Corporate Lounge

Why SEBI has jurisdiction over GDRs that impact Indian securities markets

DeekshaSinghEarlier this month, the Supreme Court decided on the jurisdiction of the Securities and Exchange Board of India (“SEBI”) in relation to Global Depository Receipts (“GDRs”). Let us take a closer look at GDRs and the Court’s decision in Securities and Exchange Board of India v. Pan Asia Advisors Ltd.

What are GDRs?

GDRs are instruments created by a foreign depository outside India and authorised by a company making an issue of such depository receipts. A depository can be any company, bank, or institution that holds and facilitates the exchange of securities. Depositories issue receipts for the securities deposited with them, which then function as negotiable financial instruments that can be traded on a stock exchange.

Let us look at how this works. Each GDR represents a certain number of equity shares of an Indian company, which are listed on an Indian stock exchange. A local custodian in India holds the underlying equity shares on behalf of the depository. The depository issues these GDRs, which are then listed and traded on the foreign exchanges. The underlying equity shares are not traded on the Indian stock exchange until the GDR holder redeems the depository receipts. Until then, they are merely held by the local custodian.

The GDR holder may redeem the GDRs and obtain the underlying equity shares. The terms of the redemption will depend on the terms of the deposit agreement between the issuer, the GDR holder, and depository issuing the GDRs. The GDR holder however, should be eligible to hold the underlying equity shares according to the foreign exchange laws in India, namely, the Foreign Exchange Management Act, 1999 and the regulations made under it, in order to redeem the GDRs and obtain the underlying equity shares.

In India, the Ministry of Company Affairs has issued the Companies (Issue of Global Depository Receipts) Rules, 2014 (“GDR Rules”) to govern the issue of GDRs. The GDR Rules provide that any GDR issue must comply with the GDR Rules and the Issue of Foreign Currency Convertible Bonds and Ordinary Shares (Through Depository Receipt Mechanism) Scheme, 1993, which was notified by the Ministry of Finance.

SEBI v. Pan Asia Advisors Ltd. – the facts

In this case, issued GDRs were all converted into the underlying equity shares of the issuing companies, which were then sold in large deals to several buyers, such as stock brokers. The stock brokers would in turn sell the shares to other investors.

After investigation, the SEBI found that the issuing companies, the lead manager to the GDRs, the foreign institutional investors (“FIIs”), and the stock brokers were all acting as a group. They were able to maintain the share price of the company through these transactions. No information was communicated to outside investors who may have paid a high price based on the issuance of GDRs by the companies and large holdings maintained in them by FIIs.

SEBI held that this was an instance of market manipulation and exercising its quasi-judicial function, passed an order restraining the parties from participating in the capital markets.

The Securities Appellate Tribunal (“SAT”) overturned the SEBI’s ruling on the ground that SEBI does not possess jurisdiction to regulate GDRs. SEBI appealed the matter. The issue was whether the SEBI has the jurisdiction to initiate action against the lead managers to the GDRs issued outside India.

The Supreme Court’s decision

The Supreme Court of India

The Supreme Court of India

The Supreme Court looked at the process involved in a GDR issuance. It recognised that while the deposit of the ordinary shares with the custodian takes place in India, the actual issue and trading of the GDRs takes place outside India.

Since the GDR does not come into existence unless the underlying shares are issued, Indian law does apply. This also leads to the conclusion that GDRs would fall within the definition of “securities” under section 2(h) of the Securities Contracts (Regulation) Act, 1956 (“SCRA”).

The Supreme Court then looked at the powers of the SEBI under the Securities and Exchange Board of India Act, 1992 (“SEBI Act”) and the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003. After finding that the SEBI has extensive powers to protect the interests of investors in the securities markets, the Supreme Court noted that the alleged actions of the parties involved in the transactions adversely affected the Indian securities markets. It observed that “… the violation complained of by the appellant is with reference to such of those provisions contained in SEBI Act, 1992 vis-`-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 were created and dealt with as well as traded in the stock market of Indian Territory.

It further relied on the case of GVK Industries Limited v. Income Tax Officer and stated that in order to proceed “in exercise of any extra territorial aspect, which has 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.

So with regard to the limited question of jurisdiction, the Supreme Court concluded that the SEBI has jurisdiction over GDR issues that impact the Indian securities markets. It sent the matter back to SAT for a decision on the merits of the case.

The specific facts of the case could have affected the Supreme Court’s decision. This transaction in question was not just a GDR issue. A series of allied transactions allegedly caused adverse consequences for Indian investors. The scope of this judgment may therefore be somewhat limited. However, it serves to clarify that just because a GDR issue is carried out entirely outside India does not mean that it is outside the SEBI’s territorial jurisdiction.

Deeksha Singh is part of the faculty at


What now for the SEBI after Ordinance lapse?

DeekshaSinghIn July and September last year, the Securities Laws (Amendment) Ordinance, 2013 (“the Ordinance”) was promulgated to amend three key components of the securities law statutory framework—the Securities and Exchange Board of India Act, 1992, the Securities Contracts (Regulation) Act, 1956, and the Depositories Act, 1996.

