Supreme Court of India
SECURITIES AND EXCHANGE BOARD OF INDIAversusPANASIA ADVISORS LTD. & ANR.
- Citation
- 2015 INSC 483
- Decided
- 6 July 2015
- Disposal
- Appeal(s) allowed
Holding
SEBI has jurisdiction to deem GDRs as securities and to impose the debarment order on the respondents for alleged market abuse and fraud affecting Indian investors.
Summary
The Securities and Exchange Board of India (SEBI) debarred Panasia Advisors Ltd. and its managing director for ten years, alleging that as lead managers they facilitated a fraudulent scheme involving Global Depository Receipts (GDRs) of six Indian companies, creating a false appearance of foreign investment and harming Indian investors. The respondents contended that GDRs are issued and traded entirely outside India, that SEBI lacks jurisdiction over foreign transactions, and that the alleged misconduct falls under FEMA and foreign law, not the SEBI Act. The Supreme Court examined whether GDRs fall within the definition of "securities" under the Securities Contracts (Regulation) Act, 1956 and whether SEBI's powers under Sections 11, 12A and 118 of the SEBI Act, 1992 extend to extraterritorial conduct that impacts Indian investors. Applying the "effects doctrine" and interpreting the 1993 Scheme, 2000 Regulations, 2003 Regulations and the 2014 Scheme, the Court held that GDRs are securities and that SEBI has jurisdiction to act against any person whose conduct, even abroad, adversely affects Indian investors. Consequently, the Court set aside the Securities Appellate Tribunal’s majority order and restored the debarment, directing the Tribunal to decide the merits.
Issues considered
- Whether Global Depository Receipts (GDRs) fall within the definition of securities under the Securities Contracts (Regulation) Act, 1956.
- Whether SEBI has jurisdiction under the SEBI Act, 1992 to regulate and penalise lead managers for alleged fraud involving GDRs issued abroad.
- Whether the extraterritorial "effects doctrine" applies to SEBI's power to act against conduct outside India that impacts Indian investors.
- Whether the 1993 Scheme, 2000 Regulations, 2003 Regulations and the 2014 Scheme confer authority on SEBI to address market abuse in GDR transactions.
- Whether the debarment order under Sections 11, 12A and 118 of the SEBI Act is valid despite the respondents' claim of foreign jurisdiction.
Legislation cited
- Companies Act, 1956s. 55A, s. 77(2)
- Depositary Receipts Scheme, 2014s. Paragraph 10(1), s. Paragraph 11
- Foreign Exchange Management (Transfer or Issue of Security by a Person Resident Outside India) Regulations, 2000s. Regulation 4, s. Regulation 5, s. Regulation 6, s. Schedule I paragraphs 4(1)-(3),6
- Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993
- SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003s. Regulation 2(1)(b), s. Regulation 2(1)(c), s. Regulation 3, s. Regulation 4, s. Regulation 5
- Securities and Exchange Board of India Act, 1992s. 11(1), s. 11(2), s. 11(4), s. 118, s. 12, s. 12A, s. 2(2)
- Securities Contracts (Regulation) Act, 1956s. 2(h), s. 2(j)
Subjects
Global Depository ReceiptsSEBI jurisdictionextraterritorial jurisdictionmarket abusesecurities definitionlead managerdebarmentfraudforeign exchange regulations
Judgment
(2015] 11S.C.R.90
A SECURITIES AND EXCHANGE BOARD OF INDIA
v.
PANASIAADVISORS LTD. &ANR.
(Civil Appeal No.10560 of 2013)
B
JULY06,2015
[FAKKIR MOHAMED IBRAHIM KALIFULLA
AND SHIVA KIRTI SINGH, JJ.]
c Securities and Exchange Board of India Act, 1992:
ss.2(2), 11(1), 11(2), 11(4), 118, 12A-PowerofSEBlto
probe GDRs sold by Indian Companies backed by local
shares to foreign investors and listed on overseas exchange
D - Respondents lead managers dealt with the Global
Depository Receipts (GDRs) issued by six companies -
Allegation that GDRs fictitiously created at global level by
respondent to give false. appearance to the financial
statement of the companies in order to mislead Indian
E investors - SEBI debarring the respondents for a period of
10 years prohibiting respondents from accessing the capital
market- Challenge against- Held: In the case on hand, the
allegations levelled against the issuing company in
connivance with the respondents are that a make believe
F affair was created, as though there was genuine creation of
GDRs and its investments by the foreign investors on the
very date when the GDRs were issued and thereby the global
performance of the issuing company in the local market of
the issuing company had a boost in the commercial sector,
G which lured the local investors to develop their keen interest
to make the investments on a higher share value by virtue of
the investment made by the foreign investors - The said fact
would certainly call for a probe at the hands of SEBI on whom
a duty is cast u/s. 11 (1) to protect the interest of investors in
H securities and the security market - Therefore, exercise of
90
SEBI v. PANASIAADVISORS LTD. 91
jurisdiction by SEBI against the respondents was well founded A
- Foreign Exchange Management (Transfer or Issue of
Security by a Person Resident Outside India) Regulations,
2000 - Regns 2(1)(c), 5 - Issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme 1993 - Securities B
Contracts (Regulation) Act, 1956 - ss.2(h), 2(j) .
s.118 - Exercise of jurisdiction under. - Scope of -
Discussed.
c
Global Depository Receipts (GDRs) - What is GDRs
and how it is issued- Manner in which GDR is dealt with and
how the rights in favour of the holderofGDR is created after
its transfer in his favour - Discussed.
Role of Lead Manager at the time of creation and D
disposal of GDRs - Discussed.
s. 2(h)(i) - Securities - Meaning of - Discussed.
Allowing the appeal, the Court E
HELD: 1.1 A reading of Regulation .s read along with
paragraphs (4) & (6) of Schedule I of Foreign Exchange
Management (Transfer or Issue of Security by a Person
Resident Outside. India) Regulations, 2000 gives a F
statutory recognition to the "Issue of Foreign Currency
Convertible Bonds and Ordinary Shares (Through
Depository Receipt Mechanism) Scheme 1993" which
came into force w.e.f 01.04.1992. Paragraph 4 (1 ), (2) &
(3) and (6) of Schedule I of the 2000 Regulations in effect G
authorises the issuance of Global Depository Receipts
(GDRs}and the Statutory requirements to be fulfilled for
the issuance of such GDRs ·to have a valid sanction
under law of the Indian origin. Under paragraph 3(5)
when an issuing company issues ordinary shares or H
92 SUPREME COURT REPORTS (2015] 11 S.C.R.
A bonds under the 1993 Scheme, that company should
deliver the ordinary shares or bonds to a Domestic
Custodian Bank, who will in terms of the agreement
instruct the Overseas Depository Bank to issue GDR or
a certificate to non-resident investors against the shares
B or bonds held by the Domestic Custodian Bank . [Paras
45, 47, 48] [127-C-E; 129-C-D]
1.2. A GDRs can be issued for one or more
underlying shares held .with the Domestic Custodian
C Bank. The GDRs may be denominated in any freely
convertible foreign currency. The ordinary shares under
the GDRs will be denominated only in Indian currency.
The issues viz., public or private placement, number of
GDRs to be issued, the issue price, rate of interest
D payable on foreign currency convertible bonds, the
conversion price, coupon and the pricing of the
conversion options would be decided by the issuing
company with the Lead Manager to the issue. Once such
GDRs are issued by the Overseas Depositary Bank,
E which has the approval of the appropriate authorities of
the Indian origin as well as appropriate regulatory
authority of registered agencies at the global level, the
GDR becomes an approved registered authenticated
F instrument over which any non-resident can make an
investment for possessing it as a valid holder of GDR.
Paragraph 3(1) states thatan issuing company desirous
of raising foreign funds by way of GDRs based on
ordinary shares for equity issues can create such
G receipts. In order to fulfill its desire, the prior permission
of the Department of Economic Affairs has to be
obtained. In that process, the Lead Manager P.lays a
pivotal role as in consultation with the Lead Manager,
the completion of finalization of issue structure by the
H issuing company is made subject however to the final
SEBI v. PANASIAADVISORS LTD. 93
approval for proceeding ahead with the issue from the A
Department of Economic Affairs. After such creation,
GDR which.is governed by the agreement as between
the Domestic Custodian Bank and the issuing company,
instructions are given to the Overseas Depository Bank
to issue the GDRs to the extent of underlying ordinary B
shares held by the Domestic Custodian Bank. GDR is
issued in the negotiable form and listed on any
international stock exchange for trading outside India.
On such listing, they are always issued for exchange of
freely convertible foreign currency. Again the Lead C
Manager plays a key role in relation to the issues viz.,
public or private placement, number of GDR to be issued,
the issue price etc., in consultation with the issuing
company. This is how GDRs are dealt with after creation.
0
Once the GDRs are listed on. any of the overseas Stock
Exchanges, the same can be purchased, possessed and
freely transferred by a· person who is a non-resident
within the meaning of Section 2(q) of the Foreign
Exchange Regulation Act, 1973. A holder of GDRs viz., a E
non-resident can transfer those receipts or may ask the
Overseas Depository Bank to redeem those receipts. In
the case of redemption, Overseas Depository Bank
makes a request to the Domestic Custodian Bank to get
the corresponding underlying shares released in favour F
of the non-resident investor for being sold directly on
behalf of the non-resident or being transferred in the
books of account of the issuing bank in the name of the
non-resident. That is the manner in which GDR is dealt
with after its creation ~nd that is how the rights in favour G
of the holder of GDR is created after its transfer in his
favour. The role of Lead Manager is thus prescribed
under the scheme at the time of its creation as well as its
disposal. [Paras 48, 53, 54, 55] [129-F-H; 130-A; 131-D-
H; 132-A-G] H
94 SUPREME COURT REPORTS [2015] 11 S.C.R.
A 2.1. Master Circular on Foreign Investment in India
issued by the RBI, which gives detailed description about
creation of GDRs which are negotiable securities issued
outside India by a depository bank on behalf of an Indian
company which represent the local rupee denominated
B equity shares of the company held as deposit by a
Custodian Bank in India. The Master circular reiterates
that GDRs are issued on the basis of the ratio worked
out by the Indian company in consultation with the Lead
Manager to the issuing company. It also highlights as to
C how such of those Indian listed companies which have
been restrained from accessing the securities market by
SEBI will be ineligible to issue GDRs. The Master Circular
also explains as to how under the two way fungibility
scheme which was put in place by the Government of
0
India for GDRs under which a stock broker in India
registered with tile SEBI can purchase shares of an
Indian company from the market for conversion into
GDRs based on instructions issued from overseas
E investors and also re-issuance of GDRs to be permitted
to the extent of GDRs ·which are redeemed into
underlying shares and sold in the Indian market. [Paras
58, 59] [133-G-H; 134-A-D]
F 2.2. On a consideration of the 2000 Regulations, the
1993 Scheme and the Master Circular issued by RBI
periodically one can discern that for creation of GDRs
which can be traded only at the global level, the issuing
company should have developed a reputation at a level
G where the marketability of its investment creation
potential will have a demand at the hands of the foreign
investors. Simultaneously, having regard to the
development of the issuing company in the market and
the confidence built up with the investors both internally
H as well as at global level, the issuing company's desire
SEBI v. PANASIAADVISORS LTD. 95
to raise foreign funds by creating GDRs should have the A
appreciation of investors for them to develop a keen
interest to invest in such GDRs. For creating of GDRs
apart from the desire of the issuing company to raise
foreign funds, the marketability of such shares in the
form of GDRs should have an applicable potential at the B
global level. To put it differently, by artificial creation of
global level investment operation, either the issuing
company on its own or with the aid of its Lead Manager
cannot attempt to make it appear as though there is
. scope for trading GDRs at the global level while in reality C
there is none. The above fact has to be kept in mind
when dealing with an issue relating to creation ofGDRs,
in as much as, when the GDRs gets fully subscribed at
the global level providing scope for huge foreign
0
investment, the same will have a serious impact at the
internal investment market in the form of high
appreciation of share value whereby the issuing
company and the investor will be greatly benefited
mutually. Such a real growth structurally and financially E
is the underlying principle in the creation and trading of
GDRs at the global level. [Para 60] [134-E-H; 135-A-C]
3.1. Going by the definition under Section 2(h)(i),
'security' would include other marketable securities of a F
like nature· of any inc.orporated company. Reading
Section 2(h)(i) and 2(h)(iii) together and applying the
same to GDRs, having regard to the fact that the issuance
of GDRs are always based on the underlying Indian
shares deposited with the Domestic Custodian.Bank and G
thereby the GDRs possess in it right, as well as, interest ~
in the shares, scripts etc., it will have to be held that all
GDRs would fall within the. definition of 'securities' as ,,
defined under Section 2(h) of the 1956 Act. Further, under
Section 2(2) of the SEBI Act, 1992, words and H
96 SUPREME COURT REPORTS [2015] 11 S.C.R.
A expressions used and not defined but defined under the
SCR Act, 1956, the said meaning would respectively
assign wherever used in the SEBI Act, 1992. Therefore,
for the expression 'stock exchange' one will have to fall
back upon Section 2(j) of the SCR Act, 1956. The
B definition makes it clear that a 'stock exchange' as
formed under Section (2)0)(a) & (b) are for the purpose
of assisting, regulating or controlling the business of
buying, selling or dealing in securities. It is true that
GDRs have no time limit and can be possessed as GDRs
C for any number of years. However, when the holder of
the GOR apart from trading with the same as GDR in the
global market at any point of time wish to redeem the
same or go in for fungibility of the redeemed shares back
into GDRs, necessarily the holder of a GDR will have to
0
fall back upon the stock exchanges as per the definition
under Section 2(j) of the SCR Act, who alone can assist,
regulate or control the business of buying, selling or
dealing with securities. [Paras 63-65] [136-C-F; 137-A-C]
E 3.2. The creation of the GDR by the issuing company
and after its creation in the fixation of price, value,
marketing in the global market, the support of Lead
Manager is involved and while dealing with such GDRs,
the same is regulated in so far as it related to underlying
F shares deposited with the Domestic Custodian Bank by
the laws regulating the same and prevalent in India and
so far as the corresponding GDRs created based on
such underlying shares are concerned, the same are
G governed by the laws prevailing in the respective market
where such GDRs are being traded. Post cancellation
of GDRs, the underlying shares deposited with the
Domestic Custodian Bank is made available for trading
in India depending upon the wish of the holder of GDR
H in the local market or for holding it as such i.e as mere
SEBI v. PANASIAADVISORS LTD. 97
shares of the issuing company or by virtue of the A
fungibility scheme can once again be converted as GDRs
for being traded in the global market. [Para 67] [137-H;
138-A-D]
4.1. Under Section 11(1) of the SEBIAct, 1992, a duty
8
has been cast on the SEBI to protect the interest of
investors in securities and also to promote the
development of the securities market as well as for
regulating the same by taking such measures as it thinks
fit. The duty of SEBI would include regulating the c
business in the stock exchanges arid any other
securities market which would include the working of
stock brokers, share transfer agents and similarly placed
other functionaries associated with securities market in
any manner, registering and regulating the working of D
the depositories, participants of securities including
foreign institutional investors in particular to ensure that
fraudulent and unfair trade practices relating to
securities markets are prohibited and also prohibiting
insider trading in securities. Under Section 11 (4)(a) and E
(b) SEBI can by an order in the interest of investors of
securities market either by way of interim measure or by
way of a final order after an enquiry, suspend the trading
of any security in any recognized stock exchange,
restrain persons from accessing the securities market F
and prohibiting any person associated with securities
market to buy, sell or deal in securities. A reading of
Section 11(4)(b), shows the power invested with SEBI
for passing such orders of restraint, the same can even
be exercised against "any person". Under Section 118, G
SEBI has been invested with powers in the interest of
investors or orderly development of the securities
market or to prevent the affairs of any intermediary or
other persons referred to in Section 11 in themselves H
conducting in a manner detrimental to the interest of
98 SUPREME COURT REPORTS (2015] 'I 1 S.C.R.
A investors of securities market and also to secure proper
management of any such intermediary or person. It can
issue directions to any person or class of persons
referred to in Section 11 or asseciated with securities
market or to any company in respect of matters specified
B in Section 11 B in the interest of investors in the securities
and the securities market. In exercise of its powers, SEBI
can pass orders of restrain.t to carry out the said purpose
by restraining any person. Section 12A(a) (b) and (c)
read along with Regulation 2(1)(b) and (c), as well as
C Section 2(h)(iii) of the SCR Act, 1956 cover any act which
will have relevance in protecting the interest of the
investors in securities and security market with any
person however remotely the same are connected with
such securities, in the event of such an act working
0
against the interest of investors in securities and
securities market by way of fraud which has been
elaborately defined under Regulation 2(i)(c) of 2003
Regulations. [Paras 71-73) [147-B-H; 148-A-E; 149-D-F]
