Jurisdiction of SEBI in regard to GDRs

In matters relating to issuance, trading and conversion of Global Depositories Receipts (GDRs), the jurisdiction rest with the RBI and/or the Ministry of Finance

In matters relating to issuance, trading and conversion of Global Depositories Receipts (GDRs), the jurisdiction rest with the RBI and/or the Ministry of Finance.  SEBI comes into picture only when GDRs are converted into shares and traded on Indian Stock Exchanges and that too when any loss or prejudice is caused to the Indian investors or to the Indian capital market

Whether Global Depositories Receipts (GDRs) created and issued by foreign banks listed on foreign stock exchanges at the instance of Issuer Companies located in India by a Lead Manager registered in the UK and governed by regulations framed and enforced by a foreign regulator are amenable to the jurisdiction of an Indian regulator namely, the Securities and Exchange Board of India (SEBI) in the event of any allegations of irregularity or illegality leveled against the Lead Manager registered in the UK?

SEBI on receiving alerts in respect of trading in scrips of certain companies during the relevant period conducted preliminary investigation, which revealed that during the investigation period, there was a sharp increase in average daily volume of trading in shares of certain companies. The shares of companies under investigation were sold by a set of FIIs/sub-accounts and bought by a set of clients. The investigation revealed that GDRs of the Company (ies) ‘X’ were subscribed to by entities controlled by ‘A’ and the same were sold thereafter to entities controlled by ‘A’ which in turn converted the said GDRs into equity shares. These equity shares were then sold in Indian market to the entities with which ‘A’ was connected. SEBI alleged ‘A’ of creating liquidity in the scrips of companies under investigation, detrimental to the interests of investors in India.

It was contended that SEBI’s jurisdiction is limited to the territory of India in respect of acts or omission committed by the party concerned and is not extendable to countries outside India with respect to the issuance of GDRs since these are governed by the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (through Depository Receipts Mechanism) Scheme, 1993 (GDR Scheme) as issued by the Ministry of Finance and the Master Circular on Foreign Investment as issued by the Reserve Bank of India (RBI), time to time. Further, as also contended, SEBI does not have jurisdiction more so when it has not framed any regulation governing GDRs. The GDR Scheme of 1993 shows that GDRs are to be “created and issued” by an Overseas Depository Bank. No Merchant Banker (Lead Manager) registered with SEBI or any other authority in India is competent to handle GDRs issued abroad by an Issuer Company located in India. SEBI cannot thus conceivably extend its reach to a company incorporated outside India (UK in the  
instant matter and registered with the financial regulator of the UK, i.e., FSA) is also managed and supervised by the FSA.

While adjudicating the above questions, the majority held that the issuance of GDRs is managed by the RBI. As per the relevant Master Circular, GDRs fall squarely within the RBI’s domain as they are to be managed in accordance with the GDR Scheme of 1993 issued by RBI. As part of procedure also once GDRs have been issued, a report relating to its completion process is to be sent to the RBI and not SEBI.

From the majority decision following outcome can be drawn:

•    Jurisdiction of SEBI is comes into effect when GDRs are converted into shares and traded on Indian Stock Exchanges and that too when any loss or prejudice is caused to the Indian investors or to the Indian capital market;
•    It is the RBI and/or the Ministry of Finance, Government of India, which has exclusive jurisdiction in respect of the issuance, trading and conversion of GDRs into shares abroad;
•    RBI/ Ministry of Finance has the jurisdiction to investigate and/or adjudicate upon any alleged wrong-doing in the issuance of GDRs abroad by an Issuer Company through a lead manager overseas;
•    If, however, the Issuer Company has been debarred by SEBI on account of any violations of its regulations, the said Issuer Company cannot issue any GDRs;
•    If an Issuer Company intends to issue Initial Public Offerings (IPO) of its shares in the Indian capital market and simultaneously, intends to float GDRs abroad, SEBI is empowered to look into the aspect of the issue of IPOs only;
        Separate Order (Dissenting Opinion):
        Vide separate order, the views taken by majority was disagreed holding that in order to protect interests of investors, SEBI is empowered to:
•    take such measures as it thinks fit;
•    to restrain persons from accessing the securities market;
•    to prohibit any person associated with securities market to buy, sell or deal in securities for such period as it deems fit.

If SEBI in investigation concludes that alleged persons were associated with transaction of sale/purchase of underlying shares in India, detrimental to interests of inventors in India, then SEBI can its invoke jurisdiction under the relevant provisions of SEBI Act, 1992. In the instant matter, SEBI’s action was in relation to sale/purchase of underlying shares in India with fraudulent intention and where fraud is alleged to have been committed by persons connected with transactions carried out in India SEBI is justified in invoking jurisdiction under SEBI Act, 1992.

In the above perspective, it would be apposite to say that the questions involve an issue which may be a subject matter of dispute/ debates in future, unless settled down by a Higher Court. The dissenting opinion has raised a valid issue embarking upon SEBI’s jurisdiction.

Pan Asia Advisors & Anr. vs. Securities and Exchange Board of India
(Securities Appellate Tribunal, 30.09.2013)