Supreme Court on SEBI’s Jurisdiction Over GDRs

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
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. 

About the author

Umakanth Varottil

Umakanth Varottil is an Associate Professor at the Faculty of Law, National University of Singapore. He specializes in corporate law and governance, mergers and acquisitions and cross-border investments. Prior to his foray into academia, Umakanth was a partner at a pre-eminent law firm in India.

1 comment


    What calls for a special noting is this: The ongoing controversy whether or not, if so to what extent, the lately invented idea of preference to ‘substance ‘over ‘form’, in the view the apex court has taken, stands extended to take within its sweep also matters not necessarily related to but unrelated to the issue on jurisdiction /absence of jurisdiction of fiscal authorities in the matter of ‘taxation’. In short, the inference one is obliged to draw is, – there is virtually no dearth of scope for the idea to be invoked by any authority, not barring a ‘regulatory authority ‘such as SEBI, almost to every ‘transaction’, within its general or legal meaning, coming within its domain, remotely or otherwise. One has no option but to wait and watch for further developments of the kind; in particular, the likely /impending changes, desirable or otherwise, in store for the future of the national economy, as isolated from the narrow concern for shareholders’ rights and interests, and with no regard to the size of the investing population as of now or in times to come.

    As perforce visualized, the other directly concerned authority namely, the FIPB may be expected to, given the provocation, though not intended, press for a different stroke/line of reasoning, logical or otherwise, to be accepted and carried forward.

    Our economic cum law experts at large also may wish to explore the inherent potentials of such or similar judicial interpretation to impact or impair in the wider perspective of the national economy.

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