E 4.2. The creation of GDR and its trading in the global
market are governed by the respective laws of the
country in which they are dealt with. But one special
feature to be borne in mind is that in the case on hand,
the allegations levelled against the issuing company ii:i
F connivance with the respondents are that a make believe
affair was created, as though there was genuine creation
ofGDRs and its investments by the foreign investors on
the very date when the GDRs were issued and thereby
the global performance of the issuing company in the
G local market of the issuing company had a boost in the
commercial sector, which lured the local investors to
develop their keen interest to make the investments on
a higher share value by virtue of the investment made
H by the foreign investors and in that process it is alleged
SEB: 11. PANASIAADVISORS LTD. 99
that the issuing company itself provided every scope for A
the foreign investments to be financed and in reality the
ultimate investment was made by Indian investors viz.,
the ordinary share holders. The said fact would certainly
call for a probe at the hands of SEBI on whom a duty is
cast under Section 11(1) to protect the interest of B
investors in securities and the security market. Under
Section 11(2)(b) while regulating working of stock
brokers, etc., it is also provided that SEBI can regulate
"such other intermediaries who may be associated with
security markets in any manner". The said set of C
expressions would cover anyone who are directly or
indirectly or in a subterfuge manner dealt with the
securities to deceive the real investors in Indian stock
market. If the allegation thatthe respondents facilitat~d
0
issuing company (viz,) Asahi aided the foreign investor
company to invest in its GDRs by supporting the loan it
borrowed from Euram and thereby the said allegation
can be brought within the expression 'insider trading'·
that would also empower SEBI to intervene. It is for the E
respondents as well as the Indian issuing company to
demonstrate that any of the allegations made by the
appellant in relation to the so called fraud or fictitious
creation of GDRs at the global level to mislead the local
investors was totally baseless and that therefore no F
action was called for. It is common knowledge that in
the commercial sector, companies which are in the field
of manufacturing or any other business activity are able
to gain the confidence of the investors by virtue of their
appreciable performance in the . respective G
manufacturing or other business activities and while
controlling and developing the growth in their respective
field of business, aspire to make further excellence by
drawing the attention of foreign investors to make
investments and thereby broad base their business H
100 SUPREME COURT REPORTS [2015] '11 S.C.R.
A venture also endeavour to sustain their development in
the concerned business in which they are involved. Any
such initiative taken by any entrepreneur would develop
an appreciable trend in the share market which would
draw the attention of the local investors to stake their
B claim in such well established, well grown business
ventures with a view to earn better profits on whatever
investments they wish to make. Therefore, if there is
going to be a false pretext or misleading information
circulated with a view to lure both the foreign investors
C as well as Indian investors and in that process the very
purpose of creation and trading in GDRs are found to
be not true or bona fide, it cannot be said that simply
because creation of such GDRs and its trading is in
global market, SEBI should keep its mouth shut on the
0
ground that it cannot extend its long statutory arm
beyond Indian territory to control any such misdeeds
deliberately committed with a view to defraud the Indian
investors and thereby their interest in the investment of
E securities and its protection is at great stake. Having
regard to the nature of allegations in the interests of
investors in securities as well as the statutory obligation/
duty cast upon SEBI to protect their interests, SEBI has
got every jurisdiction to proceed against the
F respondents as well as the issuing company. The 1993
Scheme was acknowledged under the 2000 Regulations,
but on that score it cannot be held that the said Scheme
or Regulations will have no application when it comes
to the question of any action being initiated under the
G provisions of SEBI Act, 1992 read along with SCR Act,
1956. There is no statutory .prohibition either under FEMA
or RBI Act preventing SEBI from taking action in exercise
of its powers under Section 11, 118 and 12A of the SEBI
Act, 1992. Therefore it is too late in the day for the
H respondents to contend that action can only be taken
SEBI " PANASIAADVISORS LTD. 101
for any violation under the FEMA and there is no scope A
for invoking the provision of SEBI Act, 1992. The said
submission therefore is also liable to be rejected. [Para
80, 81, 82] [157-F-H; 158-A-F; 159-D-H; 160-A-G; 161-8]
5.2 Any use, intended or otherwise, of depository B
receipts or market of depository receipt in a manner,
which has potential to cause or has caused abuse of
securities market in India, is "market abuse" and shall
be dealt with accordingly. According to Clause 10(2) for
the purpose of this paragraph, "market abuse" means c
any activity prohibited under Chapter V-A of the SEBI
. ~ct, 1992. Under paragraph 11 of the 2014 Scheme, the
1993 Scheme stood repealed except to the extent
relating to foreign currency convertible bonds and sub-
para (2) of Section 11 contains a non-dbstante clause o
that notwithstanding such repeal, anything done or any
action taken under the 1993 Scheme shall be deemed to
have been done or taken under the corresponding
provision of the present scheme. The 2014 Scheme
having thus explained what is "market abuse", it must E
be stated that now after the 2014 Scheme any act done
under the 1993 Scheme has also been validated. The
definition of "market abuse'; would squarely cover the
allegation presently made by the appellant as against
the respondents. Simply because "market abuse" has F
been now codified under the 2014 Scheme, it cannot be
held that there is no scope for proceeding against any
person for indulgence in such a "market abuse" prior to
the introduction of the 2014 Scheme. The underlying
stiares of GDR were created and dealt with as well as G
traded in the stock market. of Indian Territory. Any act
which c.aused any infringement in such trading of those
underlying shares by virtue of any malfeasance or
misfeasance or misdeeds committed by any person H
under the Act which worked against the interests of the
102 SUPREME COURT REPORTS (2015) 11 S.C.R.
A investors in securities and the securities mal'ket, the
SEBI was entitled to proceed against such persons who
are involved in any of those allegations. Therefore, the
reference to those provisions contained in other
enactments does not cause any impediment for SEBI to
B proceed against the respondents in exercise of its
jurisdiction under the SE81Act, 1992. [Paras 85, 86) [163-
8-G; 164-D-F]
5.2. As per paragraph 4(2) and (3) of Schedule I of
c 2000 Regulations, the Indian company issuing shares
for the purpose of issuing GDRs should furnish to the
Reserve Bank the full details of such issue in the
prescribed form DR with.in 30 days from the date of
closing of the_issue. Similarly under paragraph 4(3)
D issuing company against GDR should furnish a quarterly
return in the prescribed form DR-Quarterly to RBI within
15 days of the close of the calendar quarter. In the event
of any wrong statement furnished in these forms, it
provides scope for proceeding against the issuing
E company as well as any person connected with such
violation and it would certainly empower the authority
viz., SEBI to initiate action under the SEBI Act, 1992 in
order to protect the interests of Indian investors in
securities and the security market. [Paras 87, 88) [164-
F G-H; 165-A, E-F]
6.1. As far as the stand of the second respondent
that he is a non-resident. Indian residing in Dubai till
September, 2011 and was the Managing Director of the
G first respondent and that the first respondent is a distinct
and separate legal entity from the second respondent
and therefore the first respondent cannot be made liable
or responsible for the action of the second respondent.
It is too late in the day for the respondents in attempting
H to get themselves excluded from the alleged violations
SEBI v. PANASIAADVISORS LTD. 103
as against the issuing companies along with the A
respon~ents, which resulted in the passing of the order
of debarment. For the very same reasons, the stand of
the second respondent that he is not an intermediary
and his role in relation to GDR was limited to advising
for the listing of GDRs etc., would not absolve the second B
respondent from facing the action initiated by the
appellant. [Paras 91, 92] [167-D-H]
6.2. Parliament has no power to legislate for any
territory other than the territory of India or other part of c
India with respect to aspects or causes which have no
impact or nexus with India. The SEBI Act itself provides
for proceeding against any person in order to protect
the interests of investors and the stock market in India
· with reference to any fraud played against such interest D
of the investors in India. Even if the law applies to
persons who are not corporally present within the
territory of India, even if they are citizens abroad when
such persons commit acts which affects the legitimate
interest of this country which would include such E
legitimate interest in the case on hand of the investors
in India at the stock market, it must be held that the
appellant would be fully empowered to proceed against
such persons as provided under the provisions of SEBI
Act, 1992. [Paras 96, 98] [171-E-F; 172-F-G] F
GVK Industries Limited and another v. Income Tax
Officer and Another2011 (3) SCR 366: (2011) 4
SCC 36; Union of India and Others v.
Dharamendra Textile Processors and Others
G
2008 (14) scR 13: (2008) 13 sec 369 -
followed.
Republic of Italy through Ambassador and Others
v. Union of India and Others 2013 (4) SCR 595:
(2013) 4 sec 721 - relied on. H
104 SUPREME COURT REPORTS [2015] 11 S.C.R.
A Vodafone International Holdings BV v. Union of
India and Another 2012 (1) SCR 573: (2012) 6
sec 613- held inapplicable.
Haridas Exports v. All India Float Glass
Manufacturers' Assn. and Others 2002 (1) Suppl.
B
SCR 229: (2002) 6 sec 600; Chairman, SEBI v.
Shriram Mutual Fund and Another2006 (2) Suppl.
SCR 833: (2006) 5 SCC 361 - referred to.
Case Law Reference
c
2011 (3) SCR 366 followed. Paras 29, 94
2013 (4) SCR 595 relied on. Paras 29, 97
2006 (2) Suppl. SCR 833 referred to. Paras 29, 99
2008 (14) SCR 13 followed. Paras 29, 100
D
2002 (1) Suppl.SCR 229 Referred to. Paras 42, 101
2012 (1) SCR 573 held
inapplicable. Paras 42, 103
CIVIL APPELLATE JURISDICTION: Civil Appeal No.
E 10560 of2013.
From the Judgment and Order dated 30.09.2013 in
Appeal No. 126 of 2013 of the Securities Appellate Tribunal,
Mumbai ("SAT')
F
Chander Uday Singh, Pratap Venugopal, Surekha
Raman, Purushottam KumarJha, Gaurav Nair, Niharika (for
K. J. John & Co.) for the Appellant.
G Shyam Divan, Shaiwal Srivastava, Abhinav Malhotra,
Ashok K. Srivastava for the Respondents.
The Judgment of the Court was delivered by
FAKKIR MOHAMED IBRAHIM KALIFULLA, J. 1. This
H appeal at the instance of the Securities and Exchange Board
SEBI v. PANASIAADVl.SORS LTD. [FAKKIR MOHAMED 105
IBRAHIM KALIFULLA, J.]
of India (hereinafter called "SEBI") is directed against the A
majority judgment and final order dated 30.09.2013, passed
by the Securities Appellate Tribunal, Mumbai, in Appeal
No.126 of 2013.
2. The short question that arises in this appeal relates to B
the jurisdiction of SEBI under the Securities and Exchange
Board of India Act, 1992, (in short "SEBIAct, 1992") to initiate
proceedings against the respondents as Lead Managers to
the Global Depository Receipts (in short "GDRs") issued
outside India based on investigations held by it and on its C
conclusion that in relation to transaction of sale/purchase of
underlying shares released on redemption of GDRs in the
securities market in India, the Lead Managers had committed
fraud on the investors in India and that such fraudulent intention
existed at every stage of the GDR process till sale/purchase D
of underlying shares in the securities market in India. The further
question that arises for consideration is that if the said question
is answered in the affirmative, whether the SEBI was justified
in passing its impugned order dated 20.06.2013, debarring
the respondents herein from rendering services in connection E
with instruments that are defined as securities under Section
2(h) of the Securities Contracts (Regulation).Act, 1956 (in short
"SCRAct, 1956") and such debarment fora period of 10 years
prohibiting the respondents from accessing the capital market F •
directly or indirectly under SEBI Act, 1992 and the regulations
framed there under was justified.
3. When the order of SEBI dated 20.06.2013 was
challenged by the respondents before the Securities Appellate
Tribunal, Mumbai in Appeal No.126 of 2013, the Chairman of G
the Tribunal in his minority view upheld the order of the SEBI
while the members of the Tribunal by way of their majority view
set aside the order of SEBI debarring the respondents. It was
in the above stated background SEBI has come forward with H
this appeal before us.
106 SUPREME COURT REPORTS [2015] 11 S.C.R.
A 4. Therefore, for us, the only question to be decided is
as to whether SEBI had jurisdiction in passing the impugned
order dated 20.06.2013 debarring the respondents for a
period of ten years in dealing with securities while considering
the role played by the respondents as Lead Managers relating
B to the GDRs issued by six companies who issued such GDRs.
In the counter affidavit filed on behalf of the first respondent, it
is stated that the said respondent's name has been changed
and is now known as Global Finance &Capital Limited, having
its office International Corporate House, Monster House, 42
C Mincing Lane, London and represented by its Executive Officer
Ms. Neha Dua. Therefore, whatever stated with reference to
first respondent and applicable to it in this order shall mutatis
mutandis apply to the said entity namely Global Finance &
Capital Limited in all respects.
0
5. In order to appreciate the issue raised, it will be
necessary to explain the manner in which the respondents dealt
with the GDRs issued by those six entities in the foreign market
and the nature of allegation which according to SEBI was found
E true and which led SEBI to conclude that such manner of dealing
of the GDRs of those companies by the respondents as Lead
Managers did have a serious impact in the securities market
of Indian origin and consequently it had jurisdiction to proceed
F against the respondents.
6. In the present appeal, according to SEBI the
respondents as Lead Managers dealt with the GDR.s issued
by six entities viz., (1)Asahi Infrastructure & Projects Ltd (Asahi)
(2) IKFTechnologies Ltd. (IKF) (3)Avon Corporation Ltd (Avon)
G (4) K Sera Sera Ltd (K Sera) (5) CAT Technologies Ltd (Cat)
and (6) Maars Software International Ltd (Maars).
7. Mr. C.U. Singh, learned senior counsel who appeared
for SEBI submitted that since the nature and manner of handling
H of the GDRs by the respondents as Lead Managers were
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 107
IBRAHIM KALIFULLA, J.]
identical relating to all the six companies, for the purpose of A
noting the nature of such dealings we can restrict it to the first
company viz., Asahi and that the same can be applied mutatis
mutandis in respect of the six other companies. We are
therefore referring to the details of the GD Rs issued by Asahi
and the manner in which such issuance of GDRs were B
disposed of and ultimately converted into shares and sold out
in the Indian Market.
8. According to SEBI, Asahi issued equity shares of
Rs.29,91,00,000/- of Rupee one each at the value of 2 USO C
on 29.04.2009. Such shares issued resulted in allotment of
29,91,000 GDRs containing 29,91,00,000 equity shares. The
total value of the GDRs issued was 5.98 million USO. Such
GDRs issued were fully subscribed and closed on 29.04.2009
itself. D
9. Prior to the GDRs issue, Asahi had 3,71,96,000 fully
paid equity shares and GD Rs issued was about eight times
of Asahi's outstanding share capital. The first respondent
herein was appointed as the Lead Manager for the GDR E
issued and the entirety-of the share capital of the first
respondent was held by the second respondent. While
referring to the GDR issued by Asahi and the appointment of
the respondents as its Lead Managers, it will be necessary to
refer to two other entities viz., Vintage and Eu ram. The second F
respondent is the Managing Director of Vintage and Eu ram is
the foreign bank lender. It was mainly stressed at the instance
of SEBI that there was a loan taken from Eu ram by Vintage for
subscribing to the GDRs of Asahi and that the same was
managed by a loan and pledge agreement signed not only by G
Vintage and Eu ram but by Asahi as well. According to SEBI,
the second respondent herein structured the loan and pledge
agreement to which Asahi, Vintage and Euram were
signatories and the terms of the Joan agreement as well as the H
108 SUPREME COURT REPORTS [2015] 11 S.C.R.
A pledge agreement were intertwined and they were the keys to
the alleged fraudulent issuance and subscription of GDRs.
10. It was pointed out that the loan agreement was dated
21 /22.04.2009 between Euram and Vintage bearing
B agreement No.K210409-003 i.e. eight days before the
issuance of GDRs themselves. The second respondent signed
the loan agreement as Managing Director of Vintage under
the loan agreement, Euram sanctioned a loan of 59,82,000
USD to Vintage, the borrower to enable Vintage to take Asahi's
C GDRs and thereafter to transfer to Euram Ale No.540030.
However, as a matter of fact, it was found that Ale No.540030
in Eu ram was Asahi's account for depositing the proceeds of
GD Rs. Clause 6.1 of the loan agreement stipulated for creation
of a pledge of (A) the securities held in the borrower's account
D No.540030 (in reality it was Asahi's account) at Euram (B)
Pledge of that very account No.540030 (pledging of Asahi's
account itself) for supporting the borrower under the loan
agreement. The pledge agreement was dated 21.04.2009,
between Asahi and Euram signed by Mr.Laxminarayan Rathi
E in his capacity as Managing Director of Asahi on 28.04.2009.
It is relevant to note that family members of Mr.Rathi are the
promoters of the Asahi. It was pointed out on behalf of SEBI
that Mr.Rathi did not inform Bombay Stock Exchange (BSE)
F or the company or the shareholders about the signing of the
pledge agreement in favour of Eu ram. Therefore, Asahi was
the Pledgor with Eu ram Bank under the pledge agreement.
The preamble of the pledge agreement after referring to the
loan agreement between Eu ram and Vintage stated that the
G pledgor agreed to th~ terms of loan agreement and a copy of
the loan agreement was also delivered to pledgor and in effect
having regard to such nature of agreement as between Asahi
and Eu ram as pledgor and ledge and the borrower made by
Vintage from Euram for whom loan was advanced, Eu ram got
H it secured by the pledge of GDR themselves issued by Asahi.
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 109
IBRAHIM KALIFULLA, J.]
11. Further Clause 2.1 of pledge agreement provided A
for pledging of the pledgor's assets as collateral security for
due repayment of the loan under the loan agreement for the
value of 59,82,000 USO. Clauses 6.1, 6.2 and 6.3 of the
pledge agreement gave full rights to the bank Euram to ealiza
its loan agreement by ealization of pledged securities. By virtue B
of the coalesce manner of the loan agreement and pledge
agreement, the resultant position was found to be a common
ownership of bank account by the borrower, subscriber and
the issuing company added to a guarantee by the issuing
company for the loan taken by the subscriber to its GDRs. C
According to SEBI such a nature of transactions as between
Asahi, Vintage and Euram disclosed central and determining
features of a scheme to fraudulently raise fake capital by the
issuing company.
D
12. At this juncture, we want to make it very clear that we
are not expressing any opinion as to the correctness or
otherwise of the stand of SEBI at this moment. We are only
concerned with the question as to the jurisdiction of SEBI to
exercise its powers under the provisions of the SEBI Act, 1992 E
and SCR Act, 1956 read along with the regulations framed
under the provisions of SEBI Act, 1992 to proceed against the
respondent(s) as the Lead Managerfor the so called fraudulent
transaction indulged in by the respondents.
F
13. As far as the nature of fraud alleged is concerned,
according to SEBI the investors of GDR of Asahi were found
to be Messers Greenwich Management Inc and Tradetec
Corporation. Greenwich was stated to have paid 29,82,000
USO for the purchase of 14,91,000 GDRs and Tradetec G
Corporation paid 30,00,000 USO for 15,00,000 GDRs. It is
further pointed out that while Greenwich claimed to have its
office at Hong Kong and Tradetec at Singapore, inspite of its
best efforts, SEBI could not contact both the addresses H
furnished by the above investors as it turned out ultimately that
110 SUPREME COURT REPORTS [2015] 11 S.C.R.
A the addresses were non-existent or the said addresses do
not belong to them. It also came to the knowledge of SEBI
that the said investors had investments in several other GDRs
of Indian Companies.
