After SC panel’s report in Adani-Hindenburg, Sebi seeks to tighten FPI norms | Latest News India - Hindustan Times
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After Supreme Court panel’s report in Adani-Hindenburg case, Sebi seeks to tighten FPI norms

Jul 11, 2023 03:47 AM IST

On May 17, the apex court gave Sebi time till August 14 to complete its probe into the allegations thrown up by the Hindenburg report released in January.

The Securities and Exchange Board of India (Sebi) informed the Supreme Court on Monday that its board has approved a proposal mandating granular disclosures for certain categories of foreign portfolio investors (FPIs), more than a month after a court-appointed expert committee to probe the Adani-Hindenburg episode raised certain red flags regarding the current FPI regulations.

On May 17, the apex court gave Sebi time till August 14 to complete its probe into the allegations thrown up by the Hindenburg report released in January (REUTERS)
On May 17, the apex court gave Sebi time till August 14 to complete its probe into the allegations thrown up by the Hindenburg report released in January (REUTERS)

Read here: SEBI’s new disclosure norms for FPIs ‘a public admission of guilt’: Congress

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Proposing to make its norms regarding identifying holders of economic interest in FPIs more stringent, the market regulator apprised the top court of the decision taken on June 28, which it said “for the first time” would mandate granular disclosures to the last mile (without any thresholds) by certain categories of FPIs.

“The Sebi Board, in meeting dated June 28, 2023, 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 Assets Under Management (AUM) in a single corporate group, or have a total AUM of over 25,000 crore, subject to certain exemptions,” the report stated.

At the same time, Sebi differed with the justice AM Sapre-led committee that the regulator had hit a wall because of the deletion of a requirement under the 2014 FPI regulations to ensure FPIs do not have “opaque structure”.

In its report submitted before a bench led by Chief Justice of India Dhananjaya Y Chandrachud in May, the committee had noted that the Sebi investigation initiated in October 2020 to look into possible violation of the minimum public shareholding (MPS) norms by Adani companies using 13 overseas entities that the regulator suspected “could be fronts for the promoters” of some Adani companies has “drawn a blank so far”.

The panel had in its report highlighted that 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 is not known. However, it added that Sebi, in its legislative capacity, did away with the prohibition against any FPI having an “opaque structure” in 2018 and 2019.

Read here: Gautam Adani lost over 4 trillion in past six months of 2023: Report

On May 17, the apex court gave Sebi time till August 14 to complete its probe into the allegations thrown up by the Hindenburg report released in January, alleging “brazen accounting fraud” and “stock manipulation” by the Gautam Adani-led group. Though the conglomerate rejected the report as “unresearched” and “maliciously mischievous”, it triggered a rout of Adani Group stocks, which lost over $140 billion in market capitalisation in days and forced the cancellation of a 20,000 crore share sale in the group’s flagship.

Bringing on record its disagreement with the expert committee’s conclusions, Sebi said the legislative amendments in 2018 and 2019 in fact sought to stiffen the FPI regulations by mandating upfront disclosure of beneficial owners (BO) in all categories of FPIs except government entities. Subsequently, 2019 regulations deleted the reference to “opaque structure” since the requirement of upfront BO disclosure was now compulsory while the 2014 regulations did not mandate it, as per Sebi’s report.

“Thus, the changes made in FPI Regulations in 2018 and 2019 effectively tightened the disclosure requirement related to BOs...In essence, the ability of Sebi to seek additional details as required to ensure compliance with extant regulations existed both during the 2014 regime and continue to exist currently under the 2019 regulations. There has been no relaxation of any kind on this front either,” the report claimed.

Sebi sought to clarify that the challenges presented by it before the expert committee relating to the opaque structure of certain overseas entity did not emanate due to the deletion of the 2014 provision relating to FPIs, but from the existence of thresholds for the determination of BOs of these FPIs.

“Since granular details of all underlying investors with ownership, economic, or control interest in entities below the threshold was never required to be made available to the Designated Depository Participants/Custodian of Securities, there was a possibility that the same natural person could hold a significant aggregate economic interest in the FPI via different investing entities, each of which were individually below the threshold for identification as a BO,” said Sebi, represented in the court through advocate Pratap Venugopal.

Pointing out that most of the pertinent laws have norms regarding the ownership and control but leave out entities having economic interests without ostensible control, Sebi said even the Financial Action Task Force (FATF) -- the international money laundering and terrorist financing watchdog – has identified the nebulousness over the “last natural person above every person owning any economic interest in an FPI” as a global challenge.

In its 46-page application, Sebi also objected to the committee’s prescription of timelines for initiation of investigation and proceedings. “Prescribing timelines for initiation of investigation and proceedings may not be appropriate. The process of forming a prima facie opinion before initiating investigation depends on many factors. Given the nature, scope and complexity of cases, what constitutes ‘reasonable time’ to inquiry and complete proceedings would depend on each case,” said the regulator, adding that fixing a timeline may also compromise the quality of investigation and increase litigation.

As regards to some other recommendations made by the expert committee in its May report on Sebi’s enforcement policy, settlement policy, judicial discipline and surveillance and market administration measures, the regulator has largely maintained that it already has appropriate systems in place.

The six-member panel, led by retired Supreme Court judge AM Sapre, was set up by the court on March 2 to look into regulatory failure by Sebi and alleged breach of laws by the Adani Group. In its report, the committee said the allegations of stock price manipulations or violation of MPS norms by Adani group companies cannot be proved at this stage. Indian stock market laws require a listed company to have a minimum public shareholding of 25%, with the objective to keep a free float available for price discovery of stocks.

The panel, which also found no regulatory failure on the part of Sebi, made a distinction between “proved”, “disproved” and “not proved”. “Even the fundamental rules of evidence would require a conclusion of whether an allegation is ‘proved’, ‘disproved’ or ‘not proved’. At this stage, the factual matrix appears to place the matter in the realm of ‘not proved’ — the regulator has not been able to prove that its suspicion can be translated into a firm case of prosecuting an allegation of violation,” stated its May 6 report.

Read here: Securities Appellate Tribunal refuses to stay SEBI order against Subhash Chandra, Punit Goenka

To be sure, the 173-page committee report carefully added a caveat that its conclusions are based on the “prima facie position” of Sebi, which is investigating Adani companies following the US short-seller Hindenburg Reseach’s report released on 24 January.

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