2013 (9) TMI 1231 - AT - Companies Law

Summary

Issues Involved:
1. Jurisdiction of SEBI over GDRs issued abroad.
2. Alleged fraudulent activities by the appellants in the issuance and trading of GDRs.
3. Appropriateness of SEBI's sanctions against the appellants.

Jurisdiction of SEBI over GDRs Issued Abroad:
The main issue was whether SEBI has jurisdiction over Global Depository Receipts (GDRs) created and issued by foreign banks and listed on foreign stock exchanges. The Tribunal concluded that SEBI does not have jurisdiction over the creation and issuance of GDRs abroad. The jurisdiction pertaining to GDRs falls squarely within the domain of the Reserve Bank of India (RBI) and the Ministry of Finance, Government of India, as per the Foreign Exchange Management Act (FEMA), 1999, and related regulations. SEBI's role is limited to when GDRs are converted into shares and traded on Indian stock exchanges.

Alleged Fraudulent Activities:
SEBI alleged that the appellants, while assisting certain Issuer Companies in the creation and issuance of GDRs, adopted an objectionable and seemingly illegal modus-operandi. The transactions involved Vintage FZE selling GDRs to Foreign Institutional Investors (FIIs) such as India Focus Cardinal Fund (IFCF) and KII Limited, who then converted these GDRs into shares and sold them in the Indian capital market. SEBI claimed that the appellants misled prospective investors by giving the impression that substantial foreign capital was accruing to these companies through GDR subscriptions without any genuine raising of capital. The Tribunal found that the appellants were instrumental in creating and issuing GDRs and that the funds for GDRs were from the sale of underlying shares in the Indian market.

Appropriateness of SEBI's Sanctions:
The Tribunal noted that SEBI's power under Section 11(1) and 11(4) of the SEBI Act, 1992, is wide enough to take measures to protect investors' interests and regulate the securities market. However, the Tribunal found that SEBI's jurisdiction is limited to transactions within India and does not extend to the issuance and trading of GDRs abroad. Therefore, the Tribunal set aside SEBI's order restraining the appellants from accessing the securities market for 10 years, stating that SEBI does not have jurisdiction over the creation and issuance of GDRs abroad.

Conclusion:
The Tribunal concluded that SEBI does not have jurisdiction over the creation and issuance of GDRs abroad, which falls under the purview of the RBI and the Ministry of Finance. SEBI's role is limited to when GDRs are converted into shares and traded on Indian stock exchanges. The Tribunal set aside SEBI's order against the appellants, stating that SEBI acted beyond its jurisdiction.