B 14.Apartfrom the above, it was pointed out on behalf of
SEBI that on 01.06.2009, Asahi informed BSE about allotment
and creation of 29,91,00,000 equity shares and 29,91,000
GDRs to foreign entities viz., Greenwich and Tradetec for
conversion. Based on such information, BSE made it public
C to retail investors. It was however found that in reality the GDRs
were subscribed by Vintage in connivance with Asahi and the
proceeds simultaneously pledged with Euram. On 15/
16.07.2009, BSE stated to have uthorized the trading of
29,91,000 GDRs in the Indian Market. After the issuance of
D GDRs, Vintage became the sole holder of the said GDRs and
thereby it became majority share holder of Asahi i.e. 88.94 %
shareholding. Vintage transferred the GDRs to two entities
called IFCF (India Focus Cardinal Fund) and Kii Limited
between 17.08.2009 and 15.06.2011. Another entity called
E Credo an associate company of Kil limited had an agreement
with Vintage for dealing with the GD Rs of Asahi. As per the
said agreement Vintage gave a loan of 20,00,000 USO to
Credo to further lend it to Kii Limited to enable Kil limited to
F purchase the securities of several Indian companies including
Asahi. The agreement enabled Kii iimited to convert GD Rs
into underlying shares and in fact shares were sold in the Indian
market. Such sale effected and the proceeds collected were
used to purchase further securities and to repeat the said
G process until Kil limited decided to terminate the agreement.
Credo was paid commission by Vintage and the agreement
ensured Vintage to take full liability of the dealings of Kii iimited
in the GDRs of Indian Companies and any loss by Kii iimited
to be borne by Vintage. The said agreement was also signed
H by the second respondent on behalf of Vintage.
SEBI v."PANASIAADVISORS LTD. [FAKKIR MOHAMED 111
IBRAHIM KALIFULLA, J.]
15. Cancellation of Asahi GDRs said to have started from A
19.08.2009 and completed by 14.06.2011. The shares were
released and credited to the Demat account of IFCF and Kii
limited. Between 20.08.2009 and 15.06.2011, 49.51 % of
GDRs were cancelled by IFCF and Kii iimited. The underlying
shares received by IFCF and Kii iimited were sold in the ln_dian B
Market.
16. On behalf of SEBI it was also submitted that when
the utilization of GDR proceeds by Asahi was investigated, it
was found that most of the documents submitted by Asahi to c
SEBI were inconsistent with the statements that were available
in public domain. According to SEBI, it summoned Asahi to
furnish details of the usage of proceeds of GDR issued by it,
the bank statements, agreement copies etc., Based on the
information furriist:ied by Asahi, SEBI found that there were D
transfer of funds by Asahi to its subsidiary viz., Asahi FZE in
Dubai, that Asahi transferred 26,73,000 USO to Asahi FZE by
selling the GD Rs, the total ealization came to 59,62, 136 USO
i.e. 99.66% of the total loan taken by Vintage from Euram. By
making further reference to the transactions as between Asahi E
FZE and Vintage and another entity called Ababil which
belonged to the respondent, transfer of 44.68% of GDR issued
in favour of the respondents which was suspected by SEBI as
the modus operandi adopted by the respondents for repayment
F
of loan taken by Vintage to Eu ram. It was further alleged that
Asahi failed to provide vital information relating to Asahi FZE
and other transaction details. It is claimed on behalf of SEBI
that flow of funds post GDR revealed clandestine manner of
GDR dealings by vintage and Asahi. G
17. Reliance was also placed on false information about
pleage and loan agreement and concealment of information
• .regarding tilization of funds by foreign subsidiary of Asahi which
supported to great extent the suspicion of SEBI that part of
H
112 SUPREME COURT REPORTS [2015) 11 S.C.R.
A proceedings of GDR issued were routed back to the entities
belonging to the respondents.
18. It was also alleged on behalf of SEBI that Asahi did
not disclose details of outstanding GDRs in its quarterly
B disclosure of share holding pattern to Exchanges and that as
per SSE website the enquiry held with custodians shows that
nil for Asahi even after issuance of GDR issue. It was therefore
claimed that the falsification of information regarding pledge
and loan agreement and concealment of information regarding
c tilization of funds by foreign subsidiary fully supported the
suspicion of SEBI that part of the proceeds of GDR issue were
routed back to the entities belonging to the respondents.
19. In conclusion, it was said that Asahi having executed
D fraudulent transaction of claiming subscription of GDRs by two
foreign investors, while it was only purchased by the Lead
Managers viz., the respondents and their related entities and
finding the proceeas having been encumbered due to the
underlying loan taken by the respondent(s) finally received in
E India not more than 30% of the money raised and the remaining
funds were paid out to various parties without any clear purpose
of such transfers mentioned in the books of the company apart
from highly material events not explaining clearly in the financial
statement of the company which were not even disclosed to
F the market and therefore the share holders of Asahi were
adversely affected and without warning impacted seriously
which resulted in slide in prices on account of large sale of
shares upon cancellation of GDRs. It is on the above said
basis, SEBI took the stand that it had every jurisdiction to
G proceed against the respondents for the alleged fraudulent
manner of dealing with the GD Rs issued by Asahi which had
serious impact in the share holding_ pattern of Asahi in the
Indian market which really hoodwinked the Indian investors. •
H 20. Mr. C.U. Singh the learned senior counsel appearing
SEBI v. PAN ASIAADVISORS LTD. [FAKKIR MOHAMED 113
IBRAHIM KALIFULLA, J.]
for the SEBI after making reference to the above facts and A·
also the statutory provisions submitted that the respondents
as Lead Managers were involved in the above alleged
·fraudulent transactions of GD Rs whereby without any actual
inflow of funds into the issuing company, the said company
was successful in issuing large amount of GDRs which gave a B
false respectable appearance to the financial statement of the
company while in reality by making few book entries it was
shown as though large surge in the capital of the company
was made. It was contended that the so called initial investors
to the GD Rs were found to be fictitious which were created by C
respondent. It was contended that by making such fictitious
book entries, the respondent(s) in reality ensured that the funds
mov~d from one of its controlled company to another company
also controlled by it and vice versa and ultimately the issuing D
company received post cancellation in Indian stock markets
and the sale of such shares after its cancellation in the Indian
market only resulted in reality the Indian investors and not the
foreign·investors who ultimately paid for the GDRs. It was
pointed out that as a consequence of such a fraudulent · E
arrangement perpetuated by the respondents the Indian
investors upon buying shares converted from GDRs
unknowingly assisted the issuing companies to release the
GDR subscription proceeds from encumbrance/pledge and
thereby instead of capital beirig raised from foreign investors F
by way of issuance of GDRs, the Indian investors ultimately
paid for part of the GD Rs after the same were converted into
underlying shares which were then sold in the Indian securities
market to the investors.
G
21. According to SEBI, this kind of transaction would
defeat the purpose of issuance of GDRs which is to raise
finance from foreign investors. It was therefore contended that
issuance of GDRs being sourced from uthorized share capital
of a company listed in the Indian Stock Exchanges, any H
114 SUPREME COURT REPORTS [2015] 11 S.C.R.
A structuring or manipulation related to GDRs will have a direct
impact on the stocks of the company trading in Indian market,
that the two way fungibility scheme for GDRs allow for .
conversion of GDRs in Indian market and vice versa and impact
of such issuance, cancellation /conversion and sale/transfer
B of shares so converted will have a direct bearing on the
securities market in India.
22. It was further contended that the material issue was
whether the arrangement by which the respondents as Lead
C Managers indulged in the transaction of GD Rs of the issuing
company of the Indian origin by creating a pledge on the
proceeds thereof to enable a foreign bank to lend to foreign
investors will h-ave to be tested in the anvil of Indian law as the
GDRs are always supported by the underlying Indian shares.
D
23. It was also pointed out that in the course of the hearing
the respondents clarified that the disbursement of loan by the
foreign finanGial institution actually occurred immediately
subsequent to the execution of pledge agreement by Asahi
E and thereby made it clear that the loan agreement and pledge
agreement drew strength from each other and were intricately
connected to the transaction. It was also noted by SEBI based
on the uncontroverted factual scenario that it took eight months
forthe issuing company viz., Asahi to tilize the GDR proceeds
F as till then the investor viz., Vintage could not repay. the loan
borrowed by it from Euram which borrowal was fully and mainly
supported by the pledge agreement created by Asahi in favour
of Euram. In this context, heavy reliance was placed upon
Section 77(2) of the Companies Act which prohibited any
G public company or private company which is subsidiary to a
public company to give directly or indirectly by means of a loan,
guarantee etc., any.financial assistance for the purpose or in
connection with purchase or subscription made or to be made
H by any person for any share in the company or in its holding
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 115
IBRAHIM KALIFULLA, J.]
company. Reliance was also placed upon the provisions of A
SEBI (Prohibition of Fraudulent and Unfair Trade Practice
Relating tci Securities Market) Regulations, 2003 (in short
"2003 Regulations") which prohibited such transactions.
24. According to SEBI the existing share holders and B
prospective investors were projected of the positive tlose that
the issuing company had raised foreign capital through GDRs
but were completely unaware of the activities of respondents
as Lead Managers along with their connected entities in such
GDR issues. It was the case of SEBI that the very fact that the C
GDRs were issued pursuant to the alleged fraudulent
arrangement entered into by the respondents through Vintage
that the initial investors as declared by the respondents largely
did not exist, as a result of which, the investors in India were
made to believe (falsely) that the Stocks of issuing companies D
were highly valued by foreign investors.
25. Mr. C.U. Singh therefore contended that having regard
to the nature of transaction of the GDRs of the issuing
companies of Indian origin in the global market since had a E
direct bearing on the Indian investors and such transactions
were found proved by SEBI had serious impact on the Indian
market, SEBI was fully justified in assuming jurisdiction and
thereby having passed the order of debarment in the order
dated 20.06.2013. F
26. To support his submissions, Mr. C.U. Singh learned
senior counsel for SEBI also referred to various provisions of
the SEBI Act, 1992, SCRAct, 1956 and the Regulations framed
under the provisions of the SEBI Act, 1992. In particular he G
relied upon Section 2(i) of SEBI Act, 1992 read along with
Section 2(h) of SCR Act, 1956 which defines "s.ecurities" and
contended that GD Rs are marketable securities as defined in
Section 2(h)(i) and (iii) of SCR Act, 1956. By referring to
Section 20), the definition of Stock Exchange in SCRAct, 1956 H
116 SUPREME COURT REPORTS [2015] 11 S.C.R.
A as well as Section 11(2) and (4) of SEBI Act, 1992, learned
counsel contended that SEBI has been invested with
enormous powers to check buying, selling or dealing in
securities through stock exchanges which power having regard
to the vide definition of securities under the SCR Act, 1956
B would include any fraudulent transactions relating to GRDs
which are always supported by the underlying shares. The
learned senior counsel further pointed out that such powers of
the Board have been clearly set out in Section 11 Bas well as
11 C read along with Section 12 of the SEBI Act, 1992.
c
27. The learned senior counsel by making reference to
Section 12A of SEBI Act, 1992 which prohibits manipulative
and deceptive devices relating to insider trading etc either
directly or indirectly, SEBI have every jurisdiction to proceed
D against the respondents when once it came to light that
respondents indulged in manipulative devices in dealing with
the underlying shares ofthe GDRs by hoodwinking the investors
and by making the issuing companies themselves to pledge
their own investments for the purpose of advancing loan for
E · the investment made by Vintage, which according to SEBI also
belong to the respondents who are the Lead Managers who
dealt with the GDRs of the issuing company Asahi.
28. According to the learned senior counsel by virtue of
F the alleged fraud played by the respondent(s) the Indian
investors were the victims for whom SEBI is the custodian and
the nature of transaction indulged in by the respondent resulted
in more than 140 million USO of fraudulent transaction. The
learned senior counsel, therefore, submitted that the action of
G the responoents was. in total violation of stock market
regulation, it was in violation of Section 77(2) of the Companies
Act and was a rank fraud on the share holders apart from such
violations attracting the provisions of the Foreign Exchange
H Management Act, 1999 (in short "FEMA") and Reserve Bank
of India (in short "RBI") regulations.
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 117
IBRAHIM KALIFULLA, J.]
29. In support of his submissions, the learned senior A
counsel relied upon GVK Industries Limited and another v.
Income Tax Officer and another- (2011) 4 SCC 36 paras
3 to 6 and para 124, Republic of Italy through Ambassador
and Others Vs. Union of India and Others - (2013) 4 SCC
721, paras 14, 130 and 139, Chairman, SEBI v. Shriram B
Mutual Fund and another (2006) 5 SCC 361paras15, 17,
19, 33 to 36 and Union of India and Others v. Dharamendra
Textile Processors and Others - (2008) 13 SCC 369 paras
2, 3, 13 and 20:
c
30. As against the above submissions Mr. Shyam Divan,
learned senior counsel appearing for the respondents raised
several points for consideration. The points raised by learned
senior counsel for the respondents are:
D
a) SEBI is a creature of a Statute under Section 3 of
SEBI Act, 1992 and its scope and powers are, therefore,
defined by the Statute.
b) SEBI Act, 1992 extends to the whale of India and
extra jurisdictional matters are not covered by it and as E
a creature of a Statute SEBI cannot operate beyond
India.
c) PFUTP being delegated regulation/subordinate
regulation under SEBI Act, 1992 cannot reach beyond · F
its territorial jurisdiction.
d) SEBI functions as defined under Section 11(1) and
controlled by the words in that Section which specifically
use the expression "subject to. the provisions of the Act".
G
e) Both the respondents are registered wit/] the
Financial Conduct Authority (UK) and therefore they are
the authorities which can control the respondents and
SEBI has no plenary jurisdiction over them.
H
118 SUPREME COURT REPORTS [2015] 11 S.C.R.
A f) SEBI has no subject matter jurisdiction over GDR
though the powers under FEMA regulations/schemes
and RBI directions and the authorities specified may
have jurisdiction to act and certainly not SEBI on the
subject matter. Negatively the office manual of SEBI
B has nothing to do with the subject matter of GDR. .
g) Material on records placed before the Tribunal
disclosed that the activities of respondents were fully in
compliance of local statutes of Austria and U.K.
c
h) The directions issued by SEBI to the respondents
are extremely prejudicial.
31. Mr. Shyam Divan drew our attention to the stand of
respondents 1 and 2 in their respective counter statements
0
filed in this appeal and submitted that while the first respondent
is the Lead Manager second respondent is not a Lead
Manager and that both of them were not registered with SEBI.
or any other authority for the purpose of dealing with GD Rs.
E The learned senior counsel contended that there is no
obligation either on the first respondent or the second
respondent under SEBI Act, 1992 or regulations or under any
other Indian law including FEMA to make or disclose any
information. It was contended that the first and second
F respondent have not filed any information in order to state that
false information was furnished to the Indian authorities with
an intention to mislead them. According to the learned senior
counsel, the disclosure to be made were the obligations of the
issuing company relating to GDRs including the details about
G the foreign bank, foreign exchange etc., under the statutes in
India. It was further submitted that under no statutory
prescription first and second respondent are obligated to
inform about the fund flow into India to SEBI. The fact that no
such obligation exists even as Indian issuing company.
H
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 119
IBRAHIM KALIFULLA, J.]
32. ltwas contended that as Lead Managers the role of A
respondents 1 and 2 end with the listing of GDRs. In so far as
·trading, conversion, redemption etc., they have no role to play.
It was further contended that there is no lock in period for the
GDR which is freely convertible, which may be converted and
may not be converted which depends upon the decision of the B
investor. According to the respondents, they had no control
over issuing companies which function independently in India
and except commercial contractual relationship pertaining to
GDR, the respondents had no relationship with the issuing
company. The learned senior counsel submitted that it is not C
the case of SEBI that these companies were all bogus
companies.
33. The learned senior counsel drew our attention to
certain core features of the GDR issues dealt with by D
respondents as Lead Managers and listed them as under:
"Core features of the GDR issues
1) GDRs were.issued and were subscribed in full.
E
2) GDRs were dollardenominated and the monies
received at the time of subscription was in USO.
3) The dollars stooa credited in the issuer company's
bank account maintained with Euram Bank.
F
4) This account with Euram Bank was opened by the
issuer company.
5) Dollars in the issuer company's account (GDR
subscription proceeds) became available to the ·
· issuer companies, albeit according to SEBI after G
"repayment of loan". There was an 8 months delay
in respect of Asahi with respect to free tilizedon of
the GDR proceeds.·
6) The loans have been repaid.
H
120 SUPREME COURT"REPORTS [2015) 11 S.C.R.
A 7) As on 30.06.2012, though all loans were paid, all
GDRs were not cancelled and certain GDRs
remained intact.
8) The issuer companies received US Dollars and
tilized the US Dollars by transferring them to their
B
respective overseas subsidiaries or repatriating the
funds to India."
34. The learned senior counsel further pointed out that
there was no requirement to bring the GDR proceeds into India
C or there is no time frame for such repatriation which are
supported by the RBI Master Circular apart from the fact that
there was no allegation that the funds were used for prohibited
activities, viz., stock exchange transactions or real estate
transactions prescribed under the Issue of Foreign Currency
0 Convertible Bonds and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1993 (in short "1993 Scheme").
35. Mr. Shyam Divan further contende.d that SEBl's own
documents established that the GDR issues were subscribed
E in USO and the proceeds were available to the issuing
companies and that in that process no violation of any Indian
or overseas law was alleged against either the issuing
company or the respondents. .
F 36. Mr. Shyam Divan then referred to Section 2(o) the
definition of "foreign security", Section 2(za) the definition of
"security" and Section 3 and contended that the said provisions
under the FEMA are relevant which control any transaction
pertaining to foreign security which means shares, stocks,
G bonds, debentures etc., which are denominated expressed in
foreign currency.
