Decoding the OCCRP’s Adani report

Subject: Economy

Section: Capital market

Introduction:

In March 2023, the Supreme Court of India ordered investigations into the Adani-Hindenburg matter.
The investigations were directed at the Securities and Exchange Board of India (SEBI) and an Expert Committee to examine potential violations of securities regulations.
The Organized Crime and Corruption Reporting Project (OCCRP) has done an independent investigation into the case.

Rule 19A and its Significance:

Rule 19A of the Securities Contracts (Regulation) Rules 1957 is a crucial regulation inserted through an amendment in 2010 under the “Continuous Listing Requirement.“
The rule mandates that every company listed in the Indian stock market must maintain a minimum of 25 percent public shareholding.
In this context, “public” is defined within the rule, encompassing individuals other than “the promoter and promoter group”.
- The “promoter group” includes the spouse of the person, parents, siblings, children, subsidiaries, or associates of the company.
It plays a vital role in ensuring that a sufficient number of shares of a listed company are available for trading in the stock market.
This facilitates price discovery.
Violations of Rule 19A may suggest potential issues like stock price manipulation and insider trading, which can undermine the integrity of the equity market.

Latest Revelations by OCCRP:

OCCRP uncovered investments in Adani companies by two Mauritius-based funds, EIFF and EMRF, between 2013 and 2018.
Key foreign investors were Nasser Ali Shaban Ahli and Chang Chung-Ling.
Funds were channeled through the Global Opportunities Fund (GOF), revealing significant investments.
UAE-based firm Excel Investment and Advisory Services, owned by Vinod Adani, received substantial advisory fees from these funds.
There’s prima facie evidence suggesting these entities served as fronts for Vinod Adani’s massive investments in Adani group stocks, potentially breaching securities regulations.

SEBI and DRI Probe:

OCCRP reveals correspondence between the Directorate of Revenue Intelligence (DRI) and SEBI in 2014 regarding Adani group’s stock market dealings.
SEBI’s former chairperson’s connection to the Adani group adds complexity to the situation.
SEBI claims to have conducted numerous investigations into Adani-Hindenburg matters but faces challenges in identifying “economic interest shareholders” in suspected overseas entities.

Key Organizations and Terms:

OCCRP (Organized Crime and Corruption Reporting Project):

An international non-profit organization of investigative journalists.
Specializes in exposing corruption, money laundering, and organized crime.
Collaborates with news outlets worldwide to publish in-depth investigative reports.

SEBI (Securities and Exchange Board of India):

India’s regulatory authority for securities and commodity markets was established under the Securities and Exchange Board of India Act, 1992.
Regulates and supervises market activities to protect investors and ensure market integrity.
Enforces securities laws and issues guidelines for market participants.
Promotes transparency, fairness, and efficiency in the Indian financial markets.

Directorate of Revenue Intelligence (DRI):

A government agency under the Central Board of Indirect Taxes and Customs, Department of Revenue, Ministry of Finance.
Responsible for investigating customs, excise, and tax-related offenses.
Focuses on curbing smuggling, tax evasion, and illegal financial activities.
Works to ensure compliance with customs and taxation laws.

SCRR 1957 (Securities Contracts (Regulation) Rules 1957):

A comprehensive rulebook governing securities transactions in India under the Securities Contracts (Regulation) Act, 1956.
Contains provisions related to trading, listing, and regulation of securities.
Provides the legal framework for the functioning of the Indian securities market.

Continuous Listing Requirement:

A regulatory framework that stipulates ongoing obligations for listed companies under the Listing Obligations and Disclosure Requirement (LODR) Regulations.
Includes rules related to corporate governance, financial reporting, and disclosures.
Aims to maintain market integrity and protect investor interests.
Requires companies to meet specific criteria to remain listed on stock exchanges.

Tax Haven-Based Shell Companies:

Entities registered in jurisdictions with low taxes and strict financial secrecy laws, often subject to international agreements and conventions against tax evasion.
Often used for legitimate tax planning but can also be exploited for illegal financial activities.
May facilitate tax evasion,money laundering, and concealment of beneficial ownership, subject to international anti-money laundering standards.

Foreign Portfolio Investors (FPIs):

Foreign entities, including institutional investors and individuals, invest in the securities markets of another country.
Often subject to regulations and reporting requirements by the host country’s regulatory body, e.g., SEBI in India.

Economic Interest Shareholder:

A term referring to a shareholder or entity that holds an economic or financial interest in a company, often distinct from legal ownership.
May have a stake in the company’s profits, losses, or financial performance without necessarily holding the formal legal title to shares.

Ultimate Beneficiary Ownership:

A concept related to identifying and verifying the actual individuals or entities that ultimately benefit from or control an asset or entity, particularly in cases of complex ownership structures.
Often a focus of anti-money laundering (AML) and know-your-customer (KYC) regulations to prevent hidden ownership and illicit financial activities.

Round Tripping

Money leaves the country through various channels such as inflated invoices, payments to shell companies overseas, the hawala route and so on. After cooling its heels overseas for a while, this money returns in a freshly laundered form; thus completing a round-trip.
How does the money return to India? It could be invested in offshore funds that in turn invest in Indian assets. The Global Depository Receipts (GDR) and Participatory Notes (P-Notes) are some of the other routes that have been used in the past.