Supreme Court seeks response from Morepen Labs in 2003 case

A Bench led by Justice Indira Banerjee issued notice to Morepen Labs and posted the matter for further hearing on September 9.

The Supreme Court on Monday admitted the Securities and Exchange Board of India’s (Sebi) appeal against the Securities Appellate Tribunal’s (SAT) order that set aside regulator Sebi’s order barring Delhi-based pharmaceutical company Morepen Laboratories from the securities markets for one year for making misleading disclosures about the issuance of global depository receipts (GDRs) way back in 2003.

A Bench led by Justice Indira Banerjee issued notice to Morepen Labs and posted the matter for further hearing on September 9.

Stating that SAT had failed to consider its explanation for the purported delay, senior counsel CU Singh, appearing for Sebi, argued that that the apex court had in 2015 upheld its jurisdiction to debar the entities for violation of its Sebi (Prohibition of Fraudulent and Unfair Trade Practices) relating to securities market) Regulations, 1995, (PFUTP) in respect of GDRs whose underlying shares are held with depositories based in India.

Counsel Somasekhar Sundaresan, appearing for Morepen Labs, however, opposed Sebi appeal, saying that the GDR issue took place in 2003 and the show cause notice was issued in 2017, after so much delay.

Sebi told the SC that it had in 2009 investigated 59 GDR issues made by 51 Indian companies including Morepan Labs during 2002 to 2014. For this, the market regulator had even approached foreign regulators in procuring information as transactions were carried outside India. “The entire process of collection of information was complex, tedious and time-consuming. Consequently, the investigation in the GDR issue made by Morepen got completed around March 2017,” it stated in its appeal filed through counsel Pratap Venugopal.

Sebi also found that GDRs of Morepen were subscribed by two British Virgin Islands-based entities Solsec Company and Seviron Company who obtained loans worth USD7 million and USD8 million, respectively, through credit agreement from Lisbon-based Banco Efisa, SFE, SA. Further, Morepen had secured a loan obtained by Solsec and Seviron from Banco by pledging the GDR proceeds through an ”Account Charge” agreement with Banco, Sebi told the SC.

The probe also found that Sushil Suri, who was the managing director of Morepen Labs, had executed the Account Charge Agreement along with other three directors at that time, Sebi said, adding that based on the findings, a show-cause notice was issued in June 2017 to Morepan Labs asking it to explain why it and its directors should not be charged for violation of Sebi Regulations.

However, SAT while setting aside the Sebi’s order held that there was inordinate delay in the issuance of the show-cause notice and the power to decide had not been exercised within a reasonable time, therefore no direction could have been imposed.

Besides, Morepan Labs could not have been held for issuance of a misleading statement under Regulations 5(1) of PFUTP as it had been exonerated for fraud and there was no diversion of funds in the issuance of the GDR, the tribunal said, adding that there is no finding of a violation in the procedure adopted by Morepen in the issuance of GDR and the only charge remains was non-disclosure of the Account charge agreement entered in March 2003 with Banco before the stock exchange.