Adani-Hindenburg case: Sebi defends 2019 rules on offshore investors

Markets regulator Sebi on Monday said changes in offshore reporting rules that it introduced in 2019 did not make it tough to identify ultimate beneficiaries of offshore funds. Sebi instead noted that across the changes in 2018 and 2019 FPI regulations, the framework around 80 FPI disclosures were continuously tightened.

To recall, the report by the Expert Committee in the Adani Hindenburg case cited the difficulties experienced by Sebi in identifying holders of economic interest partly due to the repeal, in 2019, of the 2014 provisions on 'opaque structures'.

Sebi told Supreme Court that it used the term 'opaque' to describe FPIs. Sebi clarified that this was used in the ordinary English language sense, since the FPI regulations make no specific reference to opaque structures that were related to specific legal clause that was a part of the old FPI (20 14) Regulations

"The report of the Expert Committee suggests that the difficulties experienced by Sebi in identifying holders of economic interest were at least partly because of the repeal, in 2019, of the 2014 provisions on "opaque structures". However, this was not the case," Sebi said while defending its stance.

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While the 2014 FPI Regulations mentions prohibition of opaque structures, three conditions were provided, subject to which, such structures were deemed not to be opaque. One of the condition was an undertaking to provide 80 details to Sebi, as and when as required.

In 2018, since upfront BO was made mandatory for all FPIs, the question of permitting such structures to register as FPI by, inter alia, undertaking to provide BO later was rendered redundant.

"Thus in 2019 FPI Regulations, reference of opaque structure was deleted. In essence, mandating upfront BO in 2018 tightened the 2014 FPI Regulations and in 2019, the reference to such structures was removed, to end ambiguity," Sebi said.

Sebi said across the changes in 2018 and 2019 FPI regulations, the framework around 80 FPI disclosures were continuously tightened.

This strengthening rendered the concept of opaque structures (as defined under FPI 2014 Regulations) redundant, since upfront compliance with 80 disclosure as per PMLA was now mandated for all FPIs irrespective of structure, Sebi said.

"The challenges presented before the Expert Committee in respect of getting the details about the economic interest holders, did not emanate from the repeal of the opaque structure provisions in 2019. Instead, the issue primarily arose from the existence of thresholds for determination of 80s. In fact, the thresholds were only lowered (i.e., made tighter) between 2014 and 2019. In addition, there never was any ''requirement to disclose the last natural person above every person owning any economic interest in the FPI," Sebi said.

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