Sebi has power to regulate GDRs, says Supreme Court

The Supreme Court said on Monday that capital 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.

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.

Sebi’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 Singhand A.S. Lamba—said that only the Reserve Bank of India or the finance ministry could investigate such irregularities.

The 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.”

He added: “Through IOSCO, Sebi has bilateral and multilateral agreements of co-operation with 125 countries. So the latest order will help Sebi a lot to tackle cross-border capital market violations by Indian entities that have a bearing on domestic markets.”