The Securities and Exchange Board of India (Sebi) told the Supreme Court on Monday that the change in rules in 2019 on how offshore funds report their ownership did not make it tougher to identify their beneficiaries. In effect, this means that the challenges it was facing in getting the details about the economic interest holders in the Adani Group companies was not because of the repeal of the rules.
Sebi’s observations are at variance with the Expert Committee report in the Adani-Hindenburg matter. The committee had said the change in 2019 rules made it difficult for Sebi to identify beneficiaries of offshore funds which allegedly invested in the companies of the Adani Group
“The issue primarily arose from the existence of thresholds for determination of beneficial owners. In fact, the thresholds were only lowered (made tighter) between 2014 and 2019,” said the affidavit.
Sebi added that despite these guidelines, challenges remained in the identification of those with economic interest in some foreign portfolio investments (FPIs), as there was a possibility that someone could hold a significant aggregate economic interest in the FPIs via different investing entities, each of which were individually below the threshold for identification as a BO.
In addition, in some cases, entities having economic interest in an FPI were in jurisdictions where the equivalent of Prevention of Money Laundering Act or PMLA regulations required BO identification only on the basis of control or ownership, leaving ambiguity regarding entities that have economic interest but no control.
In such cases, the investment manager/trustee acting through arrangements such as voting shares/management shares, was then identified as the BO of the FPI.
“Consequently, while in compliance with the regulations, the actual investing constituents with economic interest may not be identified as BOs of the FPI. This issue is further accentuated if holdings of such investors are spread through multiple FPIs,” the affidavit added.
FATF has also identified the same as a global challenge.
Shares of Adani Enterprises, Adani Ports & SEZ and Adani Green Energy cut gains while others such as Adani Power, Adani Total Gas, Adani Transmission and Adani Wilmar slipped into the red after the news about the market regulator’s affidavit came to light. After 2.30 pm, all Adani stocks started showing a declining trend.
In Monday’s filing, it also upheld the 2019 reporting rule changes for offshore funds stating they did not hinder the identification efforts of BOs.
The Supreme Court-appointed ‘expert’ committee had identified Sebi’s dilution of rules as an obstacle to identifying the economic beneficiaries of key offshore funds that had large investments in Adani Group companies.
Sebi defended its position by saying that retaining provisions of “opaque structures” would be redundant since all FPIs are mandated to declare BO or senior managing official at a minimum. Also, investors with more than 25% holding for companies and 15% for trusts, firms with an FPI have to be disclosed as a BO.
The market regulator also showcased its latest changes in the guidelines on June 28, 2023, in which the board has approved the proposal for additional granular disclosures to the last investor from specified types of FPls that either hold more than 50% of their AUM in a single corporate group, or have a total AUM of over `25,000 crore, subject to certain exemptions.
This is expected to impact around 5% of FPIs currently operating in India.
Sebi also differed with the panel’s observation that stocks will re-price if the markets feel actions taken in the past by the company were not desirable, saying even if the market may re-price the stocks of the company based on the past transactions, “there is no bar on Sebi to examine any securities laws violations because re-pricing of the stock has happened”. It also indicated it does not agree with the expert committee’s views and action will be taken if any violation is found/established.
In addition, it opposed the expert committee’s recommendation that a firm timeline for the regulator to complete its investigation must be “embedded into the law”, saying prescribing such limits “may compromise the quality of investigation”, create constraints and increase litigation.