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SEBI v. Pan Asia Advisors - Judgment Extract

1) The document discusses the definition of "securities" under Indian law and analyzes whether Global Depository Receipts (GDRs) fall under this definition. 2) It determines that GDRs meet the definition of "securities" based on the fact that they represent underlying shares in an Indian company and provide rights and interests in those shares. 3) The document also examines the definition of "stock exchange" and notes that while GDRs can be held for long periods, if a holder wishes to redeem or trade the underlying shares, they must interact with stock exchanges in India that are regulated for trading securities.

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194 views2 pages

SEBI v. Pan Asia Advisors - Judgment Extract

1) The document discusses the definition of "securities" under Indian law and analyzes whether Global Depository Receipts (GDRs) fall under this definition. 2) It determines that GDRs meet the definition of "securities" based on the fact that they represent underlying shares in an Indian company and provide rights and interests in those shares. 3) The document also examines the definition of "stock exchange" and notes that while GDRs can be held for long periods, if a holder wishes to redeem or trade the underlying shares, they must interact with stock exchanges in India that are regulated for trading securities.

Uploaded by

Gurpreet
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© © All Rights Reserved
We take content rights seriously. If you suspect this is your content, claim it here.
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Judgment Extract

(Read along with to class discussion)

SEBI v. Pan Asia Advisors Ltd. & Anr.


(2015) 14 SCC 71 ¶ 65-71

To appreciate the status of a GDR of an issuing company, it will be necessary to


consider the definition of ‘securities’ as defined under Section 2(1)(i) of SEBI Act, 1992
read along with Section 2(h) of SCR Act 1956. In fact Section 2(1)(i) of the SEBI Act,
1992 simply defines ‘securities’ to mean the definition assigned to it in Section 2(h) of
the SCR Act, 1956. Under Section 2(h) ‘security’ has been defined to mean as under in
sub-clauses (i), (iia) and (iii):

“Section 2 (h) “securities” include—


(i) shares, scrips, stocks, bonds, debentures, debenture stock or other
marketable securities of a
like nature in or of any incorporated company or other body corporate;
xxx xxx
(iia) such other instruments as may be declared by the Central Government to
be securities; and
(iii) rights or interest in securities;”

The above definition is exhaustive and includes not only shares, scripts, stocks, bonds,
debentures, debenture stocks or other marketable securities of a like nature in or any
incorporated company. The further definition under sub-clause (iia) covers such other
instruments as may be declared by the Central Government as Securities and under
sub-clause (iii) rights or interest in securities are also to be construed as securities.
Going by the definition under Section 2(h)(i) ‘security’ would include other marketable
securities of a like nature of any incorporated company. Therefore reading Section
2(h)(i) and 2(h) (iii) together and apply the same to GDRs, having regard to the fact that
the issuance of GDRs are always based on the underlying Indian shares deposited with
the Domestic Custodian Bank and thereby the GDRs possess in it right, as well as,
interest in the shares, scripts etc., it will have to be straight away held that all GDRs
would fall within the definition of ‘securities’ as defined under Section 2(h) of the 1956
Act.

Further, under Section 2(2) of the SEBI Act, 1992, words and expressions used and not
defined but 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:

“Section 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.”

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 fungibility of the redeemed shares back into GDRs,
necessarily the holder of a GDR will have to fall back upon the stock exchanges as per
the definition under Section 2(j) of the SCR Act, 1956, who alone can assist, regulate
or control the business of buying, selling or dealing with securities.

Having examined the above statutory provisions, we find that a GDR is one form of
‘security’ as defined under Section 2(h) of SCR Act, 1956, which is created by the
issuing company of Indian origin based on underlying shares deposited with the
Domestic Custodian Bank and created by the Overseas Depository Bank. Such creation
is at the instance of the issuing company in India with a desire to earn foreign
investments. Such investments made by the investors in the GDRs is facilitated by the
Lead Manager at the time of its creation as well as its investment. Thereafter, the
investors hold the GDRs either for further trading on it in the global market through
the stock exchanges at global level and in the event of such investors interested in
liquidating the GDR are entitled to liquidate the same through the Overseas Depository
Bank, in which event the extent of underlying shares of the GDRs get transferred in
the name of the investors themselves and thereby enabling such investors to trade on
underlying shares in the Indian stock market or if so wish under the fungibility scheme
once again get it redeemed in the form of GDR themselves.

Therefore, the creation of the GDR by the issuing company and after its creation in the
fixation of price, value, marketing in the global market, the support of Lead Manager is
involved and while dealing with such GDRs, the same is regulated in so far as it related
to underlying shares deposited with the Domestic Custodian Bank by the laws
regulating the same and prevalent in India and so far as the corresponding GDRs
created based on such underlying shares are concerned, the same are governed by the
laws prevailing in the respective market where such GDRs are being traded. Post
cancellation of GDRs, the underlying shares deposited with the Domestic Custodian
Bank is made available for trading in India depending upon the wish of the holder of
GDR in the local market or for holding it as such i.e., as mere shares of the issuing
company or by virtue of the fungibility scheme can once again be converted as GDRs
for being traded in the global market.

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