TMI Blog2015 (7) TMI 316X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 securities and its protection is at great stake. There is no statutory prohibition either under FEMA or RBI Act preventing SEBI from taking action in exercise of its powers under Section 11, 11B 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, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ers 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 defined under Regulation 2(1)(c) 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 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. 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 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, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ts (Regulation) Act, 1956 (in short SCR Act, 1956 ) and such debarment for a period of 10 years prohibiting the respondents from accessing the capital market 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 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 this appeal before us. 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 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e first respondent herein was appointed as the Lead Manager for the GDR 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 Euram. The second respondent is the Managing Director of Vintage and Euram is the foreign bank lender. It was mainly stressed at the instance of SEBI that there was a loan taken from Euram 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 Vintage and Euram 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 loan agreement as well as the 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 agreement No.K210409-003 i.e. eight days before the issuance of GDRs themsel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. 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 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 Manager for the so called fraudulent transaction indulged in by the respondents. 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 USD for the purchase of 14,91,000 GDRs and Tradetec Corporation paid 30,00,000 USD 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an 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 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 furnished by Asahi, SEBI found that there were transfer of funds by Asahi to its subsidiary viz., Asahi FZE in Dubai, that Asahi transferred 26,73,000 USD to Asahi FZE by selling the GDRs, the total realisation came to 59,62,136 USD i.e. 99.66% of the total loan taken by Vintage from Euram. By making further reference to the transactions as between Asahi 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 of loan taken by Vintage to Euram. It was further alleged that Asahi failed to provide vital information relating to Asahi FZE and other transaction details. It is c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... statutory provisions submitted that the respondents as Lead Managers were involved in the above alleged fraudulent transactions of GDRs 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 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 GDRs were found to be fictitious which were created by respondent. It was contended that by making such fictitious book entries, the respondent(s) in reality ensured that the funds moved from one of its controlled company to another company also controlled by it and vice versa and ultimately the issuing 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 arrangement perpetuated by the respondents the Indian inve ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 by any person for any share in the company or in its holding company. Reliance was also placed upon the provisions of SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003 (in short 2003 Regulations ) which prohibited such transactions. 24. According to SEBI the existing share holders and prospective investors were projected of the positive dose 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 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 compani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y 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 USD of fraudulent transaction. The learned senior counsel, therefore, submitted that the action of the respondents 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 Management Act, 1999 (in short FEMA ) and Reserve Bank of India (in short RBI ) regulations. 29. In support of his submissions, the learned senior 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 Mutual Fund and another (2006) 5 SCC 361 paras 15, 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. 30. As against the above submissions Mr. Shyam Divan ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made were the obligations of the issuing company relating to GDRs including the details about 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. 32. It was contended that as Lead Managers the role of 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 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 the case of SEBI that these companies were all bogus companies. 33. The learned senior counsel drew our attention to certain core fea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mulate regulations for prohibiting, restricting or regulating matters relating to transfer etc., of foreign security by a person who is resident in India as 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 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 can be exclusively dealt with under the provision of FEMA and the SEBI or any of the provision of SEBI Act, 1992 will not have any application relating to GDRs. 38. The learned senior counsel referred to master circular on foreign investment in India dated 01.07.2011 of the RBI with particular reference to paragraph 8(F) of the said circular which deals with issues of shares by Indian companies under ADR/GDR as well as the form prescribed under Annexure 11 of the said circular by w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inst the issuing company. 41. The sum and substance of the submissions of the learned senior counsel for the respondents is that GDR is statutorily defined under Clause 2(c) 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, everything relating to GDR is outside India. The contention was that both as a matter of law and fact the GDR operates outside 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 also submitted that by virtue of Section 1(2) of the SEBI Act, 1992, the SEBI can have control 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 which was advi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ) and (2) as well as Schedule 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:-- Regulation 5. Permission for purchase of shares by 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 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 purchase shares or convertible debentures of an Indian company under the Portfolio Investment Scheme, subject to the terms and conditions specified in Schedule 2. *** Paragraph 4. Issue of Shares by International offering through ADR and/or GDR (1) An Indian company may issue its Rupee denominated shares to a person resident outside ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t outside India under these Regulations, the restriction shall apply to the fresh shares from the date of their issue. 