GDR regulation: Sebi regains power but monitoring still a concern

Despite an empowering supreme Court order, Sebi isn't as well equipped as Enforcement Directorate is, to track foreign funds

The Supreme Court ruling might have cleared the air over Securities and Exchange Board of India (Sebi)'s power to regulate global depository receipts (GDRs), but compliance as well as monitoring of funds raised through these instruments remains a bone of contention. Sources in the know say Sebi has on several occasions voiced its concern over monitoring of these instruments with the finance ministry.

 

"The monitoring, compliance of companies raising capital overseas with respect to the Prevention of Money Laundering Act (PMLA) should be left to agencies that have such regulatory powers namely the enforcement directorate and financial intelligence unit," said a source on condition of anonymity.

SAT OVERRULED SEBI

• March 2015: SAT ruled in favour of DLF and quashed Sebi order that barred the company from raising funds of 3 years; Sebi later approached the SC
• March 2013: SAT quashed Sebi order against Zenith infotech promoters in asset stripping case
• August 2013: SAT had dismissed Sebi order against NSDL in the IPO scam
• September 2013: SAT ruled that Sebi does not have jurisdiction over GDRs

The regulator is also said to have brought to the notice of the ministry that the Securities Act doesn't have specific provisions to track flows raised overseas and to enforce the requirement of filing of returns. Experts opine that Sebi has limited powers compared to the Enforcement Directorate to monitor funds.

 

"If Sebi is to given the responsibility of monitoring funds raised overseas by unlisted entities, it would require some legislative changes," said a market and regulatory expert.

The Supreme Court in a ruling on Monday stated the regulator has the power to probe GDRs sold by Indian companies, backed by local shares, to foreign investors and listed on overseas exchanges.

Sebi had moved the apex court after the Securities and Appellate Tribunal (SAT) in a ruling in 2013 had held that the regulations of GDR was outside the purview of Sebi. SAT had set aside a Sebi order barring Pan Asia Advisors and its promoter Arun Panchariya from capital markets for 10 years for alleged manipulation in global securities by six Indian firms.

 

The tribunal had held that it is the Reserve Bank of India (RBI) and the Ministry of Finance that govern the issuance, trading and conversion of GDRs and cannot be under the purview of Sebi.

The ruling came as a major setback to Sebi and put a question mark on the various investigations that were pending with regulator relating to the GDR issuances. A stay order obtained by Sebi from the Supreme Court in the matter enabled it to continue the on-going investigations.

 

The modus operandi in these cases, as observed by Sebi, involved the issuing companies having the same set of initial investors, with a major portion of the GDR issue brought by the same set of clients. The trading and offloading of the GDRs used to happen between the same set of clients. Commenting on SC’s ruling, Vaneesa Abhishek, a Bombay High Court lawyer, says it was natural for Sebi to get jurisdiction over the GDRs.

“The ruling is an important one starting new stream of legal jurisprudence. After this, Sebi can exercise jurisdiction over financial products even if those are not strictly in regulatory purview as long as manipulation in issuance and trading of that financial product leads to adverse impact on securities market,” she said.