The Supreme Court-appointed Justice Sapre committee had stated the market regulator had “drawn a blank” in its investigation into the Hindenburg allegations towards the Adani Group. File.
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The Securities and Exchange Board of India (SEBI) clarified in the Supreme Court on July 10 that “challenges” introduced by it earlier than the six-member Justice A.M. Sapre professional committee in the Hindenburg-Adani allegations case didn’t 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 stated the market regulator had “drawn a blank” in its investigation into the Hindenburg allegations towards the Adani Group. The committee had stated the SEBI was in a “chicken-and-egg situation” in its investigation into the “ownership” of 13 abroad entities, together with 12 FPIs.
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The market regulator contended that the challenge primarily arose from the existence of thresholds for the dedication of useful homeowners (BO) of these FPIs. In addition, the SEBI stated, the core drawback lay in the proven fact that there had by no means been any requirement to disclose the final 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, defined in a 46-page report filed by M/s Ok.J. John and Co.
The market regulator stated there was additionally “ambiguity” relating to entities with economic interest however no ostensible management in an FPI. Even the Prevention of Money Laundering Act (PMLA) required BO identification solely on the foundation of management or possession.
“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.
SEBI stated even the Financial Action Task Force, the world 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 worldwide 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 Rs. 25,000 crore, subject to certain exemptions,” the report knowledgeable.
SEBI differed with the conclusion of the Justice Sapre committee that the market regulator had hit a wall due to amendments made in 2018 in the FPI Regulations of 2014. “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 report had noticed. It had stated for the SEBI to put to relaxation its suspicions in the Adani-Hindenburg case, its investigation would require details about the “ultimate economic ownership”, and never simply the “beneficial owners”, of the 13 abroad entities.
“In 2018, since upfront BO was made mandatory for all FPI, the question of permitting such structures to register as FPI by undertaking to provide BO later was rendered redundant… Thus, across the changes in 2018 and 2019 FPI Regulations, the framework around FPI disclosures were continuously tightened… This strengthening rendered the concept of ‘opaque structures’ (as defined under FPI 2014 Regulations) redundant, since upfront compliance with disclosure as per PMLA was now mandated for all FPIs irrespective of structure (the only exception being government and government-related entities),” the SEBI report stated.
SEBI objected to the prescription of timelines for initiation of its investigation and proceedings. The resolution of the Board to appoint an investigating authority was depending on many components, together with when the alleged violation was noticed or got here to the data of SEBI, evaluation of the data and materials accessible on report, and so forth.
The market regulator nonetheless stated that securities legal guidelines’ violations have been “economic offences having a direct bearing on the economy of the country”.
