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MANOHAR LAL SHARMA ADVOCATE Versus UNION OF INDIA & ORS

2015 (10) TMI 266 - DELHI HIGH COURT

Validation of Participatory Notes as ‘offshore derivative instruments’ (ODIs) - alleged statement by the Finance Minister – Petitioner contends with regard to the Participatory Notes which are nothing but ODI’s and the alleged statement made by the Finance Minister – Respondent holds that ODI’s include participatory notes which are entered into by a Foreign Portfolio Investor – Held That:- Premise on which the writ petition is found does not exist - Regulation 22 of SEBI(Foreign Portfolio Invest .....

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AND MR. SANJEEV SACHDEVA, JJ. For The Petitioner Mr Manohar Lal Sharma, petitioner-in-person For the Respondent/UOI Mr Sanjay Jain, ASG with Mr Akshay Makhija, Mr Sidharth Thakur, Mr Vidhur Mohan, Ms Pallavi Shali, Mr Shresth Jain, Ms Sanjugeeta Mokkan and Ms Mahima Behl, Ms Sonia Mathur with Mr S. K. Bhatt JUDGMENT BADAR DURREZ AHMED, J (ORAL) 1. This writ petition has been filed seeking multifarious reliefs. It essentially centres around two aspects. One is with regard to the instruments know .....

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Regulations. This is clearly stated in paragraph 3 of the writ petition. 3. Mr Sanjay Jain, the learned Additional Solicitor General of India, has placed before us the Securities and Exchange Board of India (Foreign Portfolio Investors) Regulations, 2014 (hereinafter referred to as the said Regulations ). On going through the said regulations, it appears that offshore derivative instruments (ODIs), include participatory notes, equity linked notes and such other instruments, by whatever names the .....

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4 of the said Regulations, stipulates the eligibility criteria of a foreign portfolio investor. The said Regulation clearly indicates that the foreign portfolio investor does not function in an unregulated environment, but operates under a regulated regime. This is clearly discernible from the said Regulation, which reads as under:- Eligibility criteria of foreign portfolio investor 4. The designated depository participant shall not consider an application for grant of certificate of registrati .....

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hose central bank is a member of Bank for International Settlements; (d) the applicant is not resident in a country identified in the public statement of Financial Action Task Force as: (i) a jurisdiction having a strategic Anti-Money Laundering or Combating the Financing of Terrorism deficiencies to which counter measures apply; or (ii) a jurisdiction that has not made sufficient progress in addressing the deficiencies or has not committed to an action plan developed with the Financial Action T .....

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ally competent, financially sound and has a generally good reputation of fairness and integrity; (i) the grant of certificate to the applicant is in the interest of the development of the securities market; (j) the applicant is a fit and proper person based on the criteria specified in Schedule II of the Securities and Exchange Board of India (Intermediaries) Regulations, 2008; and (k) any other criteria specified by the Board from time to time. Explanation.- For the purposes of this regulation: .....

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lia, provides for information sharing arrangements under clause (ib) of sub section (2) of Section 11 of the Act. 5. Foreign portfolio investors have been categorized into three separate categories in terms of Regulation 5 of the said Regulations. We need not go into that aspect of the matter. It is, however, pertinent to note Regulation 22 of the said Regulations, which prescribes the conditions for issuance of offshore derivative instruments (ODIs), of which, a participatory note is an example .....

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iance with know your client norms: Provided that those unregulated broad based funds, which are classified as Category II foreign portfolio investor by virtue of their investment manager being appropriately regulated shall not issue, subscribe or otherwise deal in offshore derivatives instruments directly or indirectly: Provided further that no Category III foreign portfolio investor shall issue, subscribe to or otherwise deal in offshore derivatives instruments directly or indirectly. (2) A for .....

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ed into by it relating to any securities listed or proposed to be listed in any stock exchange in India, as and when and in such form as the Board may specify. (4) Any offshore derivative instruments issued under the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 before commencement of these regulations shall be deemed to have been issued under the corresponding provision of these regulations. 6. It is important to note that Regulation 22 (2) clearly s .....

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lude participatory notes, as and when and, in such form, as the Board may specify. In other words, it is well within the rights of the SEBI to require a foreign portfolio investor to furnish information concerning the terms of the participatory notes as also the parties to the participatory notes. From the above provisions, it becomes clear that participatory notes, by themselves, are not illegal and are regulated in the manner prescribed under the said Regulations. If there are any deviations f .....

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