The Ordinance was expected to enable the Securities and Exchange Board of India (“SEBI”) to effectively enforce the existing statutory and regulatory framework. We have discussed the provisions of the Ordinance here and here.

Despite being promulgated twice however, the Ordinance lapsed earlier this month and now cannot be reissued. What does this mean for the SEBI?

Diminished powers

Sections 10, 15, and 21 of the Ordinance had enhanced the power of the SEBI to take strict action against defaulters, including:

– attachment and sale of movable property;

– attachment of bank accounts;

– attachment and sale of  immovable property;

– arrest and detention in prison; and

– appointing a receiver for the management of the movable and immovable properties.

New-Programme-LaunchExercising the new powers it had been seeking for a long time, the regulator passed over 300 attachment orders for recovering close to Rupees 1,700 crore from defaulters. The lapsing of the Ordinance will not affect these orders, as they were made while the Ordinance was still in effect. However, the SEBI cannot pass such orders any longer even for defaults that may have occurred while the Ordinance was still in effect. While SEBI can adjudicate and declare fines and penalties against defaulters, they can no longer proceed against the property of defaulters or carry out arrests for non-compliance with orders.

New regulations

The Ordinance gave additional powers to the SEBI including the power to conduct search and seizure of persons and premises. The SEBI could also call for information and records relevant for information, including telephone call data records. Pursuant to the establishment of these new powers, the SEBI had, earlier this month, also issued the SEBI (Procedure for Search and Seizure) Regulations, 2014. Naturally, now that the SEBI no longer has the powers of search and seizure (more about those powers here), these regulations are no longer relevant.

At the same time that the search and seizure regulations were issued, SEBI had also issued the SEBI (Settlement of Administrative and Civil Proceedings) Regulations, 2014. These regulations established a proper procedure for cases involving settlement, including eligibility for settlement, application and so on. The SEBI Chief has expressed the view that the settlement regulations mentioned above were issued while the Ordinance was in effect, and therefore, they continue to have the force of law.

My view is that while the SEBI Chief may be right about any settlements made under the regulations while the Ordinance was still in effect, the argument cannot be extended to mean that the SEBI has the power to issue settlement orders under the regulations now. The Preamble to the regulations clearly states:

In exercise of the powers conferred by section 15JB of the Securities and Exchange Board of India Act, 1992, section 23JA of the Securities Contracts (Regulation) Act, 1956 and section 19-IA of the Depositories Act, 1996 read with section 30 of the Securities and Exchange Board of India Act, 1992, section 31 of the Securities Contracts (Regulation) Act, 1956 and section 25 of the Depositories Act, 1996, the Securities and Exchange Board of India hereby makes the following regulations to provide for the terms of settlement and the procedure of settlement and matters connected therewith or incidental thereto, namely:

The sections mentioned in the initial part of the Preamble were all inserted by the Ordinance, and since the Ordinance has now lapsed, these regulations cannot be made applicable to proceedings against defaulters. The SEBI should issue a revised set of regulations for now, without making reference to the amended sections introduced by the Ordinance.

The lapsing of this Ordinance is a setback to the growth of the SEBI, which had been armed to cope with the large number of securities laws defaulters in our country. We can only hope that the positive effects of this Ordinance are not rendered meaningless and that an amendment is enacted giving the SEBI the necessary powers to effectively regulate our markets.

(Deeksha Singh is part of the faculty on


SEBI officers should be trained in conducting legal searches

DeekshaSinghThe Securities and Exchange Board of India (“SEBI”) now has new powers of search, seizure, arrest, detention, and attachment of property. This followed the promulgation of the Securities Law (Amendment) Ordinance, 2013 and the securities regulator has turned to the Income Tax (“IT”) department for help in training its officers in the exercise of these powers. For a detailed analysis of these powers, see this link.

Jurisprudential background

The powers of search, seizure, arrest, and detention — whether exercised by civil authorities like the IT department or the police — are intrinsically linked to certain basic human rights. In particular, Articles 19 and 21 of the Constitution of India, 1950, have been interpreted, in a number of cases, to be directly linked to the right to due process of law.

In Kishore Singh Ravinder Dev v. State of Rajashthan, AIR 1981 SC 625 — a landmark judgment regarding the rights of accused persons — the Supreme Court highlighted the necessity of ensuring that the constitutional, evidentiary, and procedural laws of our country protect the dignity of the accused as a human being and grant him the benefits of a just and fair trial.

Specifically with reference to procedure, in Maneka Gandhi v. Union of India, AIR 1978 SC 597, the Supreme Court underlined that the state must follow just, fair, and reasonable procedure.

While these principles, of course, form the backbone of criminal procedure, they are equally applicable to procedures for arrests, search, and seizure followed by civil authorities like the IT department and now, the SEBI.

In this post, we will discuss some key principles relating to the search and seizure powers of the IT department that are dealt with in Section 132 of the Income Tax Act, 1961. These principles should apply equally to the SEBI.

Basis of search and seizure

For an assessing officer to conduct a legal search and seizure process, that assessing officer should have information about undisclosed amounts of money and reasonably believe that that person is likely to suppress books of accounts and other relevant documents.

