A six-member expert committee — constituted by the Supreme Court in the Hindenburg-Adani allegations case and headed by former Supreme Court judge, Justice A.M. Sapre — said that the Securities Exchange Board of India (SEBI) has “drawn a blank” and is in a “chicken-and-egg situation” in its investigation into the “ownership” of 13 overseas entities, including 12 Foreign Portfolio Investors (FPIs).
The 178-page report said, “SEBI has found 42 contributories to the assets under management of the 13 overseas entities. Various avenues have been pursued - including ED, CBDT and various market regulators in the seven jurisdictions where the contributories are situated. SEBI has drawn a blank”.
The foundation of SEBI’s suspicion that led to investigations into the overseas entities’ ownership is that they have “opaque structures”, because the chain of ownership of the 13 entities was not clear.
The committee said that SEBI was investigating the ownership of the 13 entities since October 2020, with regard to allegations in the Hindenburg report about minimum public shareholding.
“The key issue is whether as the law stands, one could draw a conclusion that the FPIs are fronts for the promoters of the Adani Group... If such an outcome in the investigation would come about, it would mean that the promoters would not be compliant with the minimum public shareholding requirement,” the report pointed out.
Not regulatory failure
While it emphasised the need for a “coherent enforcement policy”, the committee concluded that it would not be possible to return a finding of “regulatory failure” in compliance with stipulations governing minimum public shareholding.
The Justice Sapre committee said that the conundrum faced by the market regulator was due to a change in the legislative policy of SEBI under the FPI Regulations 2014 on the basis of a recommendation by a Working Group in 2018. As the law stands, FPIs need to only declare their “beneficial owner”, and not the “last natural person above every person owning economic interest in the FPI”, in conformation with the anti-money laundering law.
Tracking economic owners
“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 observed.
It said that for the SEBI to put to rest its suspicions, its investigation would require information about the “ultimate economic ownership” — and not just the “beneficial owners” — of the 13 overseas entities under its lens.
The committee said that it was this “dichotomy” between the law as it stood post-2018 on the one hand, and what SEBI wants on the other, that has led the market regulator to draw a blank despite its best efforts.
“The securities market regulator suspects wrongdoing, but also finds compliance with various stipulations in attendant regulations. Therefore, the records reveal a chicken-and-egg situation,” the committee noted.
No abusive trading pattern
On the issue of price manipulations, the report said that in the case of Adani stocks, 849 alerts were generated by the trading system.
These alerts were considered by the stock exchanges in four reports to SEBI. Two of these reports were well before the Hindenburg report and two were after January 24, 2023.
However, no pattern of “artificial trading or wash trades” were found. “In a nutshell, there was no coherent pattern of abusive trading that has come to light,” the report informed the court. Here too, the committee said that it would not be possible to conclude there was any regulatory failure on SEBI’s part, as the regulator had an “active and working surveillance framework to take notice of high price and volume movements”.
The report agreed that there was “certainly high volatility in the Adani stocks after publication of the Hindenburg report”.
“The market’s expectations from, and confidence in the Adani Group was shaken by the allegations in the Hindenbrug report, which was inferential. Although the report was based on publicly available information, it questioned the foundational premises on which the market had proved Adani stocks,” the committee report said.
It noted that mitigating measures from the Adani Group — such as paring down the debt secured by encumbrances on their shareholding, and the infusion of fresh funds into Adani stocks by way of the investment of nearly $2 billion by a private equity investor — have built confidence in the stocks.
“Market had repriced and reassessed the Adani stocks… they are stable at the newly repriced level,” it said.