File picture of the Securities and Exchange Board of India (SEBI) headquarters in Mumbai
| Photo Credit: Reuters
The Supreme Court on July 11 requested the Securities and Exchange Board of India (SEBI) to clarify why the law was tweaked in 2018 to junk essential provisions which prohibited opacity in the ownership construction of Foreign Portfolio Investors (FPI).
The court docket’s concern was in gentle of a discovering in the Justice A.M. Sapre professional committee report that the SEBI investigation into the allegations made by U.S.-based Hindenburg Research towards the Adani Group had hit a wall due to 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 abroad entities, together with the 12 FPIs talked about in the Hindenburg report. The professional committee has mentioned the SEBI itself suspected these 13 entities of getting “opaque structures” as a result of their chain of ownership was not clear.
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“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 mentioned in May.
It mentioned for the SEBI to put to relaxation its suspicions, its investigation would require details about the “ultimate economic ownership”, and never simply the “beneficial owners”, of the 13 abroad entities below 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 mentioned.
Advocate Prashant Bhushan, on the petitioners’ facet, nonetheless, mentioned the professional 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 informed Mr. Mehta.
The SEBI, in a 46-page report filed on July 10, nonetheless, disagreed with the professional committee’s conclusions.
It maintained that the important “challenge” to the present investigation didn’t emanate from the repeal of the “opaque structure” provisions from the Foreign Portfolio Investors (FPI) Regulations.
Instead, the market regulator mentioned the issue lay in the existence of thresholds for dedication of useful house owners (BO) of those FPIs. In addition, the SEBI mentioned there had by no means been any requirement to disclose the “last natural person above every person” proudly owning any financial curiosity or, in different phrases, the final word proprietor, 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, additionally represented by advocate Pratap Venugopal, has mentioned in its report.
The market regulator mentioned there was additionally “ambiguity” relating to entities with financial curiosity however no ostensible management in an FPI.
SEBI mentioned even the Financial Action Task Force, the worldwide cash laundering and terrorist financing watchdog, had recognized the nebulousness over the “last natural person above every person owning any economic interest in an FPI” as a world problem.
“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 knowledgeable.
