Adani-Hindenburg case: SC asked SEBI under what circumstances the rules were amended to remove the definition of opaque structures

Bhushan submitted before a bench headed by Chief Justice of India D Y Chandrachud and comprising justices P S Narasimha and Manoj Misra that the court-appointed committee said the SEBI investigation cannot go anywhere because of the situation they have created by amending the rules, writes Sumit Saxena.

New Delhi:The Supreme Court Tuesday observed that it would certainly like to know under what circumstances the rules were amended to remove the definition of opaque structures, after advocate Prashant Bhushan, appearing for a petitioner seeking probe into Hindenburg allegation against the Adani Group, contended that Securities and Exchange Board of India (SEBI) could be prevented from going into the layers of transactions because of the amendments which have been made, for instance to the definition of beneficial owners.

In an application, filed in the Adani-Hindenburg controversy case, Market regulator SEBI 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 (BOs).

Bhushan submitted before a bench headed by Chief Justice of India D Y Chandrachud and comprising justices P S Narasimha and Manoj Misra that the court-appointed committee said the SEBI investigation cannot go anywhere because of the situation they have created by amending the rules. “They have amended the rules to remove the definition of opaque structures. They have amended the rules for related party transaction… they amended the rules for beneficial owners (BOs), in order to prevent this kind of fraud being exposed”, said Bhushan.

The Chief Justice said, “Mr Solicitor apropos this submission, you may also go into the background which led to the amendment of the rules ... .have you dealt with that in your application?” The Chief Justice, “Mr. Prashant Bhushan is arguing that today SEBI may be prevented from going into layers of transactions because of the amendments you have made, for instance to the definition of beneficial owner. What are the circumstances you amended those definitions, there is something we would like to certainly ( to see)….”.

Solicitor General Tushar Mehta, representing SEBI, said its response contains answers to queries raised by Bhushan and also by the bench, and everything is on record. Mehta said SEBI has submitted a constructive response and the investigation is going on.

Bhushan said the court-appointed panel had stated that there is no chance of SEBI proceedings anywhere with the investigation given what they have done. He argued that the facts found in the expert committee report clearly show that there is not merely gross regulatory failure on the part of SEBI but there is no chance of SEBI proceeding anywhere with its investigation.

The bench noted that Mehta has stated that SEBI has filed a response to the report which was submitted by the expert committee in connection with the functioning of SEBI.

While asking SEBI about the status of its ongoing investigation into the allegations of stock price manipulation by the Adani group, the apex court said the probe has to be concluded by August 14.

After hearing detailed submissions, the top court adjourned the hearing on the clutch of pleas on the Adani-Hindenburg row and asked SEBI to circulate its response among the counsel representing the petitioners.

In its interim report, the Supreme Court-appointed expert committee had said that it saw no evident pattern of manipulation in Adani’s companies and there was no regulatory failure. However, the committee cited several amendments the SEBI made between 2014-2019 that constrained the regulator’s ability to investigate, and its probe into alleged violation in money flows from offshore entities has drawn a blank.

The Supreme Court-appointed committee -- headed by retired judge AM Sapre probing the Adani-Hindenburg controversy -- had cited 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”, said Sebi, in an application regarding 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 BO details when sought, were allowed to be registered as FPIs i.e, upfront BO declaration was not a requirement. It 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". Sebi said, “Thus the changes made in FPI Regulations in 2018 and 2019 effectively, tightened the disclosure requirement related to BOs”.