It was in January last year that Hindenburg Research published the sensational report on the Adani group titled, ‘How the world’s third richest man is pulling the largest con in corporate history’. The report created immense volatility in the stock market with shares belonging to the group crashing. A slew of petitions were filed in the Supreme Court in February last year requesting the Court to examine the allegations.

The Supreme Court delivered its final judgment on the case last week, ruling that SEBI was competent enough to investigate the case and transfer of the case to SIT or CBI was not required. It asked SEBI to complete the investigations in three months and to take suitable action. The Court also ruled out revoking any amendment to the FPI rules.

The Adani-Hindenburg saga is now in the final stage. Will SEBI be able to prove that Adani companies flouted regulations? That depends on whether SEBI can establish the beneficiary owners of the FPIs which held substantial stakes in Adani companies. Given the existing laws, that appears difficult.

That brings us to the next question: Are the government, RBI and SEBI willing to tighten the FPI regulations and usher in transparency, despite foregoing a chunk of foreign capital flows, which emanates from domestic sources?

SEBI up against a wall

Immediately after the Hindenburg report was released, the Supreme Court had stated that SEBI was already ‘seized of the investigation into the Adani group’. The regulator was asked to continue its ongoing quest to examine if the Adani group had violated existing rules on minimum public shareholding, related party disclosures, insider trading and stock price manipulation.

As of January 2024, SEBI has completed investigation into 22 of the 24 issues pertaining to the case. The Supreme Court’s final ruling said that SEBI should, “complete the two pending investigations expeditiously, preferably within three months.”

The use of the word, ‘preferably’, implies that the regulator may need more than three months to close the case. This is not surprising since SEBI’s investigations into the Adani group have been going on for more than three years now.

The 22 issues in which SEBI has now completed investigations, pertain to non-disclosure of related party transactions, violation of FPI Act, takeover code and insider trading regulations, and manipulation of domestic stock prices.

The two issues where SEBI is up against a wall are: one, violation of minimum public shareholding caused by beneficial owners of FPIs in the group being family members or close associates. Two, short selling positions taken by Hindenburg in overseas market with an intention to cause volatility in the Adani group stocks.

The second issue relating to short selling in securities of Adani group in overseas exchanges is likely to be above board and SEBI may not find anything amiss here, even if it obtains the required information.

Violation of FPI regulation

Establishing ownership of the FPIs in Adani group is, however, going to be quite difficult. This is due to the gaps in FPI regulations. Despite several regulatory changes over the years, the FPI rules still allow complex multi-layered opaque structures where the natural person who is the ultimate beneficiary or owner of the funds, can remain hidden.

The FPI regulation of 2014 and the subsequent amendments in 2018 and 2019 identify the beneficial owner in an FPI based on the rules in the Prevention of Money Laundering Act. The PMLA rules identify the final owner in two ways. One, based on ‘controlling ownership interest’ which means entitlement to a certain per cent of capital or profits in the company. Two, based on control determined by the right to appoint majority of directors or controlling the management or voting decisions.

In case the natural person who owns the company cannot be determined through these rules, then the senior management official is said to be the beneficial owner.

The above rules can easily be circumvented. If the intent is to stay hidden, then the actual beneficiary is unlikely to hold any direct stake in these entities. He/she is more likely to own the share capital through an associate, whose link to the group would be hard to establish. Similarly, the actual beneficiary is not likely to be taking key management decisions or appointing board members if the entity was being used to round trip funds. Also, with many of these entities being shell or brass-plate companies with nil or meagre operations, there is no need for the ultimate beneficiary to be taking part in the operations.

SEBI had explained the difficulty it is facing in identifying the owners of the FPIs in the Adani group to the Supreme Court thus, “The ambiguity lies in beneficial ownership identification, which is based on control or ownership in some jurisdictions, potentially overlooking entities with economic interest but no apparent control. Consequently, investment managers or trustees, utilising arrangements like voting shares, may be recognised as beneficial owners, leading to a potential failure in identifying the actual investing entities with economic interest, especially when holdings are distributed across multiple FPIs.”

While it is true that Hindenburg Research and the OCCRP report have shown a link between the directors of these FPI entities and the Adani family, SEBI will have to verify these. Getting information from overseas to check these links appears difficult for the regulator.

Is there a will?

As the regulations stand now, round-tripping of domestic money through Indian stock market can be easily done.

If the regulators are serious about identifying the true owners, then the regulations need to be tightened by removing the thresholds of economic interest and control, and a look through principle needs to be applied through the multiple layers, to identify the owner. This information needs to be obtained from all FPIs, whether big or small.

That money is laundered through stock market is not news; the crackdown on p-notes in 2008 being a case in point. It is also common knowledge that foreign portfolio inflows are critical to finance the current account deficit and to keep the rupee stable. So, unless there is political and regulatory will to check this practice, these gaps will remain, and SEBI may have to keep extending its investigation in the Adani case.

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