37. He also made reference to Section 6(3) wherein the
RBI has been empowered to formulate regulations for
H prohibiting, restricting or regulating matters relating to transfer
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 121
. IBRAHIM KALIFULLA, J.]
etc., offoreign security by a persori who is resident in India as A
well as outside India. Further reference was made to Section
13 of the said Act which prescribed the penalties for
contravention of the provision of the Act and Section 36 for the
authorities who have been empowered under the said Act for
the enforcement of the provisions of the Act The learned senior B
counsel therefore contended that the GDRs will definitely fall
within the definition of "foreign security" as defined in section
2(o) and "security" as defined in Section 2(za) and
consequently with_ reference to any violation in dealing with the
GDRs ca_n be exclusively dealt with under the provision of C
FEMAand the SEBI or any of the provision of SEBIAct, 1992
will not have any application relating to GDRs.
38. The learned senior counsel referred to master circular
cin foreign investment in India dated 01.07.2011 of the RBI D
with particular reference to paragraph 8{F) of the said circular
which deals with issues of shares by Indian companiea under
ADR/GDR as well as the form prescribed under Annexure 11
of the said circular by which the quarterly return are to be filed
by the issuing company. The learned senior counsel pointed E
out that such procedure has been prescribed under the master
circular under the provisions of the FEMA which takes care of
the issuance of GDRs including two way fungibility provided
under the said circular. The learned senior counsel submitted F
that even such prescriptions under the master circular issued
by the Reserve Bank of India or with reference to the control
·which the Act prescribed on "foreign security" and "security"
which includes GDRs as defined under FEMA as well as the
manner in which such issuance offoreign security are to be G
controlled by tlie RBI. In this context, Mr. Shyam Divan brought
to our notice the Foreign Exchange Management (Transfer or
Issue of Security. by a Person Resident Outside India)
Regulations, 2000 (in short "2000 Regulations") in particular
Regulation 4, 5.1 along with Schedule I (4B), 5 and 6 and H
122 SUPREME COURT REPORTS [2015] 11 S.C.R.
A submitted that the scheme viz., 1993 Scheme got statutory
lavor by virtue of the 2000 Regulations referred to above.
39. Learned senior counsel also referred to Clarification
23 in the RBI guidelines for the limited two way fungibility under
B the 1993 Scheme as well as the guidelines for ADR/GDR issues
by the Indian companies under Euro.issue and submitted that
the issuance of GDR by the issuing company and dealt with
by the respondent(s) as Lead Managers fulfil all the
requirements under FEMA, RBI Guidelines, 2000 Regulations
C under FEMA as well as 1993 Scheme and, therefore, there
was no scope for SEBI to proceed against the respondents
under the provisions of the SEBIAct, 1992 or S.CRAct, 1956.
40. The learned senior counsel also brought to our notice
o the Depositary Receipts Scheme 2014 (in short "2014
Scheme") notified by the Central Government which mandates
the authorities under the RBI and SEBI as well as Ministry of
Corporate Affairs in the Ministry of Finance to implement the
provisions of the said scheme. The learned senior counsel
E fairly po.inted out paragraph 10 of the scheme which refers to
market abuse, which states that "market abuse" means any
activity prohibited under Chapter VA of the SEBI Act, 1992.
By making reference to the said scheme learned senior
counsel submitted that even the said scheme notified in the
F year 2014 cannot be invoked to rope in the respondents though
it may empower SEBI to proceed against the issuing company.
41. The sum and substance of the submissions of the
learned senior counsel for the respondents is that GDR is
G statutorily defined under Clause 2© of 1993 Scheme and 2000
Regulations which shows that cradle to grave GDR is outside.
India. The said submission was made on the footing that
issuance of GDR is outside India, investor is outside India,
market is outside India, investor bank is outside India, therefore,
H everything relating to GDR is outside India. The contention was
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 123
IBR.AHIM KALIFULLA, J.]
that both as a matter of law and fact the GDR operates outside A
India and that the respondents are covered only till the GDR is
listed in the overseas and therefore, GDR is not a security
covered by SEBI Act, 1992 as well as SCR Act, 1956.
Consequently, SEBI had no jurisdiction or role to protect the
interest of GDR investors or to regulate the GDR market. It is B
also submitted that by virtue of Section 1(2) of the SEBI Act,
1992, the SEBI can have c:Ontrol over the operation in the whole
of India but not outside the country. It was contended that the
·various provisions referred to on behalf of the respondents
under different statutes do not make express mention of GDR C
which was advisably so, because there was no impediment
for including in the definition, because GDR was fromcradle
to grave outside India, whereas SEBI Act, 1992 is exclusively
for transactions within Indian territory. By making specific D
reference to Section 12 of the SEBI Act, 1992, it was contended
that whil.e it refers to investment advisors, market bankers
whose registration is statutorily required, respondents as Lead
Managers are not required to be registered because they are
not dealing with local Indian securities. It was also contended E
that even SEBI do not contend that the respondents ar.e obliged
to registerwith SEBI.
42. It was further contended that even under Section
12(1A), the respondents are not required to get registered with F
SEBI. The learned senior counsel relied upon the decision
reported in GVK Industries Limited (supra) paragraphs 6,
108 and 124 to 126, and also relied on Haridas Exports v.
All India Float Glass Manufacturers' Assn. and Others -
(2002) 6 SCC.600 paragraphs 3, 18, 29, 33 to 39, 43, 46, 57 G
and 61. Reliance was also placed upon Vodafone
International Holdings BV v. Union of India and Anoth.er
- (2012) 6 sec 613 paragraphs 83-93, 387 and 408.
43. To appreciate the submissions made by the respective H
counsel for the appellant as well as the respondents, in the
124 SUPREME COURT REPORTS [2015) 11 S.C.R.
A forefront, we feel the following questions need our attention
viz.,
I. What is GDR and whether it will fall under the definition
of 'Securities' under Section 2(h) of SCRAct 1956?
B II. How is it created?
111. Why is it created ?
IV. After its creation, how is it dealt with ?
V. After the disposal of GDRs in the global market what
c are the rights of its investors?
VI. What is the role played by a Lead Manager while
dealing with GDRs in a foreign market?
VII. Who are all the parties who are involved in the
D creation, ownership and the cancellation of GDR?
VIII. Dealing with GDR, is it regulated by the statutory
prescription of India or only by foreign laws?
IX. Post cancellation of GDRs what impact it can create
E on the issuing company and the investors of the Indian
market?
X. In the event of any misfeasance or malfeasance in
dealing with the GD Rs whether SEBI can effectuate its
F control over those who are involved in such misfeasance
or malfeasance? .
44. To fin_d an answer to the above questions we can
make reference to Regulation 5 (1) and (2) as well as Schedule
G I of the 2000 Regulations which has been framed in exercise
of the powers conferred by Clause (b) of sub-section 3 of
Section 6 and Section 47 of the FEMA. Regulation 5 (1) and
(2) and paragraph 4 (1 ), (2) & (3) and Paragraph 6 of Schedule
I are relevant which are as under:-
H
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 125
IBRAHIM KALIFULLA, J.]
"Regulation 5. Permission for purchase ofshares by A
certain persons resident outside India:-
(1) A person resident outside India (other than a citizen
of Bangladesh or Pakistan or Sri Lanka) or an entity
outside India, whether incorporated or not, (other than
8
an entity in Bangladesh or Pakistan), may purchase
shares or convertible debentures of an Indian company
under Foreign Direct Investment Scheme, subject to
the terms and conditions specified in Schedule 1.
. .
(2) A registered Foreign Institutional Investor (Fii) may C
purchase shares or convertible debentures of an Indian
company under the Portfolio Investment Scheme,
subject to the terms and conditions specified in
Schedule 2.
D
***
Paragraph 4. Issue of Shares by International
offering through ADR and/or GDR
(1) An Indian company may issue its Rupee E
denominated shares to a person resident outside India
being a depository for the purpose of issuing Global
Depository Receipts (GDRs) and/ or American
Depository Receipts (ADRs),
Provided the Indian company issuing such shares F
(a) has an approval from the Ministry of Finance,
Government of India to issue such ADRs and/or GDRs
or is eligible to issue ADRsl GDRs in terms of the·
relevant scheme in force. or notification issued by the · G
Ministry of Finance, and
(b) is not otherwise ineligible to issue shares to
persons resident outside India in terms of these
Regulations, and
H
126 SUPREME COURT REPORTS [2015] 11 S.C.R.
A (c) the ADRs/GDRs are issued in accordance with the
Scheme for issue of Foreign Currency Convertible
Bonds and Ordinary Shares (Through Depository
Receipt Mechanism) Scheme, 1993 and guidelines
issued by the Central Government thereunder from time
B to time.
(2) The Indian company issuing shares under sub-
paragraph (1), shall furnish to the Reserve Bank, full
details of such issue in the form specified in Annexure
c 'C', within 30 days from the date of closing of the issue.
(3) The Indian company issuing shares against ADRs/
GDRs shall furnish a quarterly return in the form
specified in Annexure 'D' to Reserve Bank within fifteen
days of the close of the calendar quarter.
D
•••
Paragraph 6. Dividend Balancing
Where a company is engaged in any of the industries
in the consumer goods sector, specified in Annexure
E
E, or in any other activity where the condition of dividend
balancing has been stipulated in tenns of the provisions
of Industrial Policy and Procedures notified by
Secretariat for Industrial Assistance, the cumulative
F outflow of foreign exchange on account of payment of
dividend over a period of seven years from the date of
commencement of commercial production to investors
outside India shall not exceed cumulative amount of
export earning of the company during those years.
G Provided that
(a) the restriction under this paragraph shall not apply
i) in respect of shares held in such a company by
International Finance Corporation (IFC), the Deustche
H Entwicklungs Gescelschaft (DEG), the Commonwealth
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 127
IBRAHIM KALIFULLA, J.]
Development Corporation (CDC) and Asian A
Development Bank (ADB).
ii) to a company that has completed a period of seven
years from the date of commencement of commercial
production,
B
(b) in case of an existing company that has issued
fresh equity to persons resident outside India under
these Regulations, the restriction shall apply to the fresh
shares from the date of their issue."
c
45. A reading of Regulation 5 read along with paragraphs
,4) & (6) of Schedule I of 2000 Regulations, as rightly pointed
out by Mr.Shyam Divan gives a statutory recognition to the 1993
Scheme which came into force w.e.f 01. 04.1992. It is needless
to state that the said Scheme came to be issued by the Central D
Government in exercise of its executive powers under Article
73 of the Constitution of India, Paragraph 4 (1 ), (2).& (3) and
paragraph 6 of Schedule I of the 2000 Regulations in effect
authorises the issuance of GDRs and the Statutory
requirements to be fulfilled for the issuance of such GD Rs to E
have a valid sanction under law of the Indian origin.
46. Having noted such provisions framed under the 2000
Regulations, when we refer to paragraph 2(a), (c), (d) and (e)
of 1993 Scheme, one will get a clear idea about how GDRs F
are issued. Paragraph 2(a) defines "Domestic Custodian
Bank" to mean a banking company which acts as a custodian
for the ordinary shares or foreign currency convertible bonds
of an Indian company which are issued by it against Global
Depository Receipt or certificates. Paragraph 2(c) defines G
Global Depository Receipts to mean any instrument in the form
of a depository receipt or certificate (by whatever name it is
called) created by an Overseas Depository Bank outside India
and issued to non-resident investors against the issue of
ordinary shares or foreign currency convertible bonds of the H
128 SUPREME COURT REPORTS [2015] 11 S.C.R.
A issuing company. Paragraph 2(d) defines an issuing company
to mean an Indian company permitted to issue Foreign
Currency Convertible Bond or ordinary shares of that company
for the purpose of creation of Global Depository Receipts.
Paragraph 2(e) defines Overseas Depository Bank to mean
B a bank authorized by an issuing company to issue Global
Depository Receipts against issue of ordinary shares of the
issuing company.
47. It will be necessary to refer to paragraph 3(1) and
C 3(1 )(iii) and (iv) and 3(2) and 3(3) of 1993 Scheme in order to
get a clear picture as to what is Global Depository Receipt
and how it is issued. Under paragraph 3(1) any issuing
company desirous of raising foreign funds by issuing Foreign
Currency Convertible Bonds or ordinary shares for equity
D issues through Global Depository Receipt is required to obtain
prior permission of the Department of Economic Affairs,
Ministry of Finance, Government of India.
48. Under paragraph 3(1)(iii) an approved intermediary
E under the scheme would be an Investment Banker registered
with the Securities and Exchange Commission in USA or under
Financial Services Authority in UK or appropriate regulatory
authority in Germany, France, Singapore or in Japan. Under
paragraph 3(1 )(iv) such issues would need to confirm to the
F Foreign Direct Investment Policy and other mandatory
statutory requirement and detailed guidelines issued in this
regard. The provisions of paragraph 4(B) of Schedule I of 2000
Regulations as notified by the RBI vide Notification No. FEMA
41/2001-RB dated 02.03.2001 should also be adhered. Under
G paragraph 3(2), an issuing company seeking permission under
sub-paragraph I should have a consistent track record of good
performance (financial or otherwise) for a minimum period of
three years on the basis of which an approval of finalizing the
H issue structure would be issued to the company by the
Department of Economic Affairs, Ministry of Finance. Under
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 129
IBRAHIM KALIFULLA, J.]
paragraph 3(3) on the completion of the finalization of the issue A
structure in consultation with the Lead Manager to the issue,
the issuing company shall obtain the final approval for
proceeding ahead with the issue from the Department of
Economic Affairs. Under paragraph 3(4) the Foreign Currency
Convertible Bonds shall be denominated in any convertible B
foreign currency and the ordinary shares of an issuing company
to be denominated in Indian rupees. Under paragraph 3(5)
when an issuing company issues ordinary shares or bonds
under the 1993 Scheme, that company should deliver the
ordinary shares or bonds to a Domestic Custodian Bank, who C
will in terms of the agreement instruct the Overseas Depository
Bank to issue Global Depository Receipt or a certificate to
non-resident investors against the shares or bonds held by
the Domestic Custodian Bank. A Global Depository Receipt D
may be issued in the negotiable form and may be listed on
any international stock exchange enabling the investor for
trading outside India under paragraph 3(6). Under paragraph
3(7) the provisions of any raw relating to issue of capital by an
Indian company would apply in relation to the issuance of E
Foreign currency convertible bonds or the ordinary shares of
an issuing company and the issuing company should obtain
necessary permission or exemption from the appropriate
authority under the relevant law r.elating to the issue of capital.
For this purpose, Sections 55A and 77(2) of the Companies F
Act are relevant which are to be followed. The issue structure
of GDRs is governed by paragraph 5 of 1993 Scheme. A
Global Depository Receipt can be issued for one or more
underlying shares held with the Domestic Custodian Bank.
The GDRs may be denominated in any freely convertible G
foreign currency. The ordinary shares under the GDRs will be
denominated only in Indian currency. The issues viz., public or
private placement, number of GDRs to be issued, the issue
price, rate of interest payable on foreign currency convertible
bonds, the conversion price, coupon and the pricing of the H
130 SUPREME COURT REPORTS [2015] 11 S.C.R.
A conversion options would be decided by the issuing company
with the Lead Manager to the issue. There would be no lock-in
period for the GDRs issued under this scheme.
49. Under paragraph 6, the GDRs issued under this
B Scheme may be listed on any one of the Overseas Stock
Exchanges or over the counter exchanges or through Book
Entry Transfer System prevalent abroad and such receipts can
be purchased, possessed and freely transferable by a person
who is a non-resident within the meaning of Section 2(q) of
C the Foreign Exchange Regulation Act, 1973 and subject to
the provisions of the said Act.
50. Paragraph 7 of the Scheme deals with the transfer
and redemption. Under paragraph 7(1), a non-resident holder
D of GDR may transfer those receipts or may ask the overseas
Depository Bank to redeem those receipts. In the case of
redemption Overseas Depository Bank should request the
Domestic Custodian Bank to get the corresponding underlying
shares released in favour of the non-resident investor for being
E sold directly on behalf of the non-resident on being transferred
in the books of account of the issuing company in the name of
non-resident.
51. Under paragraph 7(3), on redemption, the cost of
F acquisition of shares under lying the Global Depository
Receipts should be reckoned as the cost on the date on which
the Overseas Depository Bank advises the Domestic
Custodian Bank for redemption. The price of the ordinary
shares of the issuing company prevailing in the Bombay Stock
G Exchange or the National Stock Exchange on the date of advice
of redemption should be taken as the cost of acquisition of the
underlying ordinary shares.
52. A combined reading of paragraphs 2(a), (c), (d) and
H (e) shows thatthe Global Depository Receipts are issued by
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 131
IBRAHIM KALIFULLA, J.]
a company in India based on the ordinary shares deposited A
with the domestic custodian bank and issued by the
corresponding overseas depository bank depending upon the
extent of ordinary shares held by the Domestic Custodian Bank.
Once such Global Depository Receipts are issued by the
Overseas Depositary Bank, which has the approval of the B
appropriate authorities of the Indian origin as well as
appropriate regulatory authority of registered agencies at the
global level, the GDR becomes an approved registered
authenticated instrument over which any non-resident can
make an investment for possessing it as a valid holder of GDR. C
53. Under paragraph 3(1) it gives an indication as to why
such Global Depository Receipts are sought to be created.
