Market regulator Securities and Exchange Board of India finds itself in a tight corner on the issue of uncovering the final beneficial ownership of foreign portfolio investors. It is attempting a course correction as a recent consultation paper on this issue shows.

This situation is largely a fallout of Hindenburg Research’s report on the Adani group which alleged that many of the Adani companies were not compliant with SEBI’s minimum public shareholding norms; the 13 overseas entities including 12 FPIs investing in the Adani stocks were ultimately owned by Adani and his close associates. SEBI has been investigating these overseas investors in the Adani group since 2020, but has not been able to establish the true ownership since “the very requirement to disclose the last natural person above every person owning any economic interest (in a foreign portfolio investor) was done away with in 2018 pursuant to a recommendation of a working group,” as the report of the expert committee appointed by the Supreme Court noted. SEBI is trying to make amends and obtain the required information to not only determine minimum public shareholding violation in the Adani case, but in other Indian companies too. The paper says that this information will help identify investors from countries with which India shares its land border. Such investment has to be cleared by the government, whereas the regulator seems to feel that they could be holding stakes in Indian companies through the FPI route.

The third unstated objective of the consultation paper could be to bolster its regulations before the upcoming FATF review. With stock markets being a popular route for money-laundering, the government may want to tighten regulations speedily on this front. The consultation paper shows SEBI’s resolve to drill down to the natural persons who ultimately own high-risk FPIs; defined as non-government and non-institutional investors with concentrated exposure to a single group or large assets under management. Additional granular information regarding all the owners in these high-risk FPIs can give SEBI enough ammunition to arrive at the truth. FPIs had been concealing the ultimate owner by maintaining their shareholding below the regulatory threshold or giving shares to an investment manager and naming him as the beneficial owner. SEBI is proposing to plug all the loopholes by stating that it will use the ‘look through’ principle to identify the ultimate beneficiary; all existing thresholds for identifying ownership will be overlooked and the PMLA laws and secrecy shields available in the tax havens where FPIs reside will not apply.

SEBI should expedite the enforcement of these rules at the earliest. There will be resistance from foreign portfolio investors, there could be a market sell-off too. But SEBI should not backtrack. As the paper points out, the risky category FPIs hold only 1 per cent of the Indian market capitalisation. Even if they pull out their money, it should not matter in the long run.