SAT on Market Manipulation Involving GDRs

Last year, we
had discussed
a decision of the Supreme Court which clarified that the
Securities and Exchange Board of India (SEBI) had jurisdiction over the
issuance of global depository receipts (GDRs), due to which lead managers to
such issuances would also come within the purview of SEBI if their actions were
found to violate Indian securities law. This involved PAN Asia Advisors Limited
and its promoter, Mr. Arun Panchariya (AP).
The matter had gone up to the Supreme Court only on the issue of
jurisdiction, which it settled. However, SEBI had earlier imposed sanctions on
PAN Asia and AP in connection with their actions relating the GDR issue of
several companies. Against this order, PAN Asia and its promoter appealed to
the Securities Appellate Tribunal (SAT). In an order
passed on October 25, 2016, SAT upheld SEBI’s order.
The relevant facts as set out by SAT are that PAN Asia was a
lead manager to several companies in connection with the issuance of GDRs by
such companies. In one of the cases (involving Asahi Infrastructure &
Projects Ltd) that SAT discusses in detail as the modus operandi, an overseas
company (Vintage) owned by AP obtained a loan from a bank in order to acquire
the GDRs to be issued by Asahi. In addition, Asahi itself provided some form of
security to the bank towards repayment of the loan by Vintage. Following the
seemingly successful issuance of the GDRs, there was heavy trading in Asahi’s
scrip. As SAT summarizes: “… AP, as Managing Director of PAN Asia got the GDRs
issued, as Managing Director of Vintage subscribed to the GDRs and thereafter transferred
the GDRs to the entities controlled by AP and on conversion of GDRs into equity
shares ensured that the said equity shares of the issuer companies are bought
by the entities with whom AP was connected.”
The question before SAT therefore was whether PAN Asia Advisors
and AP have violated the provisions of the Securities and Exchange Board of
India Act, 1992 and the SEBI (Prohibition of Fraudulent and Unfair Trade Practices
Relating to Securities Market) Regulations, 2003 (the PFUTP Regulations). The
concern as articulated by SEBI was that PAN Asia and AP had made it appear to
investors in India that foreign investors had found Asahi to have great
potential by subscribing to the GDR issuance of the company.
In considering whether SEBI was justified in holding the PAN
Asia and AP committed fraud on the investors in India, SAT noted as follows:
21. Thus, instead of
ensuring that the foreign investors subscribe to the GDRs of Asahi, AP as
Managing Director of PAN Asia planned to subscribe to the GDRs of Asahi through
Vintage and in fact as Managing Director of Vintage took loan of 5.98 Million
USD from Euram Bank for subscribing to the GDRs of Asahi and made Asahi to pledge
to the Euram Bank the GDR subscription amount of 5.98 Million USD as security
for the loan taken by Vintage. Similar modus operandi was adopted in case of
other issuer companies. Thus, the investors in India were made to believe that
in the global market the issuer companies have acquired high reputation in
terms of investment potential and hence the foreign investors have fully
subscribed to the GDRs, when in fact, the GDRs were subscribed by AP through
Vintage which was wholly owned by AP. In other words, PAN Asia as a Lead
Manager and AP as Managing Director of PAN Asia attempted to mislead the
investors in India that the GDRs have been subscribed by foreign investors when
in fact the GDRs were subscribed by AP through Vintage. Any attempt to mislead
the investors in India constitutes fraud on the investors under the PFUTP
Such a modus operandi was found to create an artificial
impression in the minds of investors that the GDRs of Asahi had commanded
considerable interest. This misled the investors, as PAN Asia and AP had
attempted to commit fraud on the investors in India. For these reasons, SEBI’s
order debarring PAN Asia and AP from rendering services in connection with the
securities market, and prohibiting them from accessing the capital market
directly or indirectly for a period of 10 years, was upheld.
While the SAT order is largely based on the facts of the case,
it has accepted the jurisdiction conferred upon SEBI (and consequently SAT) to
decide over matters involving GDRs. Ultimately, jurisdiction had to be
exercised as the actions of the parties had a direct impact on the Indian
securities market, and SEBI’s role relates to protection of investors in this

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.

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