Manohar Lal Sharma Advocate vs Union Of India & Ors
2015 Latest Caselaw 7045 Del

        THE HIGH COURT OF DELHI AT NEW DELHI
%                                      Judgment delivered on: 17.09.2015

+      W.P.(CRL) 2001/2015 & CRL. M. A. 13324/2015

MANOHAR LAL SHARMA ADVOCATE                                    ... Petitioner

                                         versus

UNION OF INDIA & ORS                                           ... Respondents

Advocates who appeared in this case:
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
For the Respondent/CBI       : Ms Sonia Mathur with Mr S. K. Bhatt


CORAM:-
HON'BLE MR JUSTICE BADAR DURREZ AHMED
HON'BLE MR JUSTICE SANJEEV SACHDEVA

                                   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 known as 'participatory notes' which are nothing but 'offshore

derivative instruments' (ODIs). The other aspect is with regard to the press

report which appeared in 'THE HINDU', New Delhi Edition on July 27,

2015 with regard to the alleged statement made by the Finance Minister.

2. The entire petition is based on the premise that a participatory note is

an illegal instrument and is prohibited under the Prevention of Money

Laundering Act, 2002, Foreign Exchange Management Act, 1999 and the

SEBI Rules and 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 they are called,

which are entered into by a foreign portfolio investor relating to securities

listed or proposed to be listed in any stock exchange in India. A foreign

portfolio investor has been defined in Regulation 2(h) to mean a person

who satisfies the eligibility criteria prescribed under Regulation 4 and has

been registered under Chapter II of the Regulations and is deemed to be an

intermediary in terms of the provisions of the Securities and Exchange

Board of India Act, 1992.

4. Regulation 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 registration as a foreign portfolio investor unless the applicant satisfies the following conditions namely,-

(a) the applicant is a person not resident in India;

(b) the applicant is resident of a country whose securities market regulator is a signatory to International Organization of Securities Commission's Multilateral Memorandum of Understanding (Appendix A Signatories) or a signatory to bilateral Memorandum of Understanding with the Board;

(c) the applicant being a bank, is a resident of a country whose 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 Task Force to address the deficiencies;

(e) the applicant is not a non-resident Indian;

(f) the applicant is legally permitted to invest in securities outside the country of its incorporation or establishment or place of business;

(g) the applicant is authorized by its Memorandum of Association and Articles of Association or equivalent document(s) or the agreement to invest on its own behalf or on behalf of its clients;

(h) the applicant has sufficient experience, good track record, is professionally 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:

(i) The term "person" shall have the same meaning as assigned to it under section 2 (31) of the Income- tax Act, 1961;

(ii) The term "non-resident" shall have the same meaning as assigned to it under the Income-tax Act, 1961;

(iii) The term "resident in India" shall have the same meaning as assigned to it under the Income-tax Act, 1961;

(iv) "Bilateral Memorandum of Understanding with the Board" shall mean a bilateral Memorandum of Understanding between the Board and the overseas regulator that, inter alia, 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. Regulation 22 of the said Regulations reads as under:-

"Conditions for issuance of offshore derivative instruments

22. (1) No foreign portfolio investor may issue, subscribe to or otherwise deal in offshore derivative instruments, directly or indirectly, unless the following conditions are satisfied:

(a) such offshore derivative instruments are issued only to persons who are regulated by an appropriate foreign regulatory authority;

(b) such offshore derivative instruments are issued after compliance 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 foreign portfolio investor shall ensure that further issue or transfer of any offshore derivative instruments issued by or on behalf of it is made only to persons who are regulated by an appropriate foreign regulatory authority.

(3) Foreign portfolio investors shall fully disclose to the Board any information concerning the terms of and parties to off-shore derivative instruments such as participatory notes, equity linked notes or any other such instruments, by whatever names they are called, entered 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 stipulates that a

foreign portfolio investor has to ensure that the further issue or transfer of any

offshore derivative instruments issued by or on its behalf, 'is made only to

persons who are regulated by an appropriate foreign regulatory authority'.

7. Regulation 22 (3) is also important inasmuch as it clearly empowers

the SEBI to require a foreign portfolio investor to fully disclose any

information concerning - (i) the terms of; and (ii) parties to the offshore

derivative instruments, which include 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 from the Regulations, it is well within the power of the SEBI

to take corrective action. In fact, Regulation 44 of the said Regulations

specifies the liability for action in case of default. Regulation 44 reads as

under:-

"Liability for action in case of default

44. A foreign portfolio investor, designated depository participant, depository or any other person who contravenes any of the provisions of these regulations shall be liable for action under the Securities and Exchange Board of India (Intermediaries) Regulations, 2008 and/or the relevant provisions of the Act or the Depositories Act, 1996."

8. From the above, it is abundantly clear that the very premise, on

which the writ petition is founded, does not exist.

9. Insofar as the newspaper report is concerned, it indicates that the SIT

setup by the Supreme Court has suggested stricter norms for participatory

notes. The Finance Minister has only stated that the Government would not

take any 'knee-jerk' reaction with regard to stipulating or not stipulating

any norms stricter than what are already in place under the said SEBI

Regulations, 2014. This does not give the petitioner any cause for filing the

present petition and seeking the multifarious reliefs that the petitioner has

sought. The petition has no merit. Before we part with this case, it needs

to be recorded that the personal allegations and innuendos made against the

respondent No. 2 in paragraphs 2, 4 and 23 and/ or at any other place in the

petition have been withdrawn by the petitioner-in-person.

The writ petition is dismissed.

                                         BADAR DURREZ AHMED, J



SEPTEMBER 17, 2015                        SANJEEV SACHDEVA, J
SR