SEBI rejects expert committee observations on Beneficial Owners

SEBI rejects expert committee observations on Beneficial Owners

Subject: Economy

Section: Capital Market

Context: SEBI has submitted its response to the report of the Supreme Court appointed expert committee to probe the Adani-Hindenburg controversy. The response denies that changes to the law governing disclosure of Beneficial Owners (BO), made identification of the beneficial owners (party whose economic interest is involved) of FPI difficult.

Key Points:

• The SC appointed committee was constituted to provide an overall assessment of the situation as well as suggesting measures to strengthen investor awareness, the statutory architecture and secure compliance with the existing framework.
• A part of the committee’s study dealt with the Securities and Exchange Board of India (SEBI)’s probe into allegations against the Adani Group made by US-based short seller Hindenburg Research.
• Three issues (see Box) were being investigated by SEBI, as ordered by the Supreme Court. The first of which required ascertaining whether the requirement of minimum public holding of 25% was being fulfilled in case of Adani.
• Doubts over this were cast by allegations that family members of Adani are using the foreign portfolio investors (FPIs) as a front for investing in Adani, thus the actual free float status (percentage of shares held by public) of Adani comes under question.
• Who owns the FPI ?
  • FPI 2014 Regulations: Required the FPIs to provide beneficial ownership (BO) information only when sought by Sebi, and FPIs were prohibited from having opaque structures.
  • FPI Regulations amended in 2018 and 2019: Sebi tweaked FPI rules making it mandatory for all FPIs, excluding sovereign funds, to submit BO information upfront. Hence, the opaque structure prohibition clause became redundant and was removed.
• The expert committee views these changes (removal of opaque structure prohibition) as the reason for inability to get to the beneficial owners of the FPIs under scrutiny.
• SEBI response:
  • The difficulty of identifying beneficial owners is not because of the law change, but because of the existence of thresholds for the determination of BOs. In fact the thresholds were only lowered between 2014 and 2019. The threshold limit as per the Master Circular is 25%.
  • Further there never was any requirement to disclose the last natural person above every person owning any economic interest in the FPI.
  • SEBI holds that while in the 2019, FPI Regulations, reference of opaque structure was deleted, the mandating up-front BO in 2018 in fact tightened the 2014 FPI regulations further. The reference to opaque structures was removed, to end redundancy and ambiguity (while the 2014 required disclosure of BO only when sought, the 2018 rules made it mandatory).
• Control vs ownership:
  • SEBI also held that the upfront BO disclosure norm was in compliance with the PMLA guidelines which require BO identification only on the basis of control or ownership, leaving ambiguity regarding entities that have economic interest but no ostensible control.
  • The investment manager/ trustee acting through arrangements such as voting shares/ management shares, is then identified as the BO of the FPI.
  • So while the control may be with the FPI management or trustee agency, the actual investor of the FPI is the matter of interest. And as per the present laws it is only the control that is being disclosed.
  • This issue of final ownership is also complicated by investors investing through multiple FPIs.
  • To address these gaps, SEBI now3 requires FPIs with more than 50 per cent of their total assets under management invested into a single group to disclose the actual beneficiaries.
• Other observations:
  • SEBI has also rejected the expert committee’s recommendations on other issues including setting a firm timeline for the regulator to complete its investigation. SEBI said prescribing such limits may compromise the quality of investigation, create constraints and increase litigation
  • SEBI also dismissed the observations made by the expert panel saying the number of cases where Sebi initiated regulatory actions has skyrocketed in the last two years. Sebi said the increase in number of cases increased due to illiquid stock options probe which resulted in Sebi filing 13,000 cases for non-genuine trades.