FPI identification pursuit a 'journey without destination': Expert SC panel

Sebi has drawn a blank while investigating foreign hand in Adani firms, says top court-appointed committee report

The Supreme Court (SC)-constituted expert panel has noted that the Securities and Exchange of India (Sebi) has ‘hit a wall’ in establishing the ultimate beneficial owners (UBOs) behind the 13 foreign portfolio investors (FPIs) holding stakes in the listed companies of the Adani group.

In its investigation into possible violations of minimum public shareholding norms, Sebi has found 42 contributors spread across seven jurisdictions behind the 13 FPIs holding considerable stakes in Adani group firms.

The market regulator has been pursuing various avenues to ascertain the ownership pattern of these 42 contributors with assistance from domestic enforcement agencies and overseas regulators.

However, Sebi has drawn a blank from regulators in Cayman Islands, Malta, Curaçao, British Virgin Islands and Bermuda. The market regulator now is in the process of seeking assistance from the international body of regulators, IOSCO, through amendments in multilateral memorandums of understandings, reveals the 173-page report submitted to the apex court.

The committee headed by Justice A M Sapre observed that even if Sebi were able to get behind the contributing participating shareholders of the FPIs, these contributors could, in turn, be bodies of other corporates, with funds from multiple classes of shareholders, thereby making it difficult to establish the real individuals behind them.

In the report submitted to the SC bench, the panel has observed that though the exercise to look for UBOs of FPIs invested in Adani group companies could be a “voluminous one but potentially a journey without a destination”.

The 13 overseas entities include 12 registered FPIs while one is a financial institution. As of March 2020, the shareholding of these 13 entities in Adani Enterprises, Adani Transmission, Adani Total Gas, Adani Green Energy, and Adani Power stood at 15.56 per cent, 18.05 per cent, 17.91 per cent, 20.39 per cent, and 14.11 per cent, respectively. Often these FPIs have come under the eye of a storm, with some alleging they are front entities for the Adani promoters.

Sebi has been attempting to find out contributors who have an economic interest in these FPIs even for the publication of the Hindenburg report on January 24. “This is where it has hit a wall”, the committee observes.

Earlier in 2018, Sebi had done away with prohibition against FPIs with ‘opaque structures’ on the premise that declarations of beneficial owner flows under PMLA rules are sufficient for the regulatory purposes.

The 13 entities under investigation have identified beneficial owners for compliance of PMLA rules but the ownership pattern of the 42 investors to these entities is being sought.

The committee observes that the repeal of the provisions on ‘opaque structure’ has led to a ‘chicken-and-egg’ situation and its search for evidence of connection of FPI’s natural owners could become a perpetual one.

The Enforcement Directorate (ED) was referred to by Sebi in the investigation as the issue of tracing fund flows under money laundering falls under its purview. However, as Sebi has not filed any case of offence under PMLA, ED cannot invoke the provisions of PMLA.  

With no evidence on record, the panel stated, “The inversion of the process of proving a charge, leaves the matter in the realm of suspicion. It is trite law that suspicion, however strong, cannot replace proof.”

“It appears that the legislative policy stance of Sebi on the ownership structure of FPIs has moved in one direction while the enforcement by Sebi is moving in the opposite direction,” noted the report.

The six-member expert committee has noted that it is open to Sebi to amend the FPI regulations to stipulate the level of economic interest declared by the FPIs on who owns any stipulated proportion.