Extra-territorial application of India’s securities law – Has SEBI cast its net too wide?

If a connection exists, it is for the Legislature to decide how far it should go in the exercise of its powers.[1]


The territorial application of laws made by Parliament is enshrined in Article 245 of the Constitution of India (“Constitution”). The universal presumption that laws made by a country are limited to its own territorial borders, is provided under Article 245(1) of the Constitution, which provides that “Subject to the provisions of this Constitution, Parliament may make laws for the whole or any part of the territory of India.” However, Article 245(2) of the Constitution carves out a specific exception providing that a law made by Parliament, pursuant to Article 245(1), shall not be invalidated on the ground that such a law would have extra-territorial operation. Most countries have enacted extra-territorial laws with the US being the clear leader in this regard having enacted anti-corruption law, securities laws etc. which have extra-territorial application.

This trend of enacting law and regulations with extra-territorial operation is increasing in the recent years. While Section 1(3) of the Foreign Exchange Management Act, 1999 (“FEMA”) clearly provides for extra-territorial operation, the SEBI Act, 1992 (“SEBI Act”) does not have any such explicit provision. However, SEBI, has been using its powers to frame regulations under Section 30 of the SEBI Act, and has enacted several regulations, which have extra-territorial operation.

It is interesting to note that there is nothing in the scheme of the SEBI Act, and more specifically in Section 30, which empowers SEBI to frame and enact such regulations. However, some provisions made under the SEBI (LODR) Regulations, 2015 (“LODR”) have extra-territorial operation. In this article, the authors have examined the constitutional validity of such extra-territorial regulations and the limitations imposed by the Supreme Court of India (“SC”) on their enactment.

Principles laid down by the SC in GVK Industries

In the landmark case of GVK Industries v. Income Tax Officer[2](“GVK Industries”), the Constitution Bench of the SC analysed whether Parliament’s powers to legislate, pursuant to Article 245, includes legislative competence with respect to aspects or causes that occur, arise or exist outside the territory of India. It was held that to enact legislation with respect to extra-territorial aspects or causes, without any nexus to India, would in many measures be an abdication of the responsibility cast upon the Parliament.

The use of the words “extra-territorial operation” as opposed to “extra-territorial laws” implies that the drafters were aware of the difference between making an ‘extra-territorial law’ and a law with an ‘extra-territorial operation’. It was held that any law enacted by Parliament with respect to extra-territorial aspects which have no ‘impact on or nexus with India’ would be ultra vires Article 245 of the Constitution.

Though on the face of it, the principle of extra-territorial application of law vis-à-vis the principle of sovereignty of law made by one state having no operation in another may seem conflicting – when read in harmony, these principles can enable enforceability of extra-territoriality in a foreign state upon establishment of nexus with India. Therefore, a law with extra-territorial operation will need to satisfy the nexus test and the nexus should be real, and not illusory or fanciful.

One judgment that has extensively applied the principles laid down in GVK Industries is SEBI v. Pan Asia Advisors[3] (“Pan Asia Advisors”), which was in the context of SEBI’s extra-territorial jurisdiction.

SEBI v. Pan Asia Advisors – was SEBI’s extraterritorial jurisdiction upheld?

In Pan Asia Advisors, the SC examined whether the SEBI Act conferred SEBI with the power to take action against the respondents for alleged fraudulent trading in Global Depository Receipts (“GDRs”), which were issued outside India, and had a market and investor bank outside India. The respondents contended that SEBI did not have extra-territorial jurisdiction to regulate dealings in GDRs, as:

  • In accordance with Section 1(2) of the SEBI Act, SEBI’s jurisdiction only extends to the whole of India, and the statute does not confer it with the power to regulate acts that take place outside Indian territory.
  • GDRs will fall within the definition of “foreign security” in Section 2(o) of the FEMA, and in accordance with Section 6(3) of the FEMA, it is the RBI that is empowered to formulate regulations relating to transfer or issue of a foreign security.
  • As violations relating to dealings in GDRs shall be exclusively regulated under the FEMA, the SEBI Act will not have any application in relation to GDRs.

The SC rejected these arguments and held that GDRs fall within the definition of “security” in Section 2(h) of the Securities Contracts (Regulation) Act, 1956, and are created at the instance of the issuing company in India, with a desire to earn foreign investments. The SC held that the SEBI had a statutory duty under the SEBI Act to protect the interests of Indian investors, and the mere fact that GDRs were created and traded in the global market cannot prevent it from exercising its jurisdiction.

The SC referred to Section 11(3) of the SEBI Act, which provides that the SEBI’s powers relating to calling for information relevant for any investigation in respect of a transaction in securities can be exercised ‘notwithstanding anything contained in the provisions of any other law’. Further, it was held that the FEMA as well as the RBI Act, 1934 (“RBI Act”) do not prohibit SEBI from exercising its jurisdiction, and the SEBI Act can apply even in situations where there is a violation of the FEMA, or the RBI Act.

Referring to the test of ‘impact on or nexus with India,’ laid down in GVK Industries, the SC held that the SEBI Act itself contains sufficient provisions for proceeding against ‘any person,’ who engages in a fraudulent activity that affects the interests of Indian investors. Further, it was held that SEBI has the statutory mandate to proceed against persons who are not corporally present within Indian territory, if the acts committed affect the legitimate interests of India. This implies that protection of Indian investors amounts to a sufficient ‘nexus with India,’ which permits SEBI to initiate proceedings even when the underlying acts or transactions take place outside India.

Effects doctrine

Another test used for determining extra-territorial jurisdiction is the effects doctrine, which was examined by the SC in Haridas Exports v. All India Float Glass Manufacturers Association[4] (“Haridas Exports”), in the context of the Monopolies and Restrictive Trade Practices Act, 1969 (“MRTP Act”). Here, the SC held that the MRTP Commission shall have jurisdiction to pass appropriate orders in case of a transaction that has been executed outside India, if the effect of that transaction has resulted in a restrictive trade practice within India.

