Time has come for SEBI to know who is the real owner of Indian firms

A panel appointed by the Supreme Court in New Delhi recently restrained itself from returning a finding of regulatory failure against the Securities and Exchange Board of India. But the committee’s description of Sebi’s ongoing probe into the country’s largest infrastructure probe as a “journey without a destination” was not actually a vote of confidence.

The regulator told the expert panel that it is probing 13 opaque entities based in Mauritius and Cyprus that held between 14% and 20% of five publicly traded shares of the Ahmedabad-based Adani Group as of March 2020.

Those are huge numbers. Specifically, SEBI wants to verify that the 42 investors who pumped capital into these 13 vehicles – 12 funds and one foreign financial firm – are mere fronts for tycoon Gautam Adani and his family. The group strongly denied those allegations in a January 24 report by New York-based short-seller Hindenburg Research, saying the “impression” that any public shareholders “are in any way related parties to the promoters is incorrect.”

While the Adani group is the most high-profile case of a massive stock-market fortune by a less-than-transparent source of foreign funding, it is not the only one. How will India be able to channel the ever-changing capital to its ultimate owners? SEBI’s scheme, which it has released for public consultation, is apparently simple and rule-based.

This will leave public funds unencumbered with all pension pools as well as a diversified retail base. Foreign investors linked to the government or central bank, such as sovereign wealth funds, would also be spared. Everyone else would be classified as high risk, and would be deemed to have “any ownership interest” if their local portfolio is larger than 250 billion rupees ($3 billion), or if they have a concentration of more than 50% in a single Indian business group. provide detailed data of all entities with financial interests, economic interest, or control rights on an absolute look basis” unless the disclosure reveals the names of individuals, retail funds, or large, publicly traded firms.

Naysayers would argue that such a mechanistic approach would result in too many false positives. Not welcoming foreigners will have a bad effect on the Indian market. The second issue is one of practicality. Suppose a legitimate, diversified fund is unlucky enough to be classified as high risk. This may require the submission of information about the source of each dollar invested. But if SEBI has been unable to get to the bottom of 42 Adani investors in the Cayman Islands, Malta, Curacao, British Virgin Islands, Bermuda, Ireland and the UK, what right does a private fund manager have to peel back so many layers? Get the corporate veil and all to relinquish their privacy rights to the ultimate owners?

The danger of excessive compliance can never be dismissed by anyone familiar with India’s bureaucratic exuberance. For now, however, SEBI deserves a chance. The idea that this is the opening of Pandora’s box is baseless. The regulator’s consultation paper said it estimates 6% of foreign investments – or less than 1% of total market capitalization – to be potentially high risk. Also, it is willing to give a grace period of six months for funds that are rising or falling short. They can temporarily violate the 50% rule without additional disclosure.

Similarly, a capital pool that invests in clean technologies around the world may have a smaller SEBI-registered portfolio. It will be seen as low or medium risk as long as a single Indian conglomerate accounts for less than 25% of global funds.

For me, false negatives are a big concern. Instead of a $1 billion opaque fund with 51% allocated to an Indian business, Sebi will be confronted by two such entities, each earmarking 49% of their $500 million corpus for the same group. The drive to root out “briefcase investors” or fraudulent funds in the form of Mauritius-domiciled funds may thus produce the opposite of the intended effect. Some discretion may be required in classifying an investment vehicle as high risk to prevent gaming of the proposed rules. ,

The only crux of Sebi’s proposal is the disclosure requirement for high-risk funds, regardless of concentration, that have investments in excess of $3 billion locally. The goal here is not to catch violations of minimum public-shareholding norms, but to identify beneficial owners of land that “shares a land border with India.” It is a euphemism for China. People’s Republic of India Inc. without its permission. is acquiring interests in It is possible that hard-to-reach entities in a third country are being used to evade the rules, which have so far been stated only for foreign direct investment.

There is no suggestion that any beneficial owner of Adani is from China. Taking up the cross-country issue in a single consultation distracts from the task of repairing SEBI’s reputation, and gives a handle to those who do not want a new disclosure regime.

Adani’s shares have bounced off their post-Hindenburg lows, though their market value is still $100 billion lower than before an onslaught of short-sellers forced tycoon Gautam Adani to cancel the share sale. The former centi-billionaire from Modi’s home state of Gujarat has secured the backing of US-based GQG Partners and is once again set to validate billions of dollars in fresh fundraising from institutional investors. In a credit update on Monday, the group announced the completion of a $2.65 billion deleveraging program. Net debt stood at 3.27 times EBITDA in March, up from 3.81 times a year ago. The cash balance and funds from operations will comfortably exceed the debt maturing in the current financial year and the next two years.

As Adani signals its intent – and financial ability – to move beyond the controversy, Sebi risks being left on stage, holding a bag of unanswered questions about who really owns India’s firms. Now that he has a plan, he must go ahead and show that his so far aimless journey is finally going somewhere when it comes to running a clean market. © Bloomberg

Andy Mukherjee is a Bloomberg Opinion columnist covering industrial companies and financial services in Asia.

Updated: June 08, 2023, 07:48 AM IST