GOLDMAN SACHSINVESTMENTS (MAURITIUS) LIMITED Vs. THE ADJUDICATING OFFICER, SECURITIES AND EXCHANGE BOARD OF INDIA

JUDGEMENT

(1.) THE primary question that arises for our consideration in this Appeal is whether the Securities and Exchange Board of India (hereinafter called the Board) could ask the Foreign Institutional Investors (FIIs) to furnish an undertaking that they had not dealt in respect of off -shore derivative instruments with Indian residents, non -resident Indians (NRIs), persons of Indian origin (PIOs) or overseas corporate bodies (OCBs) in the absence of a bar on such deals.

(2.) WITH a view to regulate the activities of FIIs and their sub -accounts, the Board framed the Securities and Exchange Board of India (Foreign Institutional Investors) Regulations, 1995 (for short the Regulations). These provide that no person shall buy, sell or otherwise deal in securities as an FII unless he holds a certificate granted by the Board under the Regulations. An FII is also required to seek from the Board registration of each sub -account on whose behalf he proposes to make investments in India. Regulation 20 enjoins that every FII shall, as and when required by the Board or the Reserve Bank of India, submit to the Board or the Reserve Bank of India, as the case may be, any information, record or documents in relation to its activities as an FII. The Board found that some FIIs were issuing derivatives/financial instruments against underlying Indian securities under different names such as participatory notes, equity linked notes etc. In order to monitor the investments by FIIs through these derivatives/financial instruments, the Board decided that FIIs should report the issuance/renewal/cancellation/redemption of these instruments to it and accordingly, issued a circular dated October 31, 2001 prescribing the format in which the report was to be submitted. The Board further advised that the report shall be submitted by only those FIIs which issue such instruments and that the reports were to be submitted only on issuance/renewal/cancellation/redemption of the aforesaid instruments and only for the month(s) during which the FIIs had issued/ renewed/ cancelled/redeemed those instruments. These reports were required to be submitted on a monthly basis within a week of the end of the month duly signed and approved by the compliance officer. By a subsequent circular dated August 8, 2003 the Board decided to revise the format for reporting the issuance/renewal/cancellation/redemption of derivatives/financial instruments. The report was to be submitted in two forms which were enclosed with this circular as Annexures A and B. For the first time the reporting format included an undertaking. Annexure A is a one time report to be submitted once only in which the FII is required to indicate the outstanding off -shore derivatives as on August 15, 2003. After furnishing the requisite information in the one time report, the FII or the sub -account, as the case may be, is required to furnish the following undertaking:

(3.) IN the light of the reports filed by the appellant, the Board was of the opinion that the former had violated the circular dated August 8, 2003 and Regulation 13 (1) of the Regulations and, therefore, initiated adjudication proceedings under Chapter VIA of the Securities and Exchange Board of India Act, 1992 (hereinafter called the Act). The adjudicating officer served a notice dated June 6, 2006 calling upon the appellant to show cause why penalty be not imposed in terms of Section 15HB of the Act. The appellant filed a detailed reply controverting the allegations made in the notice. It was pointed out that it had neither violated the reporting circular nor Regulation 13(1). The adjudicating officer framed the following three issues which, according to him, arose from the show cause notice and the reply: