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Securities and Exchange Board of India has told the Supreme Court that changes made in Foreign Portfolio Investors (FPI) regulations in 2018 and 2019 effectively tightened the disclosure requirement related to beneficial owners, while disagreeing with the expert committee's findings on difficulties faced to unveil the opaque structure in the companies.

The Supreme Court-appointed committee -- headed by retired judge AM Sapre probing the Adani-Hindenburg controversy -- had referred to the change in rules as one factor, which made it difficult for the Sebi to identify beneficiaries of offshore funds which allegedly invested in the companies of the Adani Group.

“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 contended, in an application presenting its view on the report of the court-appointed committee filed on July 10.  

Sebi said under FPI 2014 regulations, certain entities that undertook to provide beneficial owners (BO) details when sought, were allowed to be registered as FPIs i.e, upfront BO declaration was not a requirement. 

The market regulator said that also it may be noted that the requirement to disclose BO was triggered only in respect of the entities who were holding above the threshold limit as per the “Master Circular, i.e. 25%. There never was any requirement to disclose the last natural person above every person owning any economic interest in the FPI".

“Thus the changes made in FPI Regulations in 2018 and 2019 effectively, tightened the disclosure requirement related to BOs,” it said.

In 2019, FPI Regulations, reference of opaque structure was deleted and in essence, mandating up-front BO in 2018 tightened the 2014 FPI regulations and in 2019, the reference to such structures was removed, to end ambiguity. “Thus, across the changes in 2018 and 2019 FPI Regulations, the framework around FPI BO disclosures were continuously tightened,” it said 

Sebi said that this strengthening rendered the concept of opaque structures (as defined under FPI 2014 Regulations) redundant, since upfront compliance with BO disclosure as per PMLA was now mandated for all FPIs irrespective of structure (the only exception being government and government related entities).

"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,” it asserted.

It said, “Instead, the issue primarily arose from the existence of thresholds for determination of BOs. 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".

In January, US-based short-seller Hindenburg Research's alleged improper governance practices and use of tax havens by Adani, which was denied by the group.

The top court appointed the panel to examine measures on investor protection, and review SEBI's findings in the matter. 

The panel in its report in May, said, “In 2020, the investigation and enforcement has moved in the opposite direction, stating that the ultimate owner of every piece of economic interest in an FPI must be capable of being ascertained. It is this dichotomy that has led to SEBI drawing a blank worldwide, despite its best efforts”.

The panel had suggested that there should be time lines stipulated for initiation of investigations, completion of investigations, initiation of proceedings, disposal of settlement, and disposal of proceedings. 

In its application before the court, the Sebi said, “the nature, scope and complexity of cases in securities market vary significantly, and reasonable time to complete investigation would depend on the facts of each specific case and availability of information. Therefore, prescribing specific timelines to complete the investigation may compromise the quality of investigation”. Also, it may create constraints for the board to function efficiently and also increase litigation, the Sebi contended.

The top court is slated to hear on July 11, pleas seeking probe into the Adani-Hindenburg controversy.

In its plea, the market regulator also said that the expert committee has recommended a robust settlement policy and put in place a coherent policy on settlement of proceedings whereby financial injury commensurate with the alleged violation may be inflicted on the party and resources need not be expended where a settlement is possible.

It asked the court to pass an appropriate order taking into consideration the views and observations of Sebi based on the report of the expert committee.

 

Case Title: Vishal Tiwari Vs Union of India