The said paragraph states that an issuing company desirous
of raising foreign funds can by way of GDRs based on ordinary D
shares for equity issues can create such receipts. In other
words, the issuance of GDRs based on ordinary shares
deposited with the Domestic Custodian Bank depends upon
the issuing companies desire for raising of foreign funds. In
order to fulfill its desire, while issuing the GDRs based upon E
the underlying shares deposited with the Domestic Custodian
Bank through the overseas Depository Bank, the prior
permission of the Department of Economic Affairs, Ministry of
Finance, Government of India has to be obtained. In that F
process, the Lead Manager plays a pivotal role as in
consultation with the Lead Manager, the completion of
finalization of issue structure by the issuing company is made
subject however to the final approval for proceeding ahead
with the issue from the Department of Economic Affairs: G
54. After such creation, GDR which is governed by the
agreement as between the Domestic Custodian Bank and the
issuing company, instructions are given to the overseas
Depository Bank to issue the GDRs to the extent of underlying H
132 SUPREME COURT REPORTS [2015] 11 S.C.R.
A ordinary shares held by the Domestic Custodian Bank. GDR
is issued in the negotiable form and listed on any international
stock exchange fortrading outside India. On such listing, they
are always issued for exchange of freely convertible foreign
currency. It is significant to note that the ordinary shares
B underlying the GDRs are always denominated only in Indian
currency. Again the Lead Manager plays a key role in relation
to the issues viz., public or private placement, number of GDR
to be issued, the issue price etc., in consultation with the issuing
company. This is how GD Rs are dealt with after creation.
c
55. Once the GD Rs are listed on any of the overseas
Stock Exchanges, the same can be purchased, possessed
and freely transferred by a person who is a non-resident within
the meaning of Section 2(q) of the Foreign Exchange
D Regulation Act, 1973. A holder of Global Depository Receipts
viz., a non-resident can transfer those receipts or may ask the
Overseas Depository Bank to redeem those receipts. In the
case of redemption, Overseas Depository Bank makes a
request to the Domestic Custodian Bank to get the
E corresponding underlying shares released in favour of the non-
resident investor for being sold directly on behalf of the non-
resident or being transferred in the books of account of the
issuing bank in the name of the non-resident. That is the
F manner in which GDR is dealt with after its creation and that is
how the rights in favour of the holder of GDR is created after
its transfer in his favour. The role of Lead Manager is thus
prescribed under the scheme at the time of its creation as well
as its disposal.
G 56. As far as applicable law is concerned, it must be
stated that the underlying ordinary shares of a GDR which is
held by the Domestic Custodian Bank prior to such shares
being created in the form of GDR have to necessarily undergo
H a procedure to be followed by the issuing company and for
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 133
IBRAHIM KALIFULLA, J.]
certain purposes in consultation with the Lead Manager and A
before the GDRs are actually created by the corresponding
Overseas Depository Bank, necessary prior permission of the
Department of Economic Affairs, Ministry of Finance,
Government of India have to be obtained. It is based on such
statutory sanction granted by the statutory authorities of Indian B
· origin, a legally enforceable right for the purpose of creation of
GDR comes into existence and based on such validity for
issuance of GDRs, the Overseas Depository Bank will have
the power to issue such GDR by way of negotiable form for
the value to be determined by prescribing number of underlying C
shares that would be covered by each of the GDR. Once the
GDR is thus created and issued by the overseas depository
bank, again in consultation with the Lead Manager
arrangements are made for being listed in the public or private D
listing of overseas Stock Exchanges. Thereafter the creation,
existence and subsequent dealing with the GDRs outside the
country of India would be governed by the relevant laws
applicable to such Receipts.
57. Though it may appear that on the one hand underlying E
ordinary shares would be governed by the laws prevailing in
India and the GDRs would be governed by the laws of the
country in Which such receipts are issued, the most relevant
fact which is to be borne in mind is that the existence of GD Rs
F
is always dependent upon the extent of underlying ordinary
shares lying with the Domestic Custodian Bank.
58. In this context, it wiU also be worthwhile to refer to
Master Circular on Foreign Investment in India issued ~y the
RBI, which gives detailed description about creation of GD Rs G
which are negotiable securities issued outside India by a
depository bank on behalf of an Indian company which
represent the local rupee denominated equity shares of the
company held as deposit by a Custodian Bank in India. The H
134 SUPREME COURT REPORTS [2015] 11 S.C.R.
A Master circular reiterates that GD Rs are issued on the basis
of the ratio worked out by the Indian company in consultation
. with the Lead Manager to the issuing company. It also highlights
as to how such of those Indian listed companies which have
been restrained from accessing the securities market by SEBI
B will be ineligible to issue GDRs.
59. The Master Circular also explains as to how under
the two way fungibility scheme which was put in place by the
Government of India for GD Rs under which a stock broker in
C India registered with the SEBI ·can purchase shares of an Indian
company from the market for conversion into GD Rs based on
instructions issued from overseas investors and also re-
issuance of GD Rs to be permitted to the extent of GDRs which
are redeemed into underlying shares and sold in the Indian
D market.
60. On a consideration of the 2000 Regulations, the 1993
Scheme and the Master Circular issued by RBI periodically
one can discern that for creation of GDRs which can be traded
E only at the global level, the issuing company should have
developed a reputation at a level where the marketability of its
investment creation potential will have a demand at the hands
of the foreign investors. Simultaneously, having regard to the
development of the issuing company in the market and the
F confidence built up with the investors both internally as well as
at global level, the issuing company's desire to raise foreign
funds by creating GDRs should have the appreciation of
investors for them to develop a keen interest to invest in such
GD Rs. Mere desire to raise foreign investments without any
G scope for the issuing company to develop a market demand
for its GDRs by increasing the share capital forthat purpose
is not the underlying basis for creation of GDRs. In fact for
creating of GD Rs apart from the desire of the issuing company
H to raise foreign funds, the marketability of such shares in the
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 135
IBRAHIM KALIFULLA, J.]
form of GDRs should have an applicable potential at the global A
level. To put it differently, by artificial creation of global level
investment operation, either the issuing company on its own
or with the aid of its Lead Manager cannot attempt to make it
appear as though there is scope for trading GD Rs at the global
level while in reality there is none. The above fact has to be B
kept in mind when dealing with an issue relating to creation of
GDRs, in as much as, when the GDRs gets fully subscribed at
the global level providing scope for huge foreign investment,
the same will have a serious impact at the internal investment
market in the form of high appreciation of share value whereby C
the issuing company and the investor will be greatly benefited
mutually. Such a real growth structurally and financially is the
underlying principle in the creation and trading of GDRs at the
global level.
D
61. In order to further appreciate the status of a GDR of
an issuing company, it will be necessary to consider the
definition of 'securities' as defined under Section 2(1)(i) of
SEBIAct, 1992 read along with Section 2(h) of SCRAct 1956.
In fact Section 2(1)(i) of the SEBI Act, 1992 simply defines E
'securities' to mean the definition assigned to it in Section 2(h)
of the SCRAct, 1956. Under Section 2(h) 'security' has been
defined to mean as under in sub-clauses (i), (iia) and (iii):
"2 (h) "securities" include- F
(iii) shares, scrips, stocks, bonds, debentures,
debenture stock or other marketable securities of a like
nature in or of any incorporated company or other body
corporate;
G
xxx xxx
(iia) such other instruments as may be declared by the
Central Government to be securities; and
(iii) rights or interest in securities;" H
136 SUPREME COURT REPORTS [2015] 11 S.C.R.
A 62. The above definition is exhaustive and includes not
only shares, scripts, stocks, bonds, debentures, debenture
stocks or other marketable securities of a like nature in or any
incorporated company. The further definition under sub-clause
(iia) covers such other instruments as may be declared by the
B Central Government as Securities and under sub-clause (iii)
rights or interest in securities are also to be construed as
securities.
63. Going by the definition under Section 2(h)(i) 'security'
C would include other marketable securities of a like nature of
any incorporated company. Therefore reading Section 2(h)(i)
and 2(h)(iii) together and apply the same to GDRs, having
regard to the fact that the issuance of GD Rs are always based
on the underlying Indian shares deposited with the Domestic
D Custodian Bank and thereby the GD Rs possess in it right, as
well as, interest in the shares, scripts etc., it will have to be
straight away held that all GDRs would fall within the definition
of 'securities' as defined under Section 2(h) of the 1956 Act.
E 64. Further, under Section 2(2) of the SEBI Act, 1992,
words.and expressions used and not defined but defined under
the SCR Act, 1956, the said meaning would respectively
assign wherever used in the SEBI Act, 1992. Therefore for the
expression 'stock exchange' one will have to fall back upon
F Section 2(j) of the SCR Act, 1956 which definition is as under:
"2(j) "stock exchange" means-
(a) any body of individuals, whether incorporated or not,
constituted before emutualization and emutualization
G under sections 4A and 48, or
(b) a body corporate incorporated under the Companies
Act, 1956 (1 of 1956) whether under a scheme of
emutualization and emutualization or otherwise, for the
purpose of assisting, regulatin9 or controlling the
H business of buying, selling or dealing in securities."
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 137
IBRAHIM KALIFULLA, J.]
65. The above definition makes it clear that a 'stock A
exchange' as formed under Section (2)U)(a) & (b) are forthe
purpose of assisting, regulating or controlling the business of
buying, selling or dealing in securities. It is true that GDRs have
no time limit and can be possessed as GDRs for any number
of years. However, when the holder of the GDR apart from B
trading with the same as GDR in the global market at any point
of time wish to redeem the same or go in for fungibility of the
redeemed shares back into GD Rs, necessarily the holder of
a GDR will have to fall back upon the stock exchanges as per
the definition under Section 2U) of the SCR Act, 1956, who C
alone can assist, regulate or control the business of buying,
selling or dealing with securities.
66. Having examined the above statutory provisions, we
find that a GDR is one form of 'security' as defined under D
Section 2(h) of SCRAct, 1956, which is created by the issuing
company of Indian origin based on underlying shares
deposited with the Domestic Custodian Bank and created by
the Overseas Depository Bank. Such creation is at the
instance of the issuing company in India with a desire to earn E
foreign investments. Such investments made by the investors
in the GD Rs is facilitated by the Lead Manager at the time of
its creation as well as its investment. Thereafter, the investors
hold the GDRs eitherforfurthertrading on it in the global market F
through the stock exchanges at global level and in the event of
such investors interested in liquidating the GDR are entitled to
liquidate the same through the Overseas Depository Bank, in
which event the extent of underlying shares of the GD Rs get
transferred in the name of the investors themselves and thereby G
enabling such investors to trade on underlying shares in the
Indian stock market or if so wish under the fungibility scheme
once again get it redeemed in the form of GDR themselves.
67. Therefore, the creation of the GDR by the issuing H
company and after its creation in the fixation of price, value,
138 SUPREME COURT REPORTS [2015] 11 S.C.R.
A marketing in the global market, the support of Lead Manager
is involved and while dealing with such GDRs, the same is
regulated in so far as it related to underlying shares deposited
with the Domestic Custodian Bank by the laws regulating the
same and prevalent in India and so far as the corresponding
B GDRs created based on such underlying shares are
concerned, the same are governed by the laws prevailing in
the respective market where such GDRs are being traded.
Post cancellation of GD Rs, the underlying shares deposited
with the.Domestic Custodian Bank is made available for
C trading in India depending upon the wish of the holder of GDR
in the local market or for holding it as such i.e as mere shares
of the issuing company or by virtue of the fungibility· scheme
can once again be converted as GD Rs for being traded in the
D global market.
68. In order to find out as to what would happen in the
event of any misfeasance or malfeasance in dealing with the
GDRs, whether SEBI can effectuate its control over those who
are involved in such misfeasance or malfeasance, it will be
E appropriate to further examine the provision available under
the SEBIAct, 1992 and SCRAct, 1956.
69. In order to assimilate the statutory functions of the
Board its functions and the area of its operation, it will be
F necessary to make a detailed reference to Sections 11, 11 B,
11C, 12and 12(A)ofSEBIAct, 1992. Aswehavetomakea
detailed reference to those provisions, the same are required
to be extracted which are as under:
G "11. Functions of Board:
(1) Subject to the provisions of this Act, it shall be the
duty of the Board to protect the interests of investors in
securities and to promote the development of, and to
regulate the securities market, by such measures as it
H
thinks fit.
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 139
IBRAHIM KALIFULLA, J ]
(2) Without prejudice to the generality of the foregoing A
provisions, the measures referred to therein may
provide for -
(a) regulating the business in stock exchanges and any
other securities markets;
B
(b) registering and regulating the working of stock
brokers, sub-brokers, share transfer agents, bankers to
an issue, trustees of trust deeds, registrars to an issue,
merchant bankers, underwriters, portfolio managers,
investment advisers and such other intermediaries who C
may be associated with securities markets in any
manner;
(ba) registering and regulating the working of the
depositories, participants, custodians of securities, 0
foreign institutional investors, credit rating agencies and
such other intermediaries as the Board may, by
notification, specify in this behalf;]
© registering and regulating the working of venture
capital funds and collective investment schemes, E
including mutual funds;
(e) prohibiting fraudulent and unfair trade practices
relating to securities markets;
(g) prohibiting insider trading in securities; F
(4) Without prejudice to the provisions contained in sub-
sections (1), (2), (2A) and (3) and section 11B, the Board
may; by an order, for reasons to be recorded in writing,
in the interests of investors or securities market, take G
any of the following measures, either pending
investigation or inquiry or on completion of such
investigation or inquiry, namely:-
(a) suspend the trading of any security in a ecognized
stock exchange; H
140 SUPREME COURT REPORTS (2015) 11 S.C.R.
A (b) restrain persons from accessing the securities
market and prohibit any person associated with
securities market to buy, sell or deal in securities;
11B. Power to issue directions: Save as otherwise
provided in section 11, if after making or causing to be
B
made an enquiry, the Board is satisfied that it is
necessary,-
(c) in the interest of investors, or orderly development
of securities market; or
c (ii) to prevent the affairs of any intermediary or other
persons referred to in section 12 being conducted in a
manner detrimental to the interest of investors or
securities market; or
D (iii) to secure the proper management of any such
intermediary or person, it may issue such dire1ctions,-
(a) to any person or class of persons referred to in
section 12, or associated with the securities market; or
E (b) to any company in respect of matters specified in
section 11A, as may be appropriate in the interests of
investors in securities and the securities market]
11 C. Investigation: (1) Where the Board has reasonable
ground to believe that-
F
(a) the transactions in securities are being dealt with in
a manner detrimental to the investors or the securities
market; or
(b) any intermediary or any person associated with the
G
securities market has violated any of the provisions of
this Act or the rules or the regulations made or directions
issued by the Board thereunder,
It may, at any time by order in writing, direct any person
H (hereafter in this section referred to as the Investigating
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 141
IBRAHIM KALIFULLA, J.]
Authority) specified in the order to investigate the affairs A
of such intermediary or persons associated with the
securities market and to report thereon to the Board.
12. Registration of Stock-brokers, sub-brokers, share
transfer agents etc.,
B
(1) No stock-broker, sub-broker, share transfer agent,
banker to an issue, trustee of trust deed, registrar to an
issue, merchant banker, underwriter, portfolio manager,
investment adviser and such other intermediary who
may be associated with securities market shall buy, sell C
or deal in securities except under, and in accordance
with, the conditions of a certificate of registration
obtained from the Board in accordance with the
regulations made under this Act:
D
Provided that a person buying or selling securities or
otherwise dealing with the securities market as a stock-
broker, sub-broker, share transfer agent, banker to an
issue, trustee of trust .deed, registrar to an issue,
merchant banker, underwriter, portfolio manager, E
investment adviser and such other intermediary who
may be associated with securities market immediately
before the establishment of the Board for which no
registration certificate was necessary prior to such
establishment, may continue to do so for a period of F
three months from such establishment or, if he has
made an application for such registration within the said
period of three months, till the disposal of such ,
application.
Provider further that any certificate of registration, G
obtained immediately before the commencement of the
Securities Laws (Amendment) Act, 1995, shall be
deemed to have been obtained from the Board in
accordance with the regulations providing for such H
registration.
142 SUPREME COURT REPORTS [2015] 11 S.C.R.
A (1A) No depository, participant, custodian of securities,
foreign institutional investor, credit rating agency or any
other intermediary associated with the securities market
as the Board may by notification in this behalf specify,
shall buy or sell or deal in securities except under and
B in accordance with the conditions of a certificate of
registration obtained from the Board in accordance with
the regulations made under this Act:
Provided that a person buying or selling securities or
c otherwise dealing with the securities f1]_arket as a
depository, [participant,] custodian of secunties, foreign
institutional investor or credit rating agency immediately
before the commencement of the Securities Laws
(Amendment) Act, 1995, for which no certificate of
D registration was required prior to such commencement,
may continue to buy or sell securities or otherwise deal
with the securities market until such time regulations
are made under clause (d) of sub-section (2) of section
30.
E
12A. Prohibition of manipulative and deceptive
devices, insider trading and substantial acquisition of
securities or control. No person shall directly or
indirectly -
F (a) use or employ, in connection with the issue,
purchase or sale of any securities listed or proposed to
be listed on a ecognized stock exchange, any
manipulative or deceptive device or contrivance in
contravention of the provisions of this Act or the rules
G or the regulations made thereunder;
(b) employ any device, scheme or artifice to defraud in
connection with issue or dealing in securities which are
listed or proposed to be listed on a ecognized stock
H exchange;
SEBI v. PAN ASIAADVISORS LTD. [FAKKIR MOHAMED 143
IBRAHIM KALIFULLA, J.]
©engage in any act, practice, course of business which A
operates or would operate as fraud or deceit upon any
person, in connection with the issue, dealing in
securities which are listed or proposed to be listed on a
ecognized stock exchange, in contravention of the
provisions of this Act or the rules or the regulations made B
thereunder" ·
70. In this respect it will be necessary to refer to some of
the regulations of 2003 Regulations. We are concerned with
Regulation 2(1)(b) & (c), Regulation 3(a)(b)(c)(d), Regulation c
4(1) and (2) (a), (b), (c), (d), (e) (f), (k) and ®and Regulation
5(a)(b). The said provisions are as under:
"Regulation 2. (1) In these regulations, unless the
context otherwise requires,-
D
(b) "dealing in securities" includes an act of buying,
selling or subscribing pursuant to any issue of any
security or agreeing to buy, sell or subscribe to any issue
of any security or otherwise transacting in any way in
any security by any person as principal, agent or E
intermediary referred to in section 12 of the Act.
® "fraud" includes any act, expression, omission or
concealment committed whether in a deceitful manner
or not by a person or by any other person with his F
connivance or by his agent while dealing in securities
in order to induce another person or his agent to deal
in securities, whether or not there is any wrongful gain
or avoidance of any loss, and shall also include-
(1) a knowing misrepresentation of the truth or G
concealment of material fact in order that another
person may act to his detriment;
(2) a suggestion as to a fact which is not true by one
who does not believe it to be true; H
144 SUPREME COURT REPORTS [2015] 'I 1 S.C.R.
A (3) an active concealment of a fact by a person having
knowledge or belief of the fact;
(4) a promise made without any intention of performing
it;
B (5) a representation made in a reckless and careless
manner whether it be true or false;
(6) any such act or omission as any other law specifically
· declares to be fraudulent,
c (7) deceptive ehavior by a person depriving another of
informed consent or full participation,
(8) a false statement made without reasonable ground
for believing it to be true.
