The Supreme Court in Securities and Exchange Board of India v. Pan Asia Advisors Ltd. clarified that the jurisdiction of the Securities and Exchange Board of India (SEBI) extends to the issuance of global depository receipts (GDRs) by Indian companies to foreign investors, and also to ensnare lead managers to such issuances if they have an adverse impact on the Indian securities markets.
Although the facts of the case and the transactions involved are somewhat convoluted, they may be summarised from a previous post:
The modus operandi was as follows. The companies issued GDRs, which were acquired by various foreign institutional investors (FIIs) or their sub-accounts. The GDRs were all soon thereafter converted into underlying equity shares of the issuing company, which were then sold in large (synchronized) deals to several buyers, such as stock brokers. The stock brokers would in turn sell the shares to other investors. After investigation, SEBI found that the companies, the lead manager to the GDRs, the FIIs/sub-accounts and the stock-brokers were all acting in common as a group. They were able to maintain the stock price of the company through these transactions without symmetry of information to outside investors who may have paid a high price given the issuance of GDRs by the companies and large holdings maintained in them by FIIs.
While SEBI found this to be an instance of market manipulation and passed an order restraining the relevant parties from participating in the capital markets, this was overturned by the Securities Appellate Tribunal (SAT) through a 2-to-1 majority on the primary ground that SEBI does not possess jurisdiction to regulate GDRs. The matter came up before the Supreme Court on SEBI’s appeal for decision on the short question whether SEBI has the jurisdiction to initiate action against the lead managers to the GDRs issued outside India.
The Supreme Court begins its analysis by breaking down the different steps involved in a GDR issuance. In a nutshell, this involves the Indian issuer company depositing its ordinary shares with a domestic custodian bank, on the strength of which a corresponding overseas depository bank issues the GDRs to the extent of such ordinary shares. In that sense, the Court recognised that while the deposit of the ordinary shares with the custodian takes place in India, the actual issue and trading of the GDRs takes place outside. The applicability of Indian law cannot be wished away since the GDR does not come into existence without the issue of the underlying shares, which is a precondition. The Court also went on to consider that for this reason GDRs would fall within the definition of “securities” under section 2(h) of the Securities Contracts (Regulation) Act, 1956 (SCRA).
As a next step, the Court went on to analyse the powers of SEBI under the Securities and Exchange Board of India Act, 1992 (SEBI Act) as well as the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003. After finding that SEBI has extensive powers to protect the interests of investors in the securities markets, the Court placed emphasis on the fact that the alleged actions of the parties involved in the transactions adversely affected the Indian securities markets. In the Court’s own words (in para. 86):
In the first place, the said reliance placed on the provisions of those enactments providing for extra territorial jurisdiction can have no impact on the action initiated by the appellant, for the simple reason that the violation complained of by the appellant is with reference to such of those provisions contained in SEBI Act, 1992 vis-`-vis the underlying shares of GDRs. Therefore, we are unable to see any violation of exercise of its jurisdiction since the underlying shares of GDR were created and dealt with as well as traded in the stock market of Indian Territory. Any act which caused any infringement in such trading of those underlying shares by virtue of any malfeasance or misfeasance or misdeeds committed by any person under the Act which worked against the interests of the investors in securities and the securities market, the SEBI was entitled to proceed against such persons who are involved in any of those allegations.
The Court also placed reliance on a Constitution Bench decision in GVK Industries Limited v. Income Tax Officer, (2011) 4 SCC 36 to state that for proceeding “in exercise of any extra territorial aspect, which has got a cause and something in India or related to India and Indians in terms of impact, effect or consequence would be a mixed matter of facts and of law, then the Courts have to enforce such a requirement in the operation of law as a matter of law itself.” It also relied upon the “effects doctrine” as the SEBI’s allegations, if established, would have far reaching consequences on the Indian stock markets.
In all, the Supreme Court’s conclusion is premised on two counts: (i) GDRs are issued on the basis of underlying shares, which are governed by Indian law, and hence the question of SEBI exceeding its jurisdiction does not arise; and (ii) given the facts of the case which involved a sell-down by certain parties after converting the GDRs into underlying shares, there was an adverse impact on the Indian securities markets. Of course, Supreme Court’s ruling was limited to the question of jurisdiction, and it has sent the matter back to SAT for a decision on the merits of the case.
The remaining question would be the scope and effect of the Supreme Court’s judgment. Any euphoria to extend the effect of this judgment in a blanket manner to all aspects of issuances of GDRs must be curbed. It appears that the specific facts of the case may have had an impact on the Court’s conclusion. This is because the transaction involved not merely a customary issuance of GDRs through the usual mechanism, but a series of allied transactions as a result of which adverse consequences allegedly befell upon Indian investors. To that extent, its scope may be somewhat confined. What it does clearly, however, it to eliminate any viewpoint that indicates that a GDR issue is carried out entirely outside India “from cradle to grave” and therefore outside the purview of SEBI’s territorial jurisdiction.