Supreme Court: Sebi has Authority Over GDRs

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NEW DELHI: The Supreme Court has ruled that market regulator Securities and Exchange Board of India (Sebi) has the power to probe Global Depository Receipts (GDRs) sold by Indian companies, backed by local shares, to foreign investors and listed on overseas exchanges.

A bench comprising justices F.M.I. Kalifulla and S.K. Singh favoured the minority view held by presiding officer J.P. Devadhar in a 30 September 2013 ruling by the Securities Appellate Tribunal (SAT). The bench set aside the majority ruling by SAT.

The court has now sent the case back to SAT to be dealt with in the next three months. Mint has not seen a copy of the verdict, which was not uploaded on the court website in time for print.

SAT had ruled that regulation of GDRs is outside the purview of Sebi. The regulator managed to get a stay on SAT’s order by the Supreme Court. The case pertains to GDR issuances by a merchant banking firm, Pan Asia Advisors Ltd, in 2009. In each of these issuances, large-scale on-market and off-market transactions took place in 2009 and 2010. When Sebi investigated these transactions, it found that entities related to Pan Asia formed an entire chain—facilitating the GDR issue for small Indian companies, arranging for investors, and then providing an exit for these investors in the Indian markets through a chain of known stock brokers.

supreme court of indiaSebi’s case was that the GDR issuances were a sham. The initial subscribers to these GDR issues were almost always the same set of investors, who would, soon enough, cancel their GDRs, convert them into Indian shares and then sell them in the Indian market.

Sebi found that a large portion of these sales were in the form of synchronized trades with the same set of stock brokers based in India. Even the brokers were found to be connected to Pan Asia and its founder.

The Sebi verdict of 20 June 2013 restrained Pan Asia from accessing the capital market for 10 years on grounds of manipulation of the market through fraudulent activities. SAT had to decide if Sebi had jurisdiction over allegations of irregularities in terms of GDR issuances. The majority ruling by two SAT members—Jog Singh and A.S. Lamba—said that only the Reserve Bank of India or the finance ministry could investigate such irregularities.

Global Sanitation and Toilet Summit in India mail footerThe tribunal said Sebi would have jurisdiction only when the GDRs are converted into shares and transacted on Indian stock exchanges.
The minority view of Devadhar was that Pan Asia had “beyond a shadow of doubt… caused misleading statements (to be) published on the website of stock exchanges that the GDRs are fully subscribed by foreign investors”  when in fact, they had been subscribed to by a company controlled by Arun Panchariya, promoter of Pan Asia Advisors.

“Supreme Court’s order, conferring powers of full jurisdiction of Sebi over GDRs will help the regulator to take action on entities misusing GDR routes even if such an issuance is carried out outside India” said Sandeep Parekh, co-founder and partner of Mumbai-based law firm Finsec Law Advisors.

“If any entity uses the GDR route in a way that may have an impact on Indian markets or be detrimental to the interest of shareholders here, Sebi must have the power to step in and take coercive and enforcement actions. So it is an important decision by the court”

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