D (9) the act of an issuer of securities giving out
misinformation that affects the market price of the
security, resulting in investors being effectively misled
even though they did not rely on the statement itself or
anything derived from it other than the market price.
E And "fraudulent" shall be construed accordingly;
Nothing contained in this clause shall apply to any
general comments made in good faith in regard to-
(a) the economic policy of the government
F (b) the economic situation of the country
(c) trends in the securities market;
(d) any other matter of a like nature whether such
comments are made in public or in private;
G
Regulation 3. Prohibition of certain dealings in
securities No person .shall directly or indirectly-
(a) buy, sell or otherwise deal in securities in a fraudulent
manner;
H
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 145
IBRAHIM KALIFULLA, J.]
(b) use or employ, in connection with issue, purchase A
or sale of any security listed or proposed to be listed in
a recognized stock exchange, any manipulative or
deceptive device orcontrivance in contravention of the
provisions of the Act or the rules or the regulations made
thereunder; B
(c) employ any device, scheme or artifice to defraud in
connection with dealing in or issue of securities which
are listed or proposed to be listed on a recognized stock
exchange; c
(d) engage in any act, practice, course of business
which operates or would operate as fraud or deceit upon
any person in connection with any dealing in or issue
of securities which are listed or proposed to be listed
on a recognized stock exchange in contravention of the D
provisions of the Act or the rules and the regulations
made thereunder.
Regulation 4. Prohibition of manipulative, fraudulent
and unfair trade practices E
(1) Without prejudice to the provisions of regulation 3,
no person shall indulge in a fraudulent or an unfair trade
practice in securities.
(2) Dealing in securities shall be deemed to be a F
fraudulent or an unfair trade practice if it involves fraud
and may include all or any of the following, namely:-
(a) indulging in an act which creates false or misleading
appearance of trading in the securities market;
G
(b) dealing in a.security not intended to effect transfer
of beneficial ownership but intended to operate only as
a device to inflate, depress or Page 4 of 11 cause
fluctuations in the price of such security for wrongful gain
or avoidance of loss; H
146 SUPREME COURT REPORTS [2015] 11 S.C.R.
A ®advancing or agreeing to advance any money to any
person thereby inducing any other person to offer to
buy any security in any issue only with the intention of
securing the minimum subscription to such issue;
(d) paying, offering or agreeing to pay or offer, directly
B
orindirect!y, to any person any money or money's worth
for inducing such person for dealing in any security with
the object of inflating, depressing, maintaining or
causing fluctuation in the price of such security;
c (e) any act or omission amounting to manipulation of
the price of a security;
(f) publishing or causing to publish or reporting or
causing to report by a person dealing in securities any
D information which is not true or which he does not
believe to be true prior to or in the course of dealing in
securities;
(k) an advertisement that is misleading or that contains
information in a distorted manner and which may
E influence the decision of the investors;
®planting false or misleading news which may induce
sale or purchase of securities.
Regulation 5. Where the Board, the Chairman, the
F member or the Executive Director (hereinafter referred
to as "appointing authority') has reasonable ground to
believe that -
(a) the transactions in securities are being dealt with in
G a manner detrimental to the investors or the securities
market in violation of these regulations;
(b) any intermediary or any person associated with the
securities market has violated any of the provisions of
the Act or the rules or the regulations, it may, at any
H time by order in writing, direct any officer not below the
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 147
IBRAH!M KALIFULLA, J.]
rank of Division Chief (hereinafter referred to as the A
"Investigating Authority'J specified in the order to
investigate the affairs of such intermediary or persons
associated with the securities market or any other
person and to report thereon to the Board in the manner
provided in section 11 C of the Act." B
71. On a reading of the above statutory provisions, we
find under Section 11 (1) of the SEBI Act, 1992, a duty has
been cast on the SEBI to protect the interest of investors in
securities and also to promote the development of the c
securities market as well as for regulating the same by taking
such measures as it thinks fit. The paramount purpose has
been shown as protection of interest of investors on the one
hand and also simultaneously for promoting the development
as well as orderly regulation of the security market. By way of D
elaboration under Section 11(2)(a) to (e) it is stipulated that
the duty of SEBI would include regulating the business in the
stock exchanges and any other securities market which would
include the working of stock brokers, share transfer agents
· and similarly placed other functionaries associated with E
securities market in any manner, registering and regulating
the working of the depositories, participants of securities
including foreign institutional investors in particular to ensure
that fraudulent and unfair trade practices relating to securities
markets are prohibited and also prohibiting insider trading in F
securities.
72. Under Section 11 (4)(a) and (b) apart from and wit~out
prejudice to the provisions contained in sub-section (1 ), (2)
(2A) and (3) as well as Section 11 B, SEBI can by an order, for G
reasons to be recorded in writing, in the interest of investors
of securities market either by way of interim measure or by
way of a final order after an enquiry, suspend the trading of
any security in any recognized stock exchange, restrain
persons from accessing the securities market and prohibiting H
148 SUPREME COURT REPORTS [2015] 11 S.C.R.
A any person associated with securities market to buy, sell or
.deal in securities. On a careful reading of Section 11(4)(b),
we find that the power invested with SEBI for passing such
orders of restraint, the same can even be exercised against
"any person". Under Section 11 B, SEBI has been invested
B with powers in the interest of investors or orderly development
of the securities market or to prevent the affairs of any
intermediary or other persons referred to in Section 11 in
themselves conducting in a manner detrimental to the interest
of investors of securities market and also to secure proper
C management of any such intermediary or person. It can issue
directions to any person or class of persons referred to in
Section 11 or associated with securities market or to any
company in respect of matters specified in Section 11 Bin the
interest of investors in the securities and the securities market.
0
The paramount'duty cast upon the Board, as stated earlier, is
protection of interests of investors in securities and securities
market. In exercise of its powers, it can pass orders of restraint
to carry out the said purpose by restraining any person.
E Section 12A of the SEBI Act, 1992 creates a clear prohibition
of manipulating and deceptive devices, insider trading and
acquisition of securities. Section 12A(a), (b) and (c) are
relevant, wherein, it is stipulated that no person should directly
or indirectly indulge in such manipulative and deceptive
F devices either directly or indirectly in connection with the issue,
purchase or sale of any sec.urities, listed or proposed to be
listed wherein manipulative or deceptive device or
contravention of the ACt, Rules or Regulations are made or
employ any device or scheme or artifice to defraud in
G connection with any issue or dealing in securities or engage
in any act, practice .or course of business which would operate
as fraud or deceit on any person in connection with any issue
dealing with security which are prohibited. By virtue of such
clear cut prohibition set out in Section 12A of the Act, in
H exercise of powers under Section 11 referred to above, as
SEBI v. PANASl/1.ADVISORS LTD. [FAKKIR MOHAMED 149
IBRAHllVI KALIFULLA, J.]
well as 11 B of the SEBI Act, it must be stated that the Board is A
fully empowered to pass appropriate orders to protect the
interest of investors in securities and securities market and
such orders can be passed by means of interim measure or
final order as against all those specified in the above referred
to provisions, as well as against any person. The purport of B
the statuary provision is protection of interests of investors in
securities and the securities market.
13. Along with the Section 12A, when we read Regulation
2(1)© of 2003 Regulations, the act of fraud has been C
elaborately defined to include any kind of activity which would
work against the interest of the investors in securities. Further,
such interest of investors can be better ascertained by making
reference to Section 2(h)(iii) of the SCR Act, 1956 which
defines the 'security' to mean the rig ht or interest in securities. D
A conspectus reference to Section 12A(a) (b) and (c) read
along with Regulation 2(1 )(b) and (c), as well as Section 2(h)(iii)
of the SCRAct, 1956 sufficiently disclose that it would cover
any act which will have relevance in protecting the interest of
the investors in securities and security market with any person E
however remotely the same are connected with such securities,
in the event of such an act working against the interest of
investors in securities and securities market by way of fraud
which has been elaborately defined under Regulation 2(i)(c) F
of 2003 Regulations.
74. Having thus noted the statutory prescription relating
to the issuance of- GDR based on the underlying shares of the
issuing company, the manner in which such GDRs were being
traded in the global market with the support and assistance of G
Lead Manager, the scope.of construing GDRs as 'securities'
falling under the definition of 'securities' as defined under
Section 2(h) of the SCRAct, 1956 requires to be noted. The
extent of duties and powers vested with SEBI, namely, the H
protection of the interest of investors in securities and securities
150 SUPREME COURT REPORTS [2015) 11 S.C.R.
A market and also the prohibitive measures as well as penal
action that can be taken by SEBI whenever it comes across
any fraud committed by any person relating to the interest of
the investors in securities and securities market are very wide.
When we examine the nature of acts alleged against the
B respondents, the following instances which according to SEBI
empowers it to exercise jurisdiction over the respondents under
SEBIAct, 1992 can be listed viz.,
I. Loan or Pledge agreement between Euram,
c Vintage and Asahi were structured by
respondents and were keys to fraudulent
issuance and subscription of GD Rs.
II. Loan agreement was dated 21/22-4-2009
between Eu ram and Vintage, while GDRs were
D issued eight days later i.e. on 29.04.2009.
Ill. The second respondent signed the loan
agreement as the Managing Director of Vintage.
IV Euram sanctioned a loan of 59,82,000 USO to
E purchase GDRs of Asahi.
v. Account No.540030 in Euram was Asahi's
account for depositing the proceeds of GDRs.
VI. Clause 6.1 of loan agreement referred to the said
F account as Borrower's account i.e., Vintage.
VII. That very account was again pledged to support
the borrowings of Vintage.
VIII. Pledge agreement dated 21.04.2009 was
G signed by Mr. M. Laxminarayan Rathi, Managing
Director of Asahi on 28.04.2009.
IX. Family members of Mr.Rathi are the promoters
of Asahi.
H
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 151
IBRAHIM KALIFULLA, J.]
x. Mr. Rathi did not inform BSE or the company or A
the shareholders about the signing of the pledge
agreement.
XI. As pledgor, Asahi agreed to the terms of the
loan agreement between Eu ram and Vintage.
B
XII. Pledgor agreed to pledge its assets as collateral
security for due repayment of the loan of
59,82,000 USO. Clause 6.1, 6.2 and 6.3 gave
full right to Euram to ealize its loan by ealizee
the pledged securities. c
XIII. According to SEBI, the original investors of
GDRs of Asahi were Greenwich and Tradetec
whose addresses were found to be fake and
non-existent.
D
. XIV. On 01.06.2009 Asahi informed BSE about
allotment and creation of GDR shares to
Greenwich and Tradetec.
xv. In turn BSE published the information to retail
investors. E
XVI. That in reality the entire GDRs were invested by
Vintage.
XVII. On 15/16-07-2009, BSE ealizeed the trading of
29,91,000 G-DRs in Indian market. F
XVIII. Vintage by virtue of the entire holding of GDRs
became 88.94% shareholder of Asahi.
XIX. Vintage transferred the GDRs to IFCF and Kli
for which Vintage granted a loan of 20,00,000
G
USO to CREDO, associate company of Kii for
lending to Kil. It enabled Kii to sell the underlying
shares of GD Rs in Indian market.
xx. Agreement between Vintage and CREDO was
also signed by the second respondent on behalf H
152 SUPREME COURT REPORTS [2015] 11 S.C.R.
A of Vintage.
XXI. GDRs of CREDO received by IFCF and Kil were
cancelled and then the underlying shares were
sold in Indian market.
B XXll. Most of the documents submitted by Asahi to
SEBI were inconsistent with the statements
available in public domain.
XXlll. There was transfer of funds by Asahi to its
subsidiary Asahi FZE, Dubai to the extent of
c 26,73,000 USO by selling the GDRs.
XXIV. Asahi failed to furnish vital informatiori about
Asahi FZE.
XXV. All the above factors led SEBI to greatly suspect
D that part of the proceeds of GDR issued were
routed back to the entities belonging to the
respondents.
XXVI. Annexure B to the first respondent's reply dated
29.05.2013 to SEBI, which is a statement
E disclosing that the loan availed by Vintage from
Euram in April 2009 and the time taken to repay
the loan i.e. till December, 2009 during which
period the pledge agreement between Asahi
and Eu ram in support of the loan submitted and
F
thereby Asa~i's right as issuing company of
GDRs was locked up.
XXVll. Indian investors upon buying shares converted
from GDRs, unknowingly assisted the issuer
G company to ealize the GDR subscription
proceeds from encumbrance I pledge.
XXVlll. Instead of capital being raised from foreign
investors through issuance of GDRs, the Indian
investors unknowingly paid for part of GDRs after
H
the said GDRs were converted into underlying
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 153
IBRAHIM KALIFULLA, J.)
shares which were sold in the Indian securities A
market to the investors.
XXIX. The highest and lowest price of Asahi for the
period of three months from January, 29, 2009
to April, 29, 2009 was Rs.0.89 and Rs.0.53
8
respectively. Subsequent to the issuance of
GDR, the price paid for each share underlying
GDRs was Rs.1.04 which was 140.54% of the
price of the script on the same day.
XL. The information provided by Asahi to BSE about C
the allotment of 29,91,000 GDRs to foreign (fake)
entities, namely Greenwich and Tradetec was
made public to retail investors on BSE website
which misled the investors in believing that the
GDRs were subscribed by genuine foreign D
investors, whereas in reality, GDRs were
subscribed by Vintage in connivance with Asahi
and the proceeds simultaneously pledged in
Euram."
E
75. In the light of the above features noted and alleged
by SEBI as against the respondents, relating to GDRs issued
by the six entities for whom the respondents acted as Lead
Manager, with particular reference to the extent of the
involvement ofthe respondents even while acting as Lead F
Managers, while facilitating the issuing companies in the
fixation of price of the GDRs and its trading in the global market,
according to SEBI, by virtue of such fraudulent nature of
involvement of the respondents along with the issuing company,
SEBI is entitled to invoke its jurisdiction under Section 11, 11 B, G
11 C, 12 and 12A of the SEBI Act, 1992 read along with its
2003 Regulations and consequently its order dated 201h June
2013 debarring the respondents from rendering services in
connedion with the instruments which are defined as
'securities' under Section 2(h) of the SCR Act, 1956 in the H
154 SUPREME COURT REPORTS [2015] 11 S.C.R.
A Indian market or dealing with them either directly or indirectly
for a period of ten years from the date of its orders and also
prohibiting them from getting access to the capital market
directly or indirectly for the said period of ten years was justified
It was, therefore, contended that the majority view of the
B impugned order in holding that SEBI lacked jurisdiction to
proceed against the respondents is liable to be set aside.
76. On the other hand according to the respondents, since
cradle to grave GD Rs are dealt with outside the country in the
C global market, SEBI lacks jurisdiction in proceeding against
the respondents. When we consider the above respective
submissions, we are convinced thatthe stand of the appellant
that having regard to the statutory prescription under the SEBI
Act, 1992, SCRAct, 1956, 2000 Regulations, 1993 Scheme
0 as well as 2003 Regulations is well justified. Having regard to
the nature of the allegations against the respondents, it
possess every jurisdiction to proceed against the respondents.
At the risk of repetition we wish to make it very clear that
whatever factual matters we have noted, as well as those
E allegations eveled against the respondents by SEBI we have
not expressed any opinion as to the correctness or otherwise
of those factors or allegations. Those factors and allegations
have been taken note of only for the purpose of deciding the
question as to the jurisdiction claimed by SEBI for proceeding
F against the respondents. In fact, by the majority view of the
impugned order, the order dated 20.06.2013 of SEBI in having
debarred the respondents for a period of ten years came to
be set aside on the sole ground that SEBI lacked jurisdiction.
The Tribunal has not gone into the merits of the allegations
G eveled against the respondents. Therefore, in the event of the
impugned order being set aside and thereby providing scope
for the Tribunal to consider the correctness of the order dated
20.06.2013 of SEBI on merits, it will be open for the
respondents to take the stand as Lead Managers that they
H have not committed anything wrong in order to justify the
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 155
IBRAHIM KALIFULLA, J.]
appellant to pass its order dated 20.06.2013. A
77. When we consider the stand of the respondents, by
the learned senior counsel Mr. Shyam Divan his contention
was two fold. According to the learned senior counsel, GD Rs
are created by the Overseas Depository Bank in the stock
market outside the country and, therefore, dealing with those B
GDRs and its trading by the Lead Manager while assisting
the issuing company are governed by the. statutory
prescriptions prevailing in the respective trading points in the
foreign countries and, therefore, SEBI has no power to deal C
with the same as its jurisdiction was limited to the securities
which are being dealt with within the Indian territory and not
outside. It was then contended that as Lead Managers the
respondents only facilitate the issuing company of India for
creation, pricing and trading of their GDRs in the foreign market D
and so long as such trading of the GD Rs by the respondents
as Lead Managers work within the framework of the law
applicable in the respective foreign countries, SEBI has no
power fo proceed against the respondents and pass the order
of debarment. The contention is that as Lead Managers, the E
respondents have never dealt with the securities issued by
the Indian company within the territory of India and therefore
neither the provision of SCRAct, 1956 and the SEBI Act, 1992
nor any of the regulations or the scheme provisions of 1993
can have any application as against the respondents. The F
further submission is that if at all any violation complained of
as against the issuing company can only be relating to the
provisions of FEMA which has recognized the 1993 Scheme
and therefore that cannot give scope for SEBI to proceed
against the respondents who acted as Lead Managers for the G
issuing companies.
