Market regulator SEBI “suspects wrongdoing” on the ownership of foreign portfolio investors (FPIs) in the Adani Group but was unable to pinpoint violations, the Supreme Court expert committee has said. The concern expressed by the Securities and Exchange Board of India (and this precedes the publication of the Hindenburg report) is that the regulator is unable to satisfy itself that the contributors of the funds to the FPIs are not linked to Adani, the committee said. According to the committee, SEBI’s contention is that it needs information from other agencies to demonstrate a link to a potential violation. “Without such information, SEBI is unable to satisfy itself that its suspicion that has been aroused can be put to rest. The securities market regulator suspects wrongdoing, but also finds compliance with various stipulations in attendant regulations. Therefore, the record reveals a chicken-and-egg situation,” it said. However, in a dig at the regulator’s policy, the committee said: “it appears that the legislative policy stance of SEBI on the ownership structure of FPIs has moved in one direction while the enforcement by SEBI is moving in the opposite direction.” The regulator, in its legislative capacity, did away with the prohibition against any FPI having an “opaque structure” on the premise that declarations of the beneficial owner flows from Rule 9 of the PMLA Rules and that such a stipulation is sufficient for its regulatory purposes. Such compliance, having been effected by the FPIs, coupled with the repeal of the provisions on “opaque structure”, the chicken-and-egg situation of hoping to get evidence, can become a perpetual one, the committee said. The foundation of SEBI’s suspicion that led to investigations into the overseas entities’ ownership is that they have “opaque” structures because the ultimate chain of ownership above the 13 overseas entities is not Money Laundering Act, 2002 and thereby under Rule 9 of the Prevention of Money Laundering (Maintenance of Records) Rules, 2004. According to the committee, it appears that bank statements of the 13 entities were made available to SEBI and indeed bank account details of 42 participating shareholders were obtained. “SEBI has been attempting to find out such contributors who have an economic interest in these FPIs. This is where it has hit a wall,” the committee said. SEBI had drawn a blank in this investigation and the publication of the Hindenburg report has revived SEBI’s efforts to attempt to figure out economic interest in the FPIs that have these investments in listed Adani stocks, it said. What is apparent is that the regulatory framework governing FPIs contains a specific stipulation for compliance with identification and disclosure of beneficial ownership. If such requirements have been complied with, the investigation is about whether the “spirit of the law” governing minimum public shareholding has been violated by reason of shareholding in the hands of FPIs that are compliant with the letter of the law, the committee said. SEBI has been investigating the matter since October 23, 2020. The Hindenburg report was published on January 24, 2023. It is for SEBI to conclude the investigations in accordance with law within a precise time frame, the committee said. SEBI has also sought information from other securities commissions in other jurisdictions. It appears SEBI has drawn a blank from regulators in Cayman Islands, Malta, Curaçao, British Virgin Islands and Bermuda. Without more information (which can only be available after it is provided by these other agencies), it is apparent that SEBI is unable to make out a case for seeking information. SEBI has stated that it is now working on initiating a process of seeking amendments to the IOSCO MMOU in order to get better inputs from overseas regulators in the future. The committee made three observations: n FPIs in question have made declarations of the beneficial owner by identifying the natural persons controlling their decisions for purposes of the PMLA. This is the declaration that comports to compliance with FPI regulations. n The very requirement to disclose the last natural person above every person owning any economic interest in the FPI was done away with in 2018 pursuant to a recommendation of a Working Group and the provisions on “opaque structure” were deleted on the premise that declarations under the PMLA constitute sufficient compliance. n SEBI has been probing the ownership of the 13 overseas entities since October 2020 despite the aforesaid legislative change that had been effected in 2018.
