Companies
Adani-Hindenburg saga: Sebi issues show-cause notices to FPIs
Summary
- The notices charge the investors with failing to maintain and disclose information about their ultimate beneficiaries.
New Delhi: The stock market regulator has issued show-cause notices to about a dozen foreign investors that owned big chunks of Adani group companies as it seeks to lift the veil on their true ownership, two people aware of the matter said. The notices charge the investors with failing to maintain and disclose information about their ultimate beneficiaries.
The Securities and Exchange Board of India’s (Sebi) notices to the foreign portfolio investors (FPIs) follow its investigations after US short-seller Hindenburg Research highlighted them in a damning report released in January. The report said several of these funds had the bulk of their investment portfolio concentrated in Adani group companies. Following the report, most of these funds either exited or reduced their stakes in Adani group companies. The Adani group has rejected the allegations in the Hindenburg report.
“The notices mostly pertain to beneficial ownership information of the funds, which was in question post-Hindenburg allegations, and the funds are in the process of responding to these notices," one of the two people cited above said on the condition of anonymity.
The market regulator last month informed the apex court that most of its investigations in the Adani-Hindenburg matter have concluded and the regulator will not seek additional time for the same. The Supreme Court has reserved its order in the matter.
A show-cause notice is issued by Sebi once its investigation team concludes the probe. The parties are required to respond to the charges mentioned in the notice; after this, the case goes to adjudication in which Sebi passes orders.
An email sent to Sebi and Adani group remained unanswered.
Maintaining beneficial ownership data was not mandatory at the time the FPIs made these investments, the second person said.
“Sebi introduced the beneficial ownership disclosure norms in 2019 under the revised FPI rules. However, the transactions being probed by Sebi pertain to a period prior to 2019 when there was no regulatory requirement to keep the beneficial owner data with them. Also, these funds designated their senior fund managers as beneficial owners, which was permitted under applicable rules in countries including Mauritius," this person said.
Earlier, fund managers were required to provide an undertaking to Sebi confirming they have obtained beneficial ownership information and will provide the same to Sebi if required. After 2019, it became mandatory for all FPIs to provide beneficial ownership information.
Sebi has struggled to discover the beneficial ownership of offshore funds mentioned in the Hindenburg report. According to a report submitted by the Supreme Court appointed committee dated 6 May, Sebi explored various avenues, but with little success.
“Various avenues have been pursued, including Directorate of Enforcement, Central Board of Direct Taxes and various securities market regulators in seven jurisdictions where the 42 contributories are situated. Sebi has drawn a blank," the panel report said.
The problem seems to be the complex layering of these funds across multiple jurisdictions, making it very difficult to ascertain the actual beneficial owners, said the people cited above.
Also, different countries have different definitions of beneficial ownership. In India, beneficial ownership generally means a person or an entity who owns more than 10% stake in a company or a fund. However, in certain global jurisdictions, funds are allowed to designate their fund manager or their chief executive officer (CEO) as beneficial owners. Such employees may or may not own any equity in the company or fund.
On 24 November, the market regulator told the Supreme Court that it is investigating 24 different cases pertaining to the Adani-Hindenburg saga. Of these, it has completed investigation in 22 cases, while in the other two, the regulator is awaiting information from foreign regulators.
Adani group stocks crashed after the Hindenburg report in January, and triggered a batch of public interest litigations in the Supreme Court. On 2 March, the Supreme Court constituted a committee headed by former Supreme Court judge Justice A.M. Sapre to supervise and advise the court on the Sebi probe.
The probe was initially supposed to be concluded in six months. However, in May, Sebi had sought more time from the apex court to conclude its investigation of the matter.
