bone of contention in several insider trading cases where direct evidence is hardly available and SEBI has had to rely on circumstantial evidence. Considerable pressure was also imposed on SEBI through international developments where call records were the basis on which convictions were obtained in the US in the Rajaratnam and Rajat Gupta insider trading cases.

The power of SEBI is also extended to obtaining information from international sources through regulators in other countries with whom it has entered into an arrangement for sharing of information. This becomes relevant in indirect foreign investments through entities such as foreign institutional investors (FIIs) where the know-your-customer (KYC) norms may not have been implemented adequately by the entities involved.

3.         Enforcement Methods / Remedies

Even where SEBI has been successful in obtaining favourable outcomes in enforcing its regulation, often the consequences on violators have been less than desirable. A standing example of this (although somewhat exceptional) is the Sahara case where despite a favourable ruling from the Supreme Court, there have been delays and difficulties in successfully enforcing those orders against the persons guilty of non-compliance. These are sought to be rectified by the Ordinance by granting specific powers to SEBI to attach the violators’ property, bank accounts, and also the arrest and detention of the violator in prison.

4.         Special Courts

In order to ensure that cases involving securities regulation that go to court are dealt with in a timely manner, the Ordinance envisages the establishment of special courts to handle such cases. This is especially because there has been no track record of criminal prosecution of securities offenders that may act as a deterrent in the markets. While this is understandable, the use of special courts and tribunals have often been susceptible to legal challenge, and it remains to be seen whether such impediments will be placed in the way of establishment and functioning of special courts for securities laws.

Of course, the Ordinance contains a lot more detail than can possibly be discussed within the contours of a brief blog post, but it does represent a significant step forward in inducing greater stringency in securities regulation in India, especially in terms of effective enforcement.