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 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 GDRs to 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 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 De ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion 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 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 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 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 law relating to issue of capital by an Indian company would apply in relation to the issuance of Foreign currency convertible bonds or the ordinary shares of an issuing company and the issuing com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the underlying ordinary shares. 52. A combined reading of paragraphs 2(a), (c), (d) and (e) shows that the Global Depository Receipts are issued by a company in India based on the ordinary shares deposited 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 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. 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 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... The role of Lead Manager is thus prescribed under the scheme at the time of its creation as well as its disposal. 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 a procedure to be followed by the issuing company and for certain purposes in consultation with the Lead Manager and 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 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 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 con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g company in the market and the 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 GDRs. Mere desire to raise foreign investments without any scope for the issuing company to develop a market demand for its GDRs by increasing the share capital for that purpose is not the underlying basis for creation of GDRs. In fact 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 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 there is none. The above fact has to be 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 fore ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ut 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 which definition is as under: 2(j) stock exchange means-- (a) any body of individuals, whether incorporated or not, constituted before corporatisation and demutualisation under sections 4A and 4B, or (b) a body corporate incorporated under the Companies Act, 1956 (1 of 1956) whether under a scheme of corporatisation and demutualisation or otherwise, for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities. 65. The above definition makes it clear that a `stock exchange' as formed under Section (2)(j)(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 for any number of years. However, when the holder of the GDR 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 fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the 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 appropriate to further examine the provision available under the SEBI Act, 1992 and SCR Act, 1956. 69. In order to assimilate the statutory functions of the Board its functions and the area of its operation, it will be necessary to make a detailed reference to Sections 11, 11B, 11C, 12 and 12(A) of SEBI Act, 1992. As we have to make a detailed reference to those provisions, the same are required to be extracted which are as under: 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 thinks fit. (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for - (a) regulating the business in stock exchanges and any other securities markets; (b) regi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (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 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 (hereafter in this section referred to as the Investigating Authority) specified in the order to investigate the affairs 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., (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 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: Provided that a person b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ions 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 recognised stock exchange; (c) engage in any act, practice, course of business which 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 recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made 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 4(1) and (2) (a), (b), (c), (d), (e) (f), (k) and (r) and Regulation 5(a)(b). The said provisions are as under: Regulation 2. (1) In these regulations, unless the context otherwise requires,-- (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 pri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , 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; (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 provisions of the Act or the rules and the regulations made thereunder. Regulation 4. Prohibition of manipulative, fraudulent and unfair trade practices (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 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; (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 fl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n 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 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 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 securities. 72. Under Section 11(4)(a) and (b) apart from and without prejudice to the provisions contained in sub-section (1), (2) (2A) and (3) as well as Section 11B, SEBI can by an order, for 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 rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 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 the statuary provision is protection of interests of investors in securities and the securities market. 73. Along with the Section 12A, when we read Regulation 2(1)(c) of 2003 Regulations, the act of fraud has been 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 right or interest in securities. 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 SCR Act, 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 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 securi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 0 USD. Clause 6.1, 6.2 and 6.3 gave full right to Euram to realise its loan by realising the pledged securities. 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. 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. XVI. That in reality the entire GDRs were invested by Vintage. XVII. On 15/16-07-2009, BSE authorised the trading of 29,91,000 GDRs in Indian market. XVIII. Vintage by virtue of the entire holding of GDRs became 88.94% shareholder of Asahi. XIX. Vintage transferred the GDRs to IFCF and KII for which Vintage granted a loan of 20,00,000 USD to CREDO, associate company of KII for lending to KII. It enabled KII to sell the underlying shares of GDRs in Indian market. XX. Agreement between Vintage and CREDO was also signed by the second respondent on behalf of Vintage. XXI. GDRs of CREDO received by IFCF and KII were cancelled and then the underlying shares were sold in Indian market. XXII. Most of the d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, 11B, 11C, 12 and 12A of the SEBI Act, 1992 read along with its 2003 Regulations and consequently its order dated 20 th June 2013 debarring the respondents from rendering services in connection with the instruments which are defined as `securities' under Section 2(h) of the SCR Act, 1956 in the 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 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 GDRs are dealt with outside the country in the global market, SEBI lacks jurisdiction in procee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market and so long as such trading of the GDRs by the respondents as Lead Managers work within the framework of the law applicable in the respective foreign countries, SEBI has no power to proceed against the respondents and pass the order of debarment. The contention is that as Lead Managers, the respondents have never dealt with the securities issued by the Indian company within the territory of India and therefore neither the provision of SCR Act, 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 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 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 of GDRs requires as many as 14 steps such as authorization by the Board of Directors, Notification to the S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion, any rights or interests in 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 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 said submission should be rejected. 