Market regulator SEBI has rejected the report of the Supreme Court-appointed expert panel that the difficulties experienced in identifying the beneficial owners (BOs) of FPIs in the Adani case were partly because of the repeal of rules in 2019. In a counter affidavit filed by the market regulator, SEBI said there never was any requirement to disclose the last natural person above every person owning any economic interest in the FPI.

“The challenges presented before the Expert Committee in respect of getting the details about the economic interest holders, did not emanate from the repeal of the opaque structure provisions in 2019. Instead, the issue primarily arose from the existence of thresholds for the determination of BOs. In fact, the thresholds were only lowered (i.e., made tighter) between 2014 and 2019. In addition, there never was any ‘‘requirement to disclose the last natural person above every person owning any economic interest in the FPI,” SEBI said in its affidavit to the Supreme Court.

The expert panel was appointed by the top court to examine if there were any regulatory lapses following the Hindenburg Research allegations against the Adani Group. Hindenburg had alleged that Adani group entities may be flouting public shareholding norms by parking shares in foreign investment vehicles controlled by family members.

Beneficial owners

The SC panel report noted that although the 2018 regulation eliminated the need for foreign portfolio investors (FPIs) to disclose the final beneficiary, investigations in 2020 sought to uncover the ultimate beneficiary by scrutinising the layers involved.

SEBI has countered this saying that it has observed in some cases that entities having economic interest in an FPI are in jurisdictions where the equivalent PMLA regulations require BO identification only on the basis of control or ownership, leaving ambiguity regarding entities that have economic interest but no ostensible control.

“Thus, the investment manager/ trustee acting through arrangements such as voting shares/ management shares, is 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,” SEBI said adding that it has plugged this gap through a recent decision asking FPIs with more than 50 per cent of their total asset under management invested into a single group to disclose the actual beneficiaries.   

In its 43-page filing, SEBI has also rejected the expert committee’s recommendations on other issues including setting a firm timeline for the regulator to complete its investigation. SEBI said prescribing such limits may compromise the quality of investigation, create constraints and increase litigation