78. When we examine the said submissions of the
learned senior counsel for the respondents, we find that the
said submissions raised the following issues viz., that issuance H
of GDRs requires as many as 14 steps such as authorization
156 SUPREME COURT REPORTS [2015] 11 S.C.R.
A by the Board of Directors, Notification to the Stock Exchange,
Issuer share holders approval, appointment of a Lead
Manager and other intermediaries viz.; the custodian who
physically hold the shares of the issuer on behalf of the
depository and the overseas bankers, receiving all information,
B certificatio'} for due diligence and other documents,
commencement and completion of due diligence for GDR
issue, opening of bank account outside India, appointment of
intermediaries, offer document and prospectus, decision to
open the issue and price fixation, opening and closing of the
C issue, allotment of underlying equity shares, listing of GDRs
with foreign stock exchanges and application to Indian stock
exchanges for listing of underling equity shares. While referring
to the above steps, it was fairly submitted by the learned senior
counsel for the respondents that the role of the respondents
0
as Lead Manager ends with the 131h step viz., listing of GD Rs
with foreign stock exchange and that it is not concerned with
the application to Indian stock exchanges for listing of underlying
equity shares. By stating so, it was contended that when such
E steps are taken for the ultimate listing of GDRs with foreign
stock exchanges as Lead Managerthe key role played is on
the price fixing, opening of the issue and enabling the issuing
company to market the GD Rs at the global level, there is no
scope to hold that SEBI can proceed against the respondents
F on the ground of any misfeasance or malfeasance in issuance
of GDRs, having regard to the territorial jurisdiction within which
SEBI can operate. Though technically such a submission
made on behalf the respondents appears to be forceful, we
are not able to countenance such a submission on a detailed
G consideration of the various provisions of the SEBI Act, 1992
read along with the definition of 'securities' under Section 2(h)
of the SCR Act, 1956 in the manner in which GDRs are to be
dealt with under the 2000 Regulations read along with the 1993
Scheme provisions.
H
79. The definition of 'securities' under Section 2(h} in
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 157
IBRAHIM KALIFULLA, J.]
particular sub-clause (iii) of Section 2(h)(a) of SCRAct, 1956 A
makes it clear that rights and interests in securities are also to
be construed as securities as defined in Section 2(h).
Therefore even if GDR as such is not specifically referred to
under the definition of 'securities' under Section 2(h) by virtue
of sub-clause (iii) ot the said section, any rights or interests in B
securities would also fall within the definition of securities.
Viewed. in that respect, every issue of GDR is based on the
underlying shares of the issuing company deposited with the
Domestic Custodian Bank which clearly falls under the definition C
of securities of Section 2(h), the Global Deposit Receipts which
create· rights and interests in those securities, the Global
Deposit Receipts would automatically fall and come within the
definition of Section 2(h) viz., 'securities'. Once when the said
legal position is insurmountable, any argument based on the D
said submission should be rejected.
80. Therefore when GD Rs create rights and interests in
the securities viz., the underlying shares deposited with the
Domestic Custodian Bank, the next question to be examined
is as to how far any alleged misdeeds involv~d in the creation E
of GDR and its dealing by the issuing company with the support
of the Lead Manager can be dealt with by SEBI. ltis true that
the creation of GDR and its trading in the global market are
governed by the respective laws of the country in which they F
are dealt with. But one special feature to be borne in mind is
that in the case on ha11d, the allegations eve led against the
issuing company in connivance with the respondents are that
a make believe affair was created, as though there was
genuine creation of GDRs and its investments by the foreign G
investors on the very date when the GD Rs were issued and
thereby the global performance of the issuing company in the
local market of the issuing company had a boost in the
commercial sector, which lured the local investors to develop
their keen interest to make the investments on a higher share H
158 SUPREME COURT REPORTS [2015) 11 S.C.R.
A value by virtue of the investment made by the foreign investors
and in that process it is alleged that the issuing company itself
provided every scope for the foreign investments to be financed
and in reality the ultimate investment was made by Indian
investors viz., the ordinary share holders. The said fact would
B certainly call for a probe at the hands of SEBI on whom a duty
is cast under Section 11 (1) to protect the interest of investors
in securities and the security market. In this context, it will be
necessary to make specific reference to the relevant provisions
of SEBI Act, 1992, 2003 Regulations and 1993 Scheme.
C Under Section 11(2)(b) while regulating working of stock
brokers, etc., it is also provided that SEBI can regulate "such
other intermediaries who m.ay be associated with security
markets in any manner". The said set of expressions would
cover anyone who are directly or indirectly or in a subterfuge
0
manner dealt with the securities to deceive the real investors
in Indian stock market. Section 11 (2)(e) also empowers SEBI
to intervene to prohibit fraudulent and unfair trade practices
relating to securities markets. Section 11 (2)(g) prohibits
E insider trading in securities. If the allegation that the
respondents facnitated issuing company (viz,) Asahi aided the
foreign investor company to invest in its GD Rs by supporting
the loan it borrowed from Euram and thereby the said allegation
can be brought within the expression 'insider trading' that would
F also empower SEBI to intervene. Under Section 11 B while
empowering SEBI to issue directions in the intoest of
investors, it is provided that such directions can be against
any person or class of persons associated with securities
market. Under Section 11C(b) it is provided that where SEBI
G has reasonable ground to believe that any person associated
with securities market violated any of the provisions of the Act
or Rules or Regulations or directions issued, it can order for
an investig&tion and take action. Under Section 12A, it is
specifically provided to prohibit any manipulative and
H deceptive devices, insider trading and substantial acquisition
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 159
IBRAHIM KALIFULLA, J.]
of securities or control by ANY PERSON either directly or A
indirectly. If SEBl's allegation listed out earlier as well as all
the other allegations fall under Section 12A(a), (b) and (c), there
will be no escape for the respondents from satisfactorily
explaining before the Tribunal as to how these allegations would
not result in fully establishing the guilt as prescribed under sub- B
clause (a)(b)(c) of Section 12A. Similar will be ihe situation for
answering the definition under Regulation 2(1)(b)(c), (3),
(4)(1 )(2)(a)(b)( c)(d)(e)(f)(k)® of 2003 Regulations, apart from
taking required penal action against those who are involved in
any fraud being played in the creation of securities. C
81. Therefore, it is for the respondents as well as the
Indian issuing company to demonstrate that any of the
allegations made by the appellant in relation to the so called
fraud or fictitious creation of GD Rs atthe global level to mislead D
the local investors was totally baseless and that therefore no
action was called for. It will be appropriate at this stage to
note that under the 2000 Regulations as well as the 1993
Scheme, one of the main reasons for creating GD Rs by the
issuing company is in ulfillment of its desire to gain foreign E
investments. It is common knowledge that in the commercial
sector, companies which are in the field of manufacturing or
any other business activity are able to gain the confidence of
the ·investors by virtue of their appreciable performance in the F
respective manufacturing or other business activities and while
controlling and developing the growth in their respective field
of business, aspire to make further excellence by drawing the
attention of foreign investors to make investments and thereby
broad base their business venture also endeavour to sustain G
their development in the concerned business in which they are
involved. Any such initiative taken by any entrepreneur would
develop an appreciable trend in the share market which would
draw the attention of the local investors to stake their claim in
such well established, well grown business ventures with a view H
160 SUPREME COURT REPORTS [2015] 11 S.C.R.
A to earn better profits on whatever investments they wish to
make. Therefore, if there is going to be a false pretext or
misleading information circulated with a view to lure both the
foreign investors as well as Indian investors and in that process
the very purpose of creation and trading in GDRs are found to
B be not true or bona fide, it cannot be said that simply because
creation of such GDRs and it~ trading is in global market, SEBI
should keep its mouth shut on the ground that it cannot extend
its long statutory arm beyond Indian territory to control any such
misdeeds deliberately committed with a view to defraud the
C Indian investors and thereby their interest in the investment of
securities and its protection is at great stake.
82. We are therefore convinced that having regard to
the nature of allegations in the interests of investors in securities
D as well as the statutory obligation/duty cast upon SEBI to
protect their interests, SEBI has got every jurisdiction to
proceed against the respondents as well as the issuing
company. The contention made on behalf of the respondents
that the only authority which can proceed against the issuing
E company can be only for violation of the FEMAAct or the RBI
Act is therefore not appealing to us. It may be that the 1993
Scheme was acknowledged under the 2000 Regulations, but
on that score it cannot be held that the said Scheme or
F Regulations will have no application when it comes to the
question of any action being initiated under the provisions of
SEBI Act, 1992 read along with SCR Act, 1956. There is no
statutory prohibition either under FEMA or RBI Act preventing
SEBI from taking action in exercise of its powers under Section
G 11, 11 B and 12A of the SEBI Act, 1992. That apart under
Section 11 (3) it is provided that SEBI can exercise its powers
under sub-section 2(i) or (ia) or sub-section 2A notwithstanding
anything contained in any other law for the time being in force,
meaning thereby, the action that can be taken for any of the
H violation under FEMA or RBI Act, SEBI can validly exercise its
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 161
IBRAHIM KALIFULLA, J.]
powers under SEBI Act, 1992. Even under the 1993 Scheme A
as well as the 2000 Regulations, there are provisions which
make specific reference to the role of SEBI in dealing with the
securities. Therefore it is too late in the day for the respondents
to contend that action can only be taken for any violation under
the FEMA and there is no scope for invoking the provision of B
SEBI Act, 1992. The said submission therefore is also liable
to be rejected.
83. In support of the contention based on applicable
jurisdiction of SEBI, reliance was placed upon the opinion C
rendered by a law firm of United Kingdom, dated 25.07.2013.
In the first place, the Courts in India cannot even be persuaded
to rely upon any such opinion as opinion may differ from person
to person depending upon the law which one may feel validly
applies. In any event, the opinion rendered in the said D
document only pertains to the transactions contemplated by
the documents placed before the said firm which related to
the loan agreement and other connected documents. The
opinion was that the documents and the performance of the
transactions contemplated by the said documents were in E
accordance with the applicable Austrian laws and do not
constitute any violation of any law or regulations of general
application in Austria. There can be no conflict with the said
opinion if in the consideration of the said law firm, the F
documents were in conformity with the laws of Austria within
whose jurisdiction, the documents came to be executed and
to be operated upon. In fact the action of SEBI initiated against
the respondents are not on the footing that any of the documents
are contrary to the laws of Austria. The initiation of proceedings G
by SEBI as against the respondents are entirely on a different
footing which was solely based on the alleged violation of the
Indian laws vis., the SEBI Act read along with the SCR Act,
1956 the provisions of 2000 Regulations and the 1993
Scheme as well as 2003 Regulations. In fact in that opinion H
162 SUPREME COURT REPORTS [2015) 11 S.C.R.
A itself it is stated that the said opinion was not to be taken to
imply that any provision of the document would ner.essarily be
capable of enforcement or be enforced in all circumstances in
accordance with its terms and that it should be understood
that the law firm which gave the opinion should be understood
B to have not been responsible for investigating or confirming
the accuracy of the facts including statements of foreign law or
the reasonableness of any statements or opinion contained in
any of the documents. Therefore, the said document is of no
use to support the stand of the respondents.
c
84. As far as the opinion rendered by solicitors firm called
Singhania and Co having its office at London, dated
17.07.2013, it only states thatthe second respondent was the
sole shareholder of Pan Asia which is now known as M/s.
D Global Finance Capital Limited. It only stated that in its opinion
from the aspect of laws applicable and enforceable in UK, the
documents and transactions pertaining to those documents
relating to the respondents were in the normal course of
business under the applicable laws in UK and they do not, in
E any manner, constitute any violation of any applicable laws of
UK. It is stated that the documents and transactions were
standard documents and transactions commonly executed by
entities as part of mode of the lawful business activities. Here
F again we do not find any need to be guided by sLJch an opinion
of a law firm which only refer to the documents placed before
it, which according to the said firm is in conformity with the
laws of UK. Our notice was also drawn to the 2014 Scheme
and in particular paragraph 10 of the said scheme under the
G caption "market abuse". The said clause reads as under:
"10. Market Abuse
(1) It is clarified that any use, intended or otherwise, of
. depository receipts or market of depository receipts in
H a manner, which has potential to cause or has caused
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 163
IBRAHIM KALIFULLA, J.]
abuse of the securities market in India, is market abuse A
and shall be dealt with accordingly."
85. It is clarified that any use, intended or otherwise, of
depository receipts or marke~ of depository receipt in a
manner, which has potential to cause or has caused abuse of B
securities market in India, is "market abuse" and shall be dealt
with accordingly. According to Clause 10(2) for the purpose
of this paragraph, "market abuse" means any activity prohibited
under Chapter V-A of the SEBI Act, 1992. Under paragraph
11 of the 2014 Scheme, the 1993 Scheme stood repealed c
except to the extent relating to foreign currency convertible
bonds and sub-para (2) of Section 11 contains a non-obstante
clause that notwithstanding such repeal, anything done or any
action taken under the 1993 Scheme shall be deemed to have
been done or taken under the corresponding provision of the D
present scheme. Under Schedule-I, the permissible jurisdiction
have been listed out as on the date of the notification in which
Austria is also included apart from United Kingdom and United
States. The 2014 Scheme having thus explained what is
"market abuse", it must be stated that now after the 2014 E
Scheme any act done under the 1993 Scheme has also been
validated. The definition of "market abuse" would squarely
cover the allegation presently made by the appellant as against
the respondents. Simply because "market abuse" has been
now codified under the 2014 Scheme, it cannot be held that F
there is no scope for proceeding against any person for
indulgence in such a "market abuse" prior to the introduction
of the 2014 Scheme. As the nature of allegation which has
now been explained under the caption "market abuse" in the G
2014 Scheme and having regard to the violation complai,ned
of by the appellant as against the respondents with particular
reference to the substantive provision of the SEBI Act, 1992
and SCR Act, 1956, read along with the 2000 Regulations
and the 1993 Scheme, the power of the appellantto proceed H
164 SUPREME COURT REPORTS (2015] 11 S.C.R.
A against the respondents based on such allegations cannot be
deprived.
86. To support the contention that the SEBI Act, 1992
operates only within Indian territory, reference was made to
B the provisions contained in other Acts viz., IPC, FERA, FEMA,
Companies Act, the Information Technology Act and the Income
Tax Act. 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
C 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-a-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
D 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
E · 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. Therefore, the reference
to those provisions contained in other enactments in our
F considered opinion does not cause any impediment for SEBI
to proceed against the respondents in exercise of its
jurisdiction under the SEBIAct, 1992.
87. In this context, it is also necessary to refer to certain
compliance to be reported by the issuing company of GDR/
G ADR. As per paragraph 4(2) and (3) of Schedule I of 2000
Regulations, the Indian company issuing shares for the purpose
of issuing GDRs should furnish to the Reserve Bank the full
details of such issue in the prescribed form DR within 30 days
from the date of closing of the issue. Similarly under paragraph
H 4(3) issuing company against GDR should furnish a quarterly
SEBI v. PANASIAAf'JVISORS LTD. [FAKKIR MOHAMED 165
IBRAH:r.~ KALIFULLA, J.)
return in the prescribed form DR-Quarterly to RBI within 15 A
days of the close of the calendar quarter. When we refer to
Form DR and Form DR-quarterly, some of the details which
are to be furnished are name and address of the depository
abroad, name and address of the Lead Manager, name and
address of the Indian custodians, details of the equity capital B
before issue after issue, number of GDRs issued, ratio of
GDRs vis-a-vis the underlying shares, whether funds are kept
abroad, if yes, name and address of the bank, amount raised
in USO, amount repatriated in USO, the date of launching of
GDR, total number of GDRs, total interest earned till the end C
of the quarter, the amount repatriated, number of GDRs still
outstanding, company share price at the end of the quarter,
the GDR price quoted on overseas stock exchange as at-the
end of the quarter and in the quarterly return, it should be
0
certified by the authorized signatory of the company that the
funds raised through GDRs/ADRs were not invested in stock
market or real estate.
88. A perusal of the above details which are required to
be furnished statutorily, shows that in the event of any wrong E
statement furnished in the above referred to forms, it provides
scope for proceeding against the issuing company as well as
any person connected with such violation and it would certainly
empower the authority viz., SEBI to initiate action under the
SEBI Act, 1992 in order to protect the interests of Indian F
investors in securities and the security market.
89. For the purpose of ascertaining the role played by
the respondents as Lead.Managers, it will be worthwhile to
refer to statement contained in the counter affidavit filed on G
behalf of the first respondent, wherein in paragraph E(ii) the
functions of the first respondent in relation to any GDR _has
been mentioned as under:
''The Functions of the first respondent in relation to any
GDRs include: H
166 SUPREME COURT REPORTS [2015] 11 S.C.R.
A (a) conducting due diligence in collecting and
evaluating all possible information which may have a
bearing on the issue for the purpose of the listing of
GDR issue abroad "outside of territory and jurisdiction
of India";
B (b) assessing the market for the purpose of the issue
and marketing the issue;
(c) obtaining confirmation of acceptance of
subscription acceptance from the initial investors to the
c GDR issues;
(d) assisting the Issuer Company at all stages from
preparing the documentation, making investor
presentation, selection of other manager(s) etc.,;
(e) receipt of confirmation of subscription monies
D received in the requisite company's escrow account
opened I maintained by the company with the escrow
account holding bank;
(f) receipt of Depository's (Depository's Banks)
confirmation of issue of instructions to the clearing
E
systems of the GDR subscribers and confirmation from
the requisite foreign stock exchange of the listing of the
GDRs issue;
(g) ensuring that the Issuer Company complies with
F applicable non-Indian legal formalities in respect of the
same."
90. It is true that if in the discharge of its functions as
Lead Managers, the respondents had confined to their
G activities to any of the procedures set out in the said paragraph,
it will be for the respondents to demonstrate before the
appellant and come out unscathed. However, if under the guise
of performing those functions as Lead Managers, if as pointed
out by the appellant, the respondents had indulged in any
H activities which were contrary to the provisions of SEBI Act,
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 167
IBRAHIM KALIFULLA, J.]
1992 read along with SCR Act, 1956, which provided scope A
for proceeding against them for having acted against the
interests of the Indian investors in securities and the security
market or were involved in collusion with any alleged act of the
issuing company in violation of the statutory prescriptions of
SEBIAct, 1992, SCRAct, 1956, 2000 Regulations read along B
with 1993 Scheme, it is the bounden duty of the respondents
to demonstrate before the appellant and now before the
Tribunal that no such involvement by the respondents is made
out in order to proceed against them as has been decided
and orders passed by the appellant in its order dated C
20.06.2013.
