SEBI has recently passed six orders in the matter of market manipulation using Global Depository Receipts (GDRs). GDRs are certificates issued by a depository bank in one country for shares of a foreign company. In 2011, SEBI had passed ad-interim ex-parte orders directing certain GDR issuing companies, suspected of using GDRs to manipulate the market, to not issue any equity shares or other instruments convertible into equity shares. In 2014, subsequent to the conclusion of its investigation, SEBI issued show cause notices to around 80 entities, including directors and promoters of the issuing companies, for violations of SEBI Act and SEBI (Prohibition of Fraudulent and Unfair Trade Practices Relating to Securities Market) Regulations (PFUTP Regulations).
Modus Operandi of the GDR scam
The GDRs of the issuer companies were being subscribed by Vintage FZE (Vintage), an entity related with Arun Panchariya. The issuer companies wilfully gave wrong details and misled SEBI regarding the original subscribers of the GDR issues. This subscription was financed by the loan taken by Vintage from Euram Bank, which was secured with a pledge agreement by the issuing company created on the proceeds of these GDRs. By this deceiving mechanism, the investors in India were made to believe that foreign investors have fully subscribed to the GDRs. Further, these GDRs were transferred by Vintage to Arun Panchariya related entities, India Focus Capital Fund (IFCF) and KII, which converted the GDRs to equity shares and sold to Indian entities, again related to Arun Panchariya. This created an artificial impression that Indian investors have also began subscribing to the shares of these issuer companies, thus influencing the investment decision of investors through fraudulent misrepresentation.
Supreme Court order on GDRs
In 2013, SAT held that SEBI has no jurisdiction over the creation and issuance of GDRs abroad. Staying this order, Supreme Court held that GDRs would fall within the definition of securities under the Securities Contracts (Regulation) Act, 1956, and hence SEBI would have jurisdiction over these instruments. Pursuant to this, SEBI has passed the recent orders.
In six separate orders, SEBI has found the GDR issuing companies, Vintage and directors directly involved, to have engaged in fraudulent activities and be in violation of the PFUTP Regulations and SEBI Act. SEBI has barred the GDR issuing companies from issuing any securities and around 11 other domestic and foreign entities from accessing the capital market and dealing in securities, for a period of 10 years. IFCF and KII are prohibited from accessing the capital market and dealing in securities for a period of 6 years. The Proceedings against one of the issuer companies, Avon Corporation Ltd., was disposed of as it is undergoing winding up proceedings. The period of prohibition already undergone by some of these entities, pursuant to the 2011 interim order, shall be considered while computing the ban duration.
Not having sufficient facts to show that they controlled the issuer companies, SEBI disposed of the proceedings against the promoters. SEBI has also warned various entities, including Euram Bank, to ensure all future dealings in securities market are done in accordance with the law.