80. Therefore when GDRs 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 involved in the creation of GDR and its dealing by the issuing company with the support of the Lead Manager can be dealt with by SEBI. It is 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 are dealt with. But one special feature to be borne in mind is that in the ca ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he provisions of the Act or Rules or Regulations or directions issued, it can order for an investigation and take action. Under Section 12A, it is specifically provided to prohibit any manipulative and deceptive devices, insider trading and substantial acquisition of securities or control by ANY PERSON either directly or indirectly. If SEBI'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-clause (a)(b)(c) of Section 12A. Similar will be the situation for answering the definition under Regulation 2(1)(b)(c), (3), (4)(1)(2)(a)(b)(c)(d)(e)(f)(k)(r) of 2003 Regulations, apart from taking required penal action against those who are involved in any fraud being played in the creation of securities. 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 GDRs at the global level to mis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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 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 11, 11B 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 violation under FEMA or RBI Act, SEBI can validly exercise its powers under SEBI Act, 1992. Even under the 1993 Scheme 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 scop ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... it only states that the second respondent was the sole shareholder of Pan Asia which is now known as M/s. 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 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 again we do not find any need to be guided by such 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 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 a manner, which has potential to cause or h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s of those enactments providing for extra territorial jurisdiction can have no impact on the action initiated by the 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-`-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. 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 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 considered opinion does not cause any impediment for SEBI to proceed against the respondents in exercise of its jurisdiction under the SEBI Act, 1992. 87. In this context, it is also necessary to refer to certain compliance to be re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... possible information which may have a bear- ing on the issue for the purpose of the listing of GDR issue abroad outside of territory and jurisdiction of India ; (b) assessing the market for the purpose of the issue and marketing the issue; (c) obtaining confirmation of acceptance of subscrip- tion acceptance from the initial investors to the GDR issues; (d) assisting the Issuer Company at all stages from preparing the documentation, making investor pre- sentation, selection of other manager(s) etc.,; (e) receipt of confirmation of subscription monies re- ceived in the requisite company's escrow account opened / maintained by the company with the es- crow account holding bank; (f) receipt of Depository's (Depository's Banks) confir- mation of issue of instructions to the clearing sys- tems 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 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... de 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 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 prohibited activities i.e. stock exchange transaction or real estate transaction as prescribed in 1993 Scheme and that the subscription of the GDR issued in USD 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 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 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 d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in the purview of its competence, including with respect to extra-territorial aspects or causes as delineated above, and as specified by the Constitution, or im- plied by its essential role in the constitutional scheme, ought not to be subjected to some a-priori quantitative tests, such as sufficiency or signifi- cance or in any other manner requiring a pre-deter- mined degree of strength. All that would be required would be that the connection to India be real or ex- pected to be real, and not illusory or fanciful. 126. Whether a particular law enacted by Parlia- ment 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 conse- quence, would be a mixed matter of facts and of law. Obviously, where Parliament itself posits a degree of such relationship, beyond the constitutional require- ment that it be real and not fanciful, then the courts would have to enforce such a requirement in the op- eration of the law as a matter of that law itself, and not of the Constitution. 127. (2) Does Parliament have the powers to legis- late f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uestion posed for consideration is noted. In the concurring view of Mr. Justice Chelameswar in paragraphs 130 and 139 it is recorded as under: 130. Though Article 245 speaks of the authority of Parliament to make laws for the territory of India, Article 245(2) expressly declares - No law made by Parliament shall be deemed to be invalid on the ground that it would have extra territorial operation . In my view the declaration is a fetter on the jurisdiction of the Municipal Courts including Constitutional Courts 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, 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 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 applies to persons who are not corporally present wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 or lack of mens rea to escape the imposition of penalty. The imputing 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 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 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 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 restrained fr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 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 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 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. 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 tha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lauses can- not be read into the Section by interpretation. For the foregoing reasons, we hold that Section 9(1)(i) is not a look 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, 1992 provided for necessary 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 defined under Regulation 2(1)(c) 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 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 parag ..... X X X X Extracts X X X X X X X X Extracts X X X X
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