The expert committee formed by the Supreme Court in the Adani-Hindenburg case submitted its report about ten days ago. Many reports concluded that the committee had given a ‘clean chit’ to SEBI. Stock markets rejoiced and most of the Adani stocks raced higher, with some reaching January 2023 levels. But it would be wrong to conclude that the committee headed by Justice AM Sapre and comprising OP Bhatt, Justice JP Devadhar, KV Kamath, Nandan Nilenkani and Somashekhar Sundaresan have absolved the Adani group and SEBI from all the allegations.

The committee did not find a link between the Adani-Hindenburg episode and stock market volatility and it did not find any circular trading or blatant price manipulation. But while assessing regulatory failure, the report points out that the regulator had made significant changes to its FPI regulations in 2018 which resulted in foreign investors not disclosing their ultimate beneficiary. However, this serious lapse is stated in such soft tones that it appears as if this is not important.

That is however far from the truth. Instances of round-tripping through the stock market and using related entities in offshore tax havens to manipulate stock prices in domestic markets are rampant in the Indian stock market and many large corporate houses including the ADAG group have been investigated and found guilty by the regulator on these counts.

The changes to FPI regulations done in 2018 facilitated such money-laundering transactions and the expert committee should have been more categorical about the seriousness of this regulatory move and questioned the motive behind it.

The committee’s remit

The remit of the expert committee was: (a) to assess the factors leading to volatility in the Adani stock prices; (b) give recommendations regarding investor awareness; (c) to judge if there had been any regulatory failure in dealing with the complaints against the Adani group; and (d) suggest measure to strengthen statutory and regulatory framework.

The committee cannot be faulted in the first, second and fourth mandates. It is difficult to establish a link between an event and stock price volatility when market prices are so dynamic and influenced by multiple domestic as well as global factors. The committee has, rightly so, left the remit of creating investor awareness to SEBI since the regulator has been doing a lot of work in this sphere, of late.

The regulatory changes suggested by the committee including creation of a financial redress agency, having multi-agency committees to investigate complex cases, establishing a process for recovering unclaimed private property of deceased persons, ring-fencing the quasi-judicial arm of SEBI from the executive arm are also welcome.

It is only in the third remit — establishing regulatory lapses in the Adani complaint — that the expert committee has soft-pedalled. This remit was assessed on three aspects — whether the stocks in the group had violated minimum public shareholding requirement, if there was non-disclosure of related-party transactions and whether there was any manipulation of stock prices. All three aspects are linked to entities belonging to the Adani group located overseas.

Where it soft-pedalled

The Hindenburg report has alleged that the 13 overseas entities including 12 foreign portfolio investors who were part of the public shareholders in the Adani group were owned by Gautam Adani or his close family members and that the public holding of many of the listed Adani stocks would decline below the minimum 25 per cent threshold if these entities were included in the promoter group. It should be quite simple for SEBI to verify the ownership of FPIs investing in India. But, the problem is that SEBI has, over the years, buckled under pressure from interested parties and significantly diluted the regulation regarding disclosure of beneficial owners of foreign portfolio investors.

The FPI regulations of 2014 required the natural person who was the ultimate beneficial owner of the FPI to be disclosed. These rules were to be in line with the declaration of ‘beneficial owner’ under the PMLA (Prevention of Money Laundering Act). In 2018, SEBI tried to tighten the FPI disclosure regime and bar NRIs and other overseas citizens of India from owning FPI entities and investing their money through these structures. But there was an uproar from large FPIs at that time, with many threatening to pull money out of India. SEBI gave in and removed the requirement to disclose the natural person who was the last beneficial owner of an FPI.

Besides this, the expert committee report points out that, “the provision on opaque structure were deleted on the premise that the declarations under PMLA constitute sufficient compliance.” This means SEBI allowed FPIs with complex, multi-layered structures which hid the ultimate beneficiary, to continue to invest in to India.

With these dissipated powers, SEBI began investigating the ownership of 13 overseas entities investing into Adani companies since October 2020. It is not surprising that the regulator was unsuccessful.

The committee should have used a sterner tone while pointing out this regulatory change, which was clearly unfavourable to India and told SEBI to avoid such back-tracking to favour influential investors. Instead it notes that SEBI was following the amended regulations and hence is not at fault.

How to find closure

SEBI was initially given time until May 2, to complete its investigations into the Adani issue. Towards the end of April, it asked for extension of the deadline by six months citing complexities in investigations. The Supreme Court has, however, allowed SEBI time until August 14 to complete its investigations and submit a report.

The immediate need is for the regulator to obtain information regarding the beneficial owners of the FPIs investing into the Adani group. Media reports suggest that the regulator has already begun sending mails to FPIs to disclose their owners by September.

SEBI’s discussion paper released on Wednesday formalises the process by proposing that all FPIs other than large banks, multilateral agencies or institutional investors and meeting certain other criteria need to disclose granular details of their ownership and that the regulator will use the ‘look through’ principle to establish ownership when the shareholding is below the minimum threshold to determine ownership. SEBI will have to ask for shareholding records for the last one year as it is possible that some shares could have been transferred to unrelated entities. Once the information is obtained, SEBI needs to take enforcement action speedily to send a strong message to other corporates indulging in similar activities and to regain credibility.

The expert committee has soft-pedalled in the third remit -- establishing regulatory lapses in the Adani complaint.