For Sebi, the probe into the Adani Group is a chicken-and-egg situation
The Securities and Exchange Board of India (Sebi) suspects some alleged wrongdoings on the part of some FPIs holding shares in Adani Group companies but they appear compliant with all the required regulations.
- May 19, 2023,
- Updated May 19, 2023 6:04 PM IST
Capital markets regulator the Securities and Exchange Board of India (Sebi) is caught in a tricky situation in its ongoing probe into the allegations raised against the Adani Group companies especially those related to foreign investors having links to the promoters of the diversified conglomerate.
The report of the expert committee appointed by the Supreme Court has revealed that while the watchdog suspected 13 overseas entities of having alleged links with the promoters of Adani Group, it failed to gather any concrete evidence from regulators in other jurisdictions.
Moreover, the suspected entities appear to be compliant with all the requisite regulations and hence it has led to a chicken-and-egg scenario even as the Hindenburg report has reinforced the suspicions of the regulatory body.
“Sebi's contention is that it needs information from these other agencies to be able to demonstrate a link to a potential violation. Without such information Sebi is unable to satisfy itself that its suspicion that has been aroused can be put to rest. The securities markets regulator suspects wrongdoing but also finds compliance with various stipulations in attendant regulations. Therefore, the record reveals a chicken-and-egg situation,” stated the report of the SC-appointed committee.
“However, the publication of the Hindenburg Report has reinforced Sebi's suspicion that perhaps there is something amiss and it desires to probe this further and is seeking time,” it added.
This assumes significance as Sebi regulations stipulate that at least 25 per cent of the ownership should be with public shareholders. In other words, promoters cannot hold more than 75 per cent stake in a listed entity, subject to certain other conditions as well.
One of the main allegations in the Hindenburg report was that few foreign portfolio investors or FPIs that own shares in Adani Group are allegedly linked to promoters of the business house.
If that is the case, then the stake held by such FPIs cannot be included in the public shareholding and the company would be in violation of the minimum public shareholding norms.
But submissions made by Sebi to the expert committee show that while it has been trying to ascertain the ultimate beneficial owners of the suspected FPIs, its probe has hit a roadblock as it is unable to get information from regulators in countries like Cayman Islands, Malta, British Virgin Islands and Bermuda among other places.
More importantly, the information that the suspected FPIs have provided to Sebi are in compliance with the existing regulatory framework. In other words, they have not violated the letter of the law.
Incidentally, the SC-appointed expert committee has also highlighted the fact that the laws of the land have been structured in such a manner that such scenarios would emerge in future as well.
“It is noteworthy that Sebi, in its legislative capacity, did away with the prohibition against any FPI having an ‘opaque structure’ on the premise that declarations of the beneficial owner flows from Rule 9 of the PMLA Rules and that such a stipulation is sufficient for its regulatory purposes. Such compliance having been affected by the FPIs, coupled with the repeal of the provisions on ‘opaque structure’, the chicken-and-egg situation of hoping to get evidence, can become a perpetual one,” stated the report.
Therefore, it appears that the legislative policy stance of Sebi on the ownership structure of FPIs has moved in one direction while the enforcement by Sebi is moving in the opposite direction, it added.
Watch: How Adani Group listed companies' net debt has ballooned in last 5 years
Capital markets regulator the Securities and Exchange Board of India (Sebi) is caught in a tricky situation in its ongoing probe into the allegations raised against the Adani Group companies especially those related to foreign investors having links to the promoters of the diversified conglomerate.
The report of the expert committee appointed by the Supreme Court has revealed that while the watchdog suspected 13 overseas entities of having alleged links with the promoters of Adani Group, it failed to gather any concrete evidence from regulators in other jurisdictions.
Moreover, the suspected entities appear to be compliant with all the requisite regulations and hence it has led to a chicken-and-egg scenario even as the Hindenburg report has reinforced the suspicions of the regulatory body.
“Sebi's contention is that it needs information from these other agencies to be able to demonstrate a link to a potential violation. Without such information Sebi is unable to satisfy itself that its suspicion that has been aroused can be put to rest. The securities markets regulator suspects wrongdoing but also finds compliance with various stipulations in attendant regulations. Therefore, the record reveals a chicken-and-egg situation,” stated the report of the SC-appointed committee.
“However, the publication of the Hindenburg Report has reinforced Sebi's suspicion that perhaps there is something amiss and it desires to probe this further and is seeking time,” it added.
This assumes significance as Sebi regulations stipulate that at least 25 per cent of the ownership should be with public shareholders. In other words, promoters cannot hold more than 75 per cent stake in a listed entity, subject to certain other conditions as well.
One of the main allegations in the Hindenburg report was that few foreign portfolio investors or FPIs that own shares in Adani Group are allegedly linked to promoters of the business house.
If that is the case, then the stake held by such FPIs cannot be included in the public shareholding and the company would be in violation of the minimum public shareholding norms.
But submissions made by Sebi to the expert committee show that while it has been trying to ascertain the ultimate beneficial owners of the suspected FPIs, its probe has hit a roadblock as it is unable to get information from regulators in countries like Cayman Islands, Malta, British Virgin Islands and Bermuda among other places.
More importantly, the information that the suspected FPIs have provided to Sebi are in compliance with the existing regulatory framework. In other words, they have not violated the letter of the law.
Incidentally, the SC-appointed expert committee has also highlighted the fact that the laws of the land have been structured in such a manner that such scenarios would emerge in future as well.
“It is noteworthy that Sebi, in its legislative capacity, did away with the prohibition against any FPI having an ‘opaque structure’ on the premise that declarations of the beneficial owner flows from Rule 9 of the PMLA Rules and that such a stipulation is sufficient for its regulatory purposes. Such compliance having been affected by the FPIs, coupled with the repeal of the provisions on ‘opaque structure’, the chicken-and-egg situation of hoping to get evidence, can become a perpetual one,” stated the report.
Therefore, it appears that the legislative policy stance of Sebi on the ownership structure of FPIs has moved in one direction while the enforcement by Sebi is moving in the opposite direction, it added.
Watch: How Adani Group listed companies' net debt has ballooned in last 5 years