In Commissioner of Income Tax v. Ramesh Chander, (1974) 93 ITR 450 (Pun.), the Punjab and Haryana High Court held that the condition precedent for authorising a search and seizure is that the assessing officer must have reason to believe the necessity of carrying out such a search and seizure. The power can be exercised only if this condition is fulfilled.

On the same lines, a search and seizure operation by the SEBI, which would mostly occur — one would imagine — in insider trading cases, should be backed by a demonstrable belief on the part of the authorising officer that such an operation is, in fact, necessary.

Use of material from illegal searches

An interesting principle applicable to searches conducted by the IT department is that if a search is rendered illegal on a technicality, it will not result in the material obtained from such a search being excluded for the purposes of ordinary assessment.

Binoculars_search_seizureIn Pooran Mal Etc. v. Director of Inspection (Investigation), Income Tax, 1974 AIR 348, the Supreme Court held that materials obtained during an illegally or irregularly conducted search or seizure can be utilised for the purpose of an ordinary assessment. In this case, the Court upheld the validity of the provisions of Section 132. Further, on admissibility of evidence, it stated:

Courts in India and in England have consistently refused to exclude relevant evidence merely on the ground that it is obtained by illegal search or seizure. Where the test of admissibility of evidence lies in relevancy, unless there is an express or implied prohibition in the Constitution or other law, evidence obtained as a result of illegal search or seizure is not liable to be shut out.

This case was examined in later cases relating to admissibility of evidence obtained through illegal search, and the Supreme Court in State of Punjab v. Baldev Singh expressed a nuanced opinion of the decision in the Pooran Mal Case.

[T]he judgment in Pooran Mal’s case cannot be understood to have laid down that an illicit article seized during a search of a person, on prior information, conducted in violation of the provisions of Section 50 of the Act, can by itself be used as evidence of unlawful possession of the illicit article on the person from whom the contraband has been seized during the illegal search”.

We can conclude therefore, that while evidence will be admissible if there is an illegality during the search process, evidence obtained during the search can be rendered inadmissible if an illegality occurs at the threshold of the search.

While the same principles may apply to searches conducted by the SEBI, SEBI officers should still be trained in conducting legal searches. Given that these powers have been granted to expedite action by the SEBI in cases involving fraud, insider trading, and other serious violations, it is important that the SEBI does not allow proceedings to be stalled owing to technical flaws in process.

We should note that the principles mentioned above evolved over time through various decisions related to the IT department and stem from the language and intent behind Section 132 of the Income Tax Act, 1961. It still remains to be seen whether the provisions of the Securities Law (Amendment) Ordinance, 2013 will find their way into a statute and what principles will govern the SEBI’s exercise of its newfound powers.

(Deeksha Singh is part of the faculty on


REITs need to take concerns about India’s real estate sector into account

DeekshaSinghSome days ago, the Securities and Exchange Board of India (“SEBI”) issued a Consultation Paper on the Draft SEBI (Real Estate Investment Trusts) Regulations, 2013 (“Draft Regulations”). The SEBI had first issued draft regulations relating to setting up of REITs in 2008. Now with the current proposal, it is looking to provide impetus to the real estate sector.

REITs were created in 1960 in the United States to give investors the opportunity to invest in the real estate sector, which is a high-yield sector, using liquid securities. This allowed them to access this sector in the same way that they would invest in other asset classes. There are different types of REITs, classified on the basis of their investment strategy.

What_are_REITsThe Draft Regulations envisage trusts registered with the SEBI that invest in real estate assets, being operated by a manager, appointed by the trustee. They can invest in properties directly or through special purpose vehicles, but only in assets based in India. The Draft Regulations also specify the manner in which the units by the REITs can be issued and listed. You can read more about the proposed structure and guidelines for the kind of REITs that SEBI will permit in India, here.

A reading of the Draft Regulations indicates that the SEBI has given due importance to transparency to ensure that investors can invest through these vehicles with a complete picture of the risks and rewards involved. However, even if it enacts these Draft Regulations, both Real Estate Investment Trusts (“REITs”) and investors will need to take into account some of the concerns plaguing the Indian real estate sector.

Foremost amongst these is the lack of clear title in most real estate transactions in India. Before investors can be brought in to invest in these real estate assets, REITs will need to ensure that sound due diligence is conducted on each of these assets.

Grading system?

Securities-LawA possible solution lies in the implementation of a grading system. The assets that form part of a REIT’s corpus must be mandatorily graded before it can issue and list units. This system should not only take care of the valuation of assets, but also be used to establish a clear and marketable title. These assets should only be deemed investment-grade if these stringent requirements are satisfied. Thus, while there will be no reduction of the obligation on investors to go through the disclosures carefully before investing, a grading system will help ensure that issues specific to the real estate sector in India are taken into account.

The SEBI will need to revise the Draft Regulations to provide mechanisms to account for issues specific to the real estate sector in India. The Draft Regulations are open for comments from the public till October 31, 2013.

(Deeksha Singh is part of the faculty on


More teeth for the securities regulator

Click here to read Deeksha Singh’s review of the new ordinance to amend the statutory framework for Indian securities law.SecuritiesOrdinanceBlog