91. As far as the stand of the second respondent that he
is a non-resident Indian residing in Dubai till September, 2011
and was the Managing Director of the first respondent and D
that the first respondent is a distinct and separate legal entity
from the second respondent and therefore the first respondent
cannot be made liable or responsible for the action of the
second respondent, it must be stated that even as per the legal
opinion of M/s. Singhania and.Co the Solicitors and Indian E
Advocates based at London who have stated apparently on
the instructions of the second respondent, that he was the sole
shareholder of the first respondent who is a non-resident Indian
residing at Dubai. Therefore, it is too late in the day for the F
respondents in attempting to get themselves excluded from
the alleged violations as against the issuing companies along
with the respondents, which resulted in the passing of the order
of debarment dated 20.06.2013.
92. For the very same reasons, the stand of the second G
respondent that he is not an intermediary and his role in relation
to GDR was limited to advising for the listing of GDRs etc.,
would not absolve the second respondent from facing the
action initiated by the appellant.
H
168 SUPREME COURT REPORTS [2015] 11 S.C.R.
A 93. As far as the contention raised by the second
respondent in paragraph M, N etc., we do not wish to go into
the said stand so made by the second respondent, as it is for
the second respondent to convince the appellant and now
before the Tribunal that he cannot be proceeded against for
B any of the alleged violations. Similarly, the stand of the
respondents by making reference to the core features of the
GDR issues, to contend that there was no requirement to bring
GDR proceeds into India and that there was no allegation that
its funds were used for prohib.ited activities i.e. stock exchange
C transaction or real estate transaction as prescribed in 1993
Scheme and.that the subscription of the GDR issued in USO
become available to the issuing company were all matters the
respondents can validly explain and substantiate the same
before the Tribunal while challenging the merits of the order
0
passed by the appellant in the order dated 20.06 . 2013.
94. In support of his submissions Mr.C.U.Singh learned
senior counsel for the appellant relied upon the Constitutional
Bench decision of this Court reported GVK Industries
E Limited and another Vs. Income Tax Officer and another
- (2011) 4 SCC 36. In paragraph 6 of the said judgment two
questions were framed for consideration which are as under:
"6. Juxtaposing the two divergent views outlined above,
F we have framed the foflowing questions:
(1) Is Parliament constitutionally restricted from
enacting legislation with respect to extra-territorial
aspects or causes that do not have, nor expected to
have any, direct or indirect, tangible or intangible
G
impact(s) on, or effect(s) in, or consequences for:
(a) the territory of/ndia, or any part oflndia; or
(b) the interests of, welfare of, wellbeing of, or security
of inhabitants of India, and Indians?
H
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 169
IBRAHIM KALIFULLA, J.]
(2) Does Parliament have the powers to legislate "for'' A
any territory, other than the territory of India or any part
of it?"
95. The said questions were ultimately answered in
paragraph 124 to 127 which are as under: B
"124. We now tum to answering the two questions that
we set out with:
(1) Is Parliament constitutionally restricted from
enacting legislation with respect to extra-territorial C
aspects or causes that do not have, nor expected to
have any, direct or indirect, tangible or intangible
impact(s) on oreffect(s) in or consequences for:
(a) the territory of India, or any part of India; or
(b) the interests of, welfare of, wellbeing of, or security D
of inhabitants of India, and Indians?
The answer to the above would be yes. However, the
Parliament may exercise its legislative powers with
respect to extra-territorial aspects or causes, - events,
things, phenomena (howsoever commonplace they E
may be), resources, actions or transactions, and the
like - that occur, arise or exist or may be expected to
do so, naturally or on account of some human agency,
in the social, political, economic, cultural, biological, F
environmental or physical spheres outside the territory
of India, and seek to control, modulate, mitigate or
transform the effects of such extra-territorial aspects or
causes, or in appropriate cases, eliminate or engender
such extra-territorial aspects or causes, only when such G
extra-territorial aspects or causes have, or are expected
to have, some impact on, oreffectin, orconsequences
for: (a) the territory of India, or any part of India; or (b)
the interests of, welfare of, wellbeing of, or security of
inhabitants of India, and Indians. H
),
170 SUPREME COURT REPORTS [2015] 11 S.C.R.
A 125. It is important for us to state and hold here that the
powers of legislation of the Parliament with regard to all
aspects or causes that are within the purview of its
competence, including with respect to extra-territorial
aspects or causes as delineated above, and a.s
B specified by the Constitution, or implied by its essential
role in the constitutional scheme, ought not to be
subjected to some a-priori quantitative tests, such as
"sufficiency" or "significance" or in any other manner
requiring a pre-determined degree of strength. All that
c would be required would be that the connection to India
be real or expected to be real, and not illusory or
fanciful.
126. Whether a particular law enacted by Parliament
D does show such a real connection, or expected real
connection, between the extra-territorial aspect or 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. Obviously, where
E Parliament itself posits a degree of such relationship,
beyond the constitutional requirement that it be real and
not fanciful, then the courts would have to enforce such
a requirement in the operation of the law as a matter of
that law itself, and not of the Constitution.
F
127. (2) Does Parliament have the powers to legislate
"for" any territory, other than the territory of India or any
part of it?
The answer to the above would be no. It is obvious that
G Parliament is empowered to make laws with respect to
aspects or causes that occur. arise or exist. or may
be expected to do so. within the territory of India. and
also with respect to extra-territorial aspects or causes
that have an impact on or nexus with India as explained
H
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 171
IBRAHIM KALIFULLA, J.]
above in the answer to Question 1 above. Such laws A
would fall within the meaning. purport and ambit of the
grant of powers to Parliament to make laws "for the
whole or any part of the territorv of India'', and they may
not be invalidated on the ground that they may require
extra-territorial operation. Any laws enacted by B
Parliament with respect to extra- territorial aspects or
causes that have no impact on or nexus with India would
... be ultra-vires, as answered in response to Question 1
above, and would be laws made "for" a foreign territory."
c
(Emphasis added)
96. A reading of the above judgment makes it clear that
a law enacted by Parliament if shows that for proceeding
against in exercise of any extraterritorial aspect, which has D
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. The Constitution Bench, however, held that Parliament E
has no power to legislate for any territory other than the territory
of India or other part of India with respect to aspects or causes
which have no impact or nexus with India as was explained in
question No.1. Keeping the said principle thus pronounced by
this Court in mind, when we examine the SEBIAct, 1992 read F
along with SCR Act, 1956 as well as the 1993 Scheme, we
find that the Act itself provides. for proceeding against any
person in order to protect the interests of investors and the
stock market in India with reference to any fraud played against
such interest of the investors in India. Therefore, the-answer G
to the first question as pronounced by the Constitution Bench
applies in all force to the case on hand.
97. The learned senior counsel then relied upon the
judgment of this Court reported in Republic of Italy through H
n
172 SUPREME COURT REPORTS [2015] 11 S.C.R.
A Ambassador (supra) in particular paragraph 14, 130 and
139. In paragraph 14 the question posed for consideration is
noted. In the concurring view of Mr. Justice Chelameswar in
paragraphs 130 and 139 it is recorded as under:
B "130. Though Article 245 speaks of the authority of
Parliament to make laws for the territory of India, Article
245(2) expressly decleros - "No law made by
Parliament shall be deemed to be invalid on the ground
that it would have extra territorial operation". In my view
c the declaration is a fetter on the jurisdiction of the
Municipal Courts including Constitutional Courls to
either declare a law to be unconstitutional or decline to
give effect to such a law on the ground of extra
territoriality. The first submission of Shri Salve must,
D therefore, fail.
139. Thus, it is amply clear that Parliament always
asserted its authority to make laws, which are applicable
to persons, who are not corporeally present within the
territory of India (whether are not they are citizens) when
E
such persons commit acts which affect the legitimate
interests of this country."
98. We fully concur with the said view expressed by the
learned Judge and applying the said principle, even if the law
F applies to persons who are not corporally present within the
territory of India, even if they are citizens abroad when such
persons commit acts which affects the legitimate interest of
this country which would include such legitimate interest in the
case on hand of the investors in India at the stock market, it
G must be held that the appellant would be fully empowered to
proceed against such persons as provided under the
provisions of SEBI Act, 1992.
99. The learned seni.or counsel then relied upon the
H decision reported in Chairman, SEBI v. Shriram Mutual
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 173
IBRAHIM KALIFULLA, J.]
Fund and another-(2006) 5 SCC 361. In particular, reliance A
was placed upon paragraphs 15, 17, 19 and 33 to 36.
Paragraph 19 is relevant for our purpose which explains the
scheme of.SEBI Act in imposing penalty which reads as under:
"19. The Scheme of the SEBI Act of imposing penalty 8
is veiy clear. Chapter VI-A nowhere deals with criminal
offences. These defaults for failures are nothing, but
failure or default of statutoiy civil obligations provided
under the Act and the Regulations made thereunder. It
is pertinent to note that Section 24 of the SEBI Act deals c
with the criminal offences under the Act and its
punishment. Therefore, the proceedings under Chapter
VI A are neither criminal nor quasi-criminal. The penalty
le viable under this Chapter or under these Sections, is
penalty in cases of default or failure of statutoiy D
obligation or in other words breach of civil obligation. In
the provisions and scheme of penalty under Chapter
VI A of the SEBI Act, there is no element of any criminal
offence or punishment as contemplated under criminal
proceedings. Therefore, there is no question of proof E
of intention or any mens rea by the appellants and it is
not essential element for imposing penalty under SEBI
Act and the Regulations."
In paragraph 36, this Court has highlighted the purported F
powers of SEBI to impose penalty under Chapter VI-A, while
commenting upon the judgment of the Securities Appellate
Tribunal which by its order curtailed the powers of SEBI to
impose such penalty. Paragraph 36 reads as under:
G
"36. In our view, the impugned judgment of the
Securities appellate Tribunal has set a serious wrong
precedent and the powers of the SEBI to impose penalty
under Chapter VIA are severely curtailed against the
plain language of the statute which mandatorily H
imposes penalties on the contravention of the Act!
174 SUPREME COURT REPORTS [2015] 11 S.C.R.
A Regulations without any requirement of the
contravention having been deliberated or
contumacious. The impugned order sets the stage for
various market players to violate statutory regulations
with impunity and subsequently plead ignorance of law
B or Jack of mens rea to cc:cape the imposition of penalty.
The imputfng mens rea into the provisions of Chapter
VI A is against the plain language of the statute and
frustrates entire purpose and object of introducing
Chapter VIA to give teeth to the SEBI to secure strict
c compliance of the Act and the Regulations."
100. The said decision was subsequently approved by
a three Judge Bench of this Court reported Union of India
and Others v. Dharamendra Textile Processors and
D Others - (2008) 13 SCC 369. The said decision also fully
supports the stand of the appellant/SEBI.
101. On behalf of the respondents reliance was placed
upon the decision reported in Haridas Exports (supra). That
E case arose under the Monopolies and Restrictive Trade
Practices Act, 1969 (in short "MRTP Act, 1969). The appellant
in that case was aggrieved by the orders passed by the
Monopolies and Restrictive Trade Practices Commission,
whereby Indonesian manufacturers of float glass had been
F restrained from exporting the same to India at allegedly
predatory prices. While considering the correctness of the
order impugn.::d in that case, the question relating to extra
territorial jurisdiction came up for consideration. In paragraph
29, the question was noted as to whether MRTP Act, 1969
G has extra-territorial jurisdiction and as to whether it can pass
orders against parties who are not in India and who do not
carry business here and where agreements were entered into
outside India with no Indian being a party to it. In paragraph
31 this Court noted that under Section 1(2), the Act applied to
H whole of India except the State of Jam mu and Kashmir as in
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 175
IBRAHIM KALIFULLA, J.]
the case of SEBI Act, 1992. Factually this Court while applying A
Sections 1, 2, 2(a) and 14 of the MRTP Act, 1969 found that
for the Commission to exercise any jurisdiction, goods should
be imported into India and so long as the import had not taken
place and the goods were merely intended for exports to India
the same would not fall within the definition of the word "goods" B
in Section 2(e). Paragraph 43 and part of paragraph 46 are
relevant for our purpose where the concept of "effects doctrine"
has been considered and explained. The said paragraph 43
and the relevant part of paragraph 46 are as under:
c
"43. Under Section 33(1)U) of the Act, any agreement
to sell goods at such prices as would have the effect of
eliminating competition or a competitor is regarded as
an agreement relating to restrictive trade practice and
shall be subject to registration. The Act nowhere states D
that this agreement should be only in India· or between
Indian parties. In effect, this Section recognizes the
'effects doctrine', namely, where an agreement results
in sale of goods at such prices which would have the
effect of eliminating competition or a competitor. In the E
very nature of things, the sale of goods keeping in mind
the definition of the word "goods" in Section 2(e) must ·
be of goods imported into India, in the case like the
present. But if we replace the word "goods" in Section
33(1)(j) with the definition of"goods" in Section 2(e)(iii), F
then the Section 33(1 )(j) would read as follows:
''.Any agreement to sell goods imported into India at
such prices as wduld have the effect of eliminating
competition or a competitor." G
Thus, the agreement requiring registration must be in
respect of goods after their import into India."
46. It is possible that persons outside India indulge in
such trade practices, not necessarily restricted to the
effectuation of prices within India, which have the effect H
176 SUPREME COURT REPORTS [2015] 11 S.C.R.
A of preventing, distorting or restricting competition in
India or gives rise to a restrictive trade practice within
India then in respect of that restrictive trade practice,
the MRTP Commission will have jurisdiction. The
counsel for the respondents is right in submitting that if
B the effect of restrictive trade practices came to be felt in
India because of a part of the trade practice being
implemented here the MRTP Commission would have
jurisdiction. This "effects doctrine" will clothe the MRTP
Commission with jurisdiction to pass an appropriate
c order even though a transaction, for example. which
results in exporting goods to India at predatory price.
which was in effect a restrictive trade practice, had been
carried out outside the territory of India if the effect of
that had resulted in a restrictive trade practice in India.
D
If power is not given to the MRTP Commission to have
jurisdiction with regard to that part of trade practice in
India which is restrictive in nature then it will mean that
persons outside India can continue to indulge in such
E practices whose adverse effect is felt in India with
impugnity. A competition law like the MRTP Act is a
mechanism to counter cross border economic
terrorism. Therefore, even though such an agreement
may enter into outside the territorial jurisdiction of the
F Commission but if it results in a restrictive trade practice
in India then the Commission will have jurisdiction under
Section 37 to pass appropriate orders in respect of such
restrictive trade practice."
(Emphasis added)
G
102. Therefore, when we apply the above principles set
down in the said judgment to the case on hand, we are
convinced that the principle of "effects doctrine" will apply to
the case on hand since we have found that in the event of the
H allegations noted in paragraph 74 of this judgment eveled
SEBI v. PANASIAADVISORS LTD. [FAKKIR MOHAMED 177
IBRAHIM KALIFULLA, J.]
against the respondents by the appellant being established, it A
will have a far reaching consequence on the Indian investors
on securities as well as the stock market and consequently
the duty of the SEBI to protect their interests would automatically
come into play as stipulated under Sections 118, 11C, 12 and
12(A) of the SEBI Act, 1992. Therefore, the said judgment B
when applied carefully we find that the same supports the case
of the appellant rather than the respondents.
103. In the decision reported in Vodafone International
Holdings (supra), three Judge Bench considered the question C
whether Section 9(1)(i) of the Income Tax Act can be said to
be a provision enabling the Income Tax Department to apply
the principle of look through. The real issue which was
considered by this Court on that aspect was based on the
contention raised by the revenue that under Section 9(1 )(i), "it D
can look through" the transfer of shares of a foreign company,
holding shares in Indian company and treat the transfer of
shares in the foreign company as equivalent to the transfer of
shares to Indian companies on the premise that Section 9(1 )(i)
covers direct and indirect transfers of capital assets. The said E
contention raised on behalf of the revenue was rejected by
holding as under in paragraph 93:·
"93. The question of providing "look through" in the
statute or in the treaty is a matter of policy. It is to be F
expressly provided for in the statute or in the treaty.
Similarly, limitation of benefits has to be expressly
provided for in the treaty. Such clauses cannot be read
into the Section by interpretation. For the foregoing
reasons, we hold that Section 9(1)(i) is not a "look G
. , through" provision."
104. We do not find any scope for applying the said
decision to the facts of this case as we have found that the
specific provisions of SEBI Act, 19.92 provided for necessary H
178 SUPREME COURT REPORTS [2015] 11 S.C.R.
A powers with the SEBI casting a duty on it to protect the interests
of the Indian investors as well as the stock market in India
whenever it finds any fraud or other.such misdeeds committed
by any person which worked against the interests of Indian
investors in securities. What is fraud has been sufficiently
B defined under Regulation 2(1)© of the 2003 Regulations as
well as under Section 12(A) of the SEBI Act, 1992. Therefore,
when such express provisions are contained in the SEBI Act
and its regulations apart from specific provisions relating to
issuance of GDR based on the underlying shares deposited
C with the Domestic Custodian Bank under the 1993 Scheme
which got a statutory backing under the 2000 Regulations, we
are convinced that the exercise of jurisdiction by SEBI against
the respondents, having regard to the nature of allegations,
listed out in paragraph 74 is well founded.
0
105. Having regard to our above conclusions, we answer
the questions posed by us and hold that SEBI had jurisdiction
in passing the impugned order dated 20.06.2013 debarring
the respondents for a period of 10 years in dealing with the
E securities while considering the role played by the respondents
as Lead Managers relating to the GDRs issued by six
companies which issued such GDRs. We, therefore, hold that
the Tribunal is bound to examine the correctness or otherwise
F of the order of SEBI dated 20.06.2013 in the appeal preferred
by the respondents in Appeal No.126 of 2013. We, therefore,
set aside the impugned order by the majority and hold that the
minority view of the Chairman of the Tribunal is perfectly in
order. The appeal stands allowed and the impugned order of
G the majority is set aside. The appeal No.126 of 2013 before
the Securities Appellate Tribunal at Mumbai shall stand restored
and the same shall be disposed of on merits and in accordance
with law expeditiously preferably within three months from the
date of production of a copy of this order.
H
Devika Gujral Appeal allowed.
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