Supreme Court asks SEBI why law was tweaked to remove provisions prohibiting opacity in FPI ownership

File photo of the Securities and Exchange Board of India (SEBI) headquarters in Mumbai
| Photo Credit: Reuters

The Supreme Court on July 11 asked the Securities and Exchange Board of India (SEBI) to explain why the law was tweaked in 2018 to junk crucial provisions which prohibited opacity in the ownership structure of Foreign Portfolio Investors (FPI).

The court’s concern was in light of a finding in the Justice A.M. Sapre expert committee report that the SEBI investigation into the allegations made by U.S.-based Hindenburg Research against the Adani Group had hit a wall because of amendments made in the FPI Regulations, 2014. These amendments had put the market regulator in a “chicken-and-egg situation” in its investigation into the “ownership” of 13 overseas entities, including the 12 FPIs mentioned in the Hindenburg report. The expert committee has said the SEBI itself suspected these 13 entities of having “opaque structures” because their chain of ownership was not clear.

Also read: Explained | Decoding the expert committee report on Adani

“In 2018, the very provision dealing with ‘opaque structure’ and requiring an FPI to be able to disclose every ultimate natural person at the end of the chain of every owner of economic interest in the FPI was done away with,” the Justice Sapre panel report had said in May.

It said for the SEBI to put to rest its suspicions, its investigation would require information about the “ultimate economic ownership”, and not just the “beneficial owners”, of the 13 overseas entities under its lens.

“Then you should go into the background of these amendments… What are the circumstances under which you had changed the provisions dealing with ‘opaque structure’… “ Chief Justice Chandrachud addressed Solicitor General Tushar Mehta, appearing for the SEBI.

Mr. Mehta however insisted that the SEBI investigation “is going on at full speed”.

“Your Lordships had extended the time for completing our investigation till August 14… We are doing our best,” Mr. Mehta said.

Advocate Prashant Bhushan, on the petitioners’ side, however, said the expert committee report had pulled up SEBI for “gross regulatory failure”.

“Further, the SEBI’s change of its FPI law in 2018 is absolutely fatal to its current investigation. They have removed the very definition of ‘opaque structure’ in the FPI Regulations… SEBI cannot do anything now in its present investigation. The amendments to provisions concerning opaque structure of FPIs, its beneficial owners and related party transactions were made to prevent such frauds from being exposed,” Mr. Bhushan submitted.

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“Mr. Solicitor, we certainly would like to know why you [SEBI] made these changes. Apropos what Mr. Bhushan said, SEBI may be prevented from going into the layers of transactions because of these amendments,” Chief Justice Chandrachud told Mr. Mehta.

The SEBI, in a 46-page report filed on July 10, however, disagreed with the expert committee’s conclusions.

It maintained that the essential “challenge” to the current investigation did not emanate from the repeal of the “opaque structure” provisions from the Foreign Portfolio Investors (FPI) Regulations.

Instead, the market regulator said the difficulty lay in the existence of thresholds for determination of beneficial owners (BO) of these FPIs. In addition, the SEBI said there had never been any requirement to disclose the “last natural person above every person” owning any economic interest or, in other words, the ultimate owner, of an 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, also represented by advocate Pratap Venugopal, has said in its report.

The market regulator said there was also “ambiguity” regarding entities with economic interest but no ostensible control in an FPI.

SEBI said even the Financial Action Task Force, the global money laundering and terrorist financing watchdog, had identified the nebulousness over the “last natural person above every person owning any economic interest in an FPI” as a global challenge.

“The SEBI Board in meeting dated June 28, 2023 has approved the proposal for additional granular disclosures to the last investor from specified types of FPls that either hold more than 50% of their Assets Under Management (AUM) in a single corporate group, or have a total AUM of over ₹25,000 crore, subject to certain exemptions,” the report has informed.