Sebi to SC: Difficult to identify natural persons in FPIs under old rules
Mumbai, July 11, 2023
Synopsis
The Securities and Exchange Board of India (Sebi) has filed an application in the Supreme Court detailing its response to various suggestions made by the apex court-appointed expert committee in the wake of the Hindenburg report against the Adani Group on potential breaches of securities laws.
India's capital-markets regulator has told the Supreme Court in the Adani Group case that since custodians were not legally mandated to keep granular details of all underlying investors with ownership in entities below a threshold, there was a possibility that one individual or entity could hold significant stakes in overseas funds through multiple platforms, each individually below the limit for identification as a beneficial owner (BO).
The Securities and Exchange Board of India (Sebi) has filed an application in the Supreme Court detailing its response to various suggestions made by the apex court-appointed expert committee in the wake of the Hindenburg report against the Adani Group on potential breaches of securities laws.
The expert committee had said that the difficulties experienced by Sebi in identifying holders of economic interest in the foreign funds investing in Adani Group companies were partly because of the repeal, in 2019, of the 2014 Foreign Portfolio Investor (FPI) provisions on "opaque structures".
However, this was not the case, Sebi's responses to the court showed.
Under FPI 2014 regulations, certain entities that undertook to provide BO details, when sought, were allowed to be registered as FPIs. There was no requirement to give upfront BO declarations.
The requirement to disclose BO was triggered only in respect of the entities that were holding above the threshold limit of 25% ownership, or beneficial interest.
"There never was any requirement to disclose the last natural person above every person owning any economic interest in the FPI," Sebi told the apex court in its filings that were seen by ET. The rules were aligned with provisions of the Prevention of Money Laundering Act (PMLA).
Changes in 2018/19
In 2018, Sebi made key changes to FPI rules, wherein it mandated upfront disclosure of BOs in all categories of FPIs - except government entities.
The threshold for identification of BO on ownership basis was also made stringent with 25% for companies, 15% for trusts and 10% for FPIs from high-risk jurisdictions. Often, the definition of 'high-risk' varied from custodian to custodian.
Further, where no natural person was identified on the basis of control through ownership, the BO was to be the relevant natural person that held the position of senior managing official (SMO).
In 2019, Sebi again introduced changes to FPI regulations. The reference to 'opaque structures' was deleted, since no FPI could continue to operate without providing BO details upfront.
"It has further been observed in some cases that entities having economic interest in an FPI are in jurisdictions where the equivalent PMLA regulations require BO identification only on the basis of control or ownership, leaving ambiguity regarding entities that have economic interest but no ostensible control," Sebi said in its application.
"Thus, the investment manager/ trustee etc. acting through arrangements such as voting shares/ management shares is then identified as the BO of the FPI," showed the Sebi filings. "Consequently, while in compliance with the regulations, the actual investing constituents with economic interest may not be identified as BOs of the FPI. This issue is further accentuated if holdings of such investors are spread through multiple FPIs."
Strengthening Surveillance
The regulator said the challenges with respect to the identification of natural person economic interest holders in FPIs are in no way a consequence of the 2018 circular or the 2019 FPI Regulations.
On the contrary, the regulatory framework was tightened during this period rather than relaxed, it said. “Even if 2014 Regulations were extant, nothing would have changed with respect to the challenges faced vis-a-vis identifying natural persons with economic interest in FPIs,” Sebi said.
To address the challenges, the Sebi board last month approved a new proposal, which for the first time, would mandate granular disclosures to the last mile without any thresholds by certain categories of FPIs that either hold more than 50% of their corpus in a single corporate group, or have total assets under management in excess of 25,000 crore.
The new rule is yet to be notified.
“It is observed by Sebi that the Expert Committee has expressed certain interpretations of facts and law in the report which has bearing on the ongoing investigation and other matters. The submissions made before the Expert Committee were based on the prima facie facts available to Sebi as on the date of submission and not based on the application of law on facts found out on completed examination,” Sebi said.
The Supreme Court will hear the ongoing Adani-Hindenburg case on Tuesday. The regulator has until August 14 to submit its report.
The panel in its report had also suggested that a firm timeline for the regulator to complete its investigations must be embedded into the law. In its 43-page filing, Sebi disagreed with that suggestion, saying prescribing such limits for completion of investigations may compromise the quality of investigation.
[The Economic Times]