While the MRTP Act has been repealed, the ‘effects’ doctrine may still be relevant, as it was applied by the SC in Pan Asia Advisors, to conclude that the SEBI will have extra-territorial jurisdiction in situations where the transactions in question have far-reaching consequences for Indian investors.

Practical difficulties faced by Indian corporates

Over the last two decades, with the liberalisation of India’s foreign exchange law relating to outbound investments (RBI’s ODI Regulations), many Indian companies have established subsidiaries and JVs across the world and large industrial house like Tatas, Birlas, etc., have large number of overseas subsidiaries with significant business operations.

The securities law regime has few examples where provisions relating to disclosure and compliance obligations extend to many such overseas subsidiaries as well as step-down subsidiaries, which are incorporated outside India.

One classic example of such an extra-territorial  obligation is found in Regulation 24(1) of the LODR, which provides that at least one independent director (“ID”) on the board of a listed company shall be a director on the board of an unlisted ‘material subsidiary,’ “whether incorporated in India or not”. The Explanation to Regulation 24(1) of LODR provides the threshold for determining ‘material subsidiary.

The extent of Regulation 24(1) of LODR becomes complicated when Indian listed companies have to appoint one of its IDs on the board of a company, which is a step-down subsidiary of a foreign subsidiary of the Indian listed company. For example, a listed Indian company ‘A’ has a foreign subsidiary ‘B’ in UK, and the subsidiary ‘B’ has a step-down subsidiary ‘C’ in China. If the subsidiaries ‘B’ and ‘C’ meet the ‘material subsidiary’ threshold as per Regulation 24(1) of LODR, then company ‘A’ will have to appoint one of its IDs on the board of companies ‘B’ and ‘C’.

This may seem a bit far-fetched extension of the extra-territorial operation, as the China subsidiary is a subsidiary of the UK parent entity, which is governed by the English Companies Act, 2006, and is subject to the corporate governance norms applicable under the said Act. Moreover, this provision also dilutes the autonomy of the board of the UK incorporated subsidiary in deciding the board composition of its China subsidiary. One needs to examine the conflict of law rules to evaluate whether the provision in India’s LODR can go that far to take away the autonomy of the decision-making power of the UK subsidiary, which is bound to observe the laws of its country of incorporation as per the conflict rules of the private international law.

Further, SEBI’s working group on the review of the regulatory architecture for related party transactions (“RPTs”)[5] has proposed amendments to the LODR provisions on RPTs to enable the audit committee of the Indian listed entities to approve the transactions between two subsidiaries (including overseas subsidiaries).

If such a provision is introduced in the LODR, then the audit committee of the listed entity in India will be required to examine and approve the RPTs entered between its two overseas subsidiaries, which may have been incorporated in two different jurisdictions.

Apart from serious conflict of law issues, such an extra-territorial provision in the LODR would make the boards of such overseas subsidiaries “functus officio,” when it comes to the approval of the RPTs. It could also amount to the violation of the provisions of the Companies Acts of those jurisdictions where such subsidiaries are incorporated. It also impinges on the autonomy of the boards of such subsidiaries to enter into contracts.

Concluding Thoughts

As Article 245(2) uses the words “no law made by Parliament shall be deemed to be invalid,”  it raises an interesting question as to whether Article 245(2) also applies to delegated legislation like LODR made by a regulator under the law enacted by Parliament.

This aspect was not directly addressed in Pan Asia Advisors, where the SC extensively referred to the provisions of the SEBI (Prohibition of Fraudulent and Unfair Trade Practice Relating to Securities Market) Regulations, 2003, but did not express any direct opinion on whether the provisions of such a delegated legislation can by itself provide for extra-territorial applicability. It may be noted that the SC made passing reference to SEBI’s wide powers to regulate insider trading, which indicates that the SEBI (Prohibition of Insider Trading) Regulations, 2015 may also provide for an extra-territorial operation, as long as there is a real nexus with India.

In this context, it may be noted that in St Johns Teachers Training Institute v. Regional Director, National Council for Teacher Education[6], the SC held that the regulations made under powers conferred by the parent statute are supporting legislations, and have the same force and effect as an act passed by the competent legislature. Applying this principle, delegated legislations framed by SEBI may also provide for extra-territorial applicability, provided that there is a nexus with India, and the connection with India is ‘real or expected to be real, and not illusory or fanciful.

Another aspect that was not examined by the SC in Pan Asia Advisors is whether the SEBI Act and the Regulations framed thereunder can have extra territorial applicability, even in situations where the provisions of Indian law are repugnant to the provisions of a foreign statute.

As the example of Regulation 24(1) of the LODR illustrates, such situations of possible conflict can arise in case of disclosure and compliance-based obligations, where the subsidiary is bound by the laws of the country of incorporation. In the authors’ view, in such a situation, Indian extra-territorial rule will have to submit to the primacy of the foreign law, which binds such overseas subsidiary. As the SC held in the Vodafone judgment[7], every subsidiary has a separate legal existence from its parent company, and the “legal position of any company incorporated abroad is that its powers, functions and responsibilities are governed by the law of its incorporation.”

[1] D.D. Basu, Commentary on the Constitution of India, 8th Edition.

[2] (2011) 4 SCC 36.

[3] AIR 2015 SC 2782.

[4] (2002) 6 SCC 600.

[5] Report of the Working Group on Related Party Transactions issued by SEBI on January 27, 2020.

[6] (2003) 3 SCC 321.

[7] Vodafone International Holdings B.V. v. Union of India, (2012) 6 SCC 613.