Adani-Hindenburg case: Lack of requirement to disclose ‘last natural person above every person’ owning economic interest in FPIs is the challenge, SEBI to SC

SEBI clarified in the Supreme Court that “challenges” presented by it before the six-member Justice A.M. Sapre expert committee in the Hindenburg-Adani case primarily arose from the existence of thresholds for the determination of beneficial owners of the FPIs

The Securities and Exchange Board of India (SEBI) clarified in the Supreme Court on July 10 that “challenges” presented by it before the six-member Justice A.M. Sapre expert committee in the Hindenburg-Adani allegations case did not emanate from the repeal of the “opaque structure” provisions from the Foreign Portfolio Investors (FPI) Regulations in 2019.

The Supreme Court-appointed Justice Sapre committee, in a 173-page report in May, had said the market regulator had “drawn a blank” in its investigation into the Hindenburg allegations against the Adani Group. The committee had said the SEBI was in a “chicken-and-egg situation” in its investigation into the “ownership” of 13 overseas entities, including 12 FPIs.

Editorial | An unclean chit: On the SEBI investigation and Hindenburg Research’s allegations  

The market regulator contended that the issue primarily arose from the existence of thresholds for the determination of beneficial owners (BO) of these FPIs. In addition, the SEBI said, the core problem lay in the fact that there had never been any requirement to disclose the last natural person above every person owning any economic interest in the FPI.

“Since granular details of all underlying investors with ownership, economic, or control interest in entities below the threshold was never required to be made available to the Designated Depository Participants/Custodian of Securities, there was a possibility that the same natural person could hold a significant aggregate economic interest in the FPI via different investing entities, each of which were individually below the threshold for identification as a BO,” SEBI, represented by advocate Pratap Venugopal, explained in a 46-page report filed through M/s K.J. John and Co.

The market regulator said there was also “ambiguity” regarding entities with economic interest but no ostensible control in an FPI. Even the Prevention of Money Laundering Act (PMLA) required BO identification only on the basis of control or ownership.

“Thus, the investment manager/ trustee, etc, acting through arrangements such as voting shares/ management shares, is then identified as the B0 of the FPI. Consequently, while in compliance with the regulations, the actual investing constituents with economic interest may not be identified as B0s of the FPI. This issue is further accentuated if holdings of such investors are spread through multiple FPIs,” the SEBI highlighted.