The Adani Saga and market watchdog SEBI's deafening silence

Securities regulator SEBI seems more inclined to protect the perpetrators than punish them’, concluded the damning Hindenburg Research report on the ‘stock manipulation scam’ and the role of shell companies in inflating the value of Adani stocks in the market.

Two and a half months after the report first came out on 24 January 2023, SEBI (Securities and Exchange Board of India) is yet to break its silence, forcing ex-RBI governor Raghuram Rajan to wonder why the regulator was finding it so difficult to do its job. Surely, if New York-based Hindenburg Research, a small firm with a handful of employees, could unearth details that remain uncontested till date, delving further should surely have been easy for the Indian body instituted for precisely such a purpose. In an interview to the Press Trust of India, Rajan asked, “Does SEBI need help from investigating agencies?”

Why has SEBI failed to solve the apparent mystery of the Mauritius-based funds holding and trading almost exclusively the Adani stocks? Indian journalists and parliamentarians have also been asking why SEBI couldn’t see the Adani Group’s alleged violations of its guidelines to reserve 25 per cent of the shares of listed companies for the public; the Adani Group companies have allegedly set aside only 2-3 per cent for the public.

The Hindenburg report—which drew attention to these opaque shell companies, the doubtful transactions between them and listed companies of the Adani Group, the huge investments made by a bunch of opaque foreign portfolio investment companies based in tax havens, and the humongous debt of the Group—had caused a bloodbath in the Indian stock market in early February.

Guidelines of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003, in Chapter 1, (C) reads: ‘...“fraud” includes any act, expression, omission or concealment committed whether in a deceitful manner or not… in order to induce another person or his agent to deal in securities…’

(C)(9) elaborates, ‘The act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled…’

The SEBI guidelines mandate that Foreign Portfolio Investors (FPIs) must submit the names of ultimate beneficial owners (UBOs) and senior management officials’ names to the regulator. But the list submitted by SEBI and shared by the junior finance minister shows that a few FPIs with their major investments concentrated in the Adani group companies were using proxies to hide the identity of UBOs.

On 19 July 2021, the Union MoS for finance, Pankaj Chaudhary, replied to a question from Trinamool Congress MP Mahua Moitra, a former investment banker turned politician, about the opaque FPIs based in tax havens. She had asked about the UBOs of the FPIs invested in the Adani Group. She wondered whether these FPIs, Adani Group companies and, more specifically, the Monterosa Group and people related to it (Alastair Guggenbühl-Even, Michael Eric Widmer, Martin de Quervain, Florian Linner) were facing any investigation by Indian law enforcement agencies.

In his reply, the minister stated that SEBI and the Directorate and Revenue Intelligence (DRI) were investigating some FPIs that appeared to have invested only in the Adani Group. It also mentioned that the disclosure of the investigation details by the Income Tax Department was prohibited under the Income Tax Act, 1961, and that the Enforcement Directorate (ED) was not investigating the allegations. The minister’s reply contained an annexure provided by SEBI that ran into 84 pages and mentioned the names of FPIs that had invested in the six listed companies of the Adani Group (Adani Total Gas, Adani Power, Adani Ports & Special Economic Zone, Adani Enterprises, Adani Green Energy and Adani Transmission) and their ultimate beneficial owners or, if the UBO’s name was not identified, the Senior Management Official of the fund.

‘Beneficial owners (BOs) are the natural persons who ultimately own or control an FPI and should be identified in accordance with Rule 9 of the Prevention of Moneylaundering (Maintenance of Records) Rules, 2005...’ say SEBI’s operational guidelines for Foreign Portfolio Investors (FPIs), Designated Depository Participants (DDPs) and Eligible Foreign Investors (EFIs).

The operational guidelines also mention that ‘in case of companies/trusts represented by service providers like lawyers/accountants, the FPIs should provide information of the real owners/effective controllers of those companies/trusts. If the BO exercises controls through means like voting rights, agreements, arrangements etc., that should also be specified. It is clarified that BO should not be a nominee of another person and real BO should be identified’.

Is SEBI following its own guidelines when it comes to FPIs? Did SEBI adhere to its own regulations in the Adani Group’s case? The regulator’s actions show that they either didn’t care or let the FPIs ‘concentrated only on the Adani Group’ have a free hand and do as they pleased.

Independent investigations have revealed that people mentioned in the SEBI’s list are not the UBOs or the real fund managers of these FPIs. All of them were proxies appointed by intermediaries helping anonymous investors hide their wealth through opaque companies and funds. Many of them have been found to be connected to opaque funds from notorious tax havens known for money-laundering and tax evasion.

It is implausible that SEBI was unaware of these facts. In July 2021, the MoS for finance effectively stated in parliament that SEBI was already investigating the matter related to these FPIs, and the DRI was conducting another investigation related to certain transactions of the Adani Group.

A source within SEBI claimed to this reporter that investigations by the regulator hit a dead-end due to jurisdictional issues because all these funds are domiciled in Mauritius or some other tax havens. Those tax havens refused to share the details or did not respond to SEBI, the source maintained.

If that is true, did the SEBI inform the Union finance and the corporate affairs ministries about it? What happened to the probe by the DRI? Why didn’t the government expedite the investigation earlier?

It was reported that in May 2022, SEBI had sought clarifications from the Adani Group about 17 offshore entities involved in the Group’s acquisition of Ambuja Cement and ACC from Holcim. By all accounts, the regulator is still examining the clarification given by the Group. What takes SEBI so long to examine the clarification? What is the outcome of the examination?

The Hindu Businessline reported that Gautam Adani visited the SEBI headquarters twice in four weeks in September and October 2022, and met with officials, directors and the SEBI chairperson, Madhabi Puri Buch. If SEBI was already investigating issues raised against the Adani Group, its offshore entities and transactions, and the FPIs which parked huge amounts of money in the group, was it appropriate for the SEBI chairperson and directors to meet Gautam Adani? What was discussed in these meetings? Does even the government know?

These questions are unlikely to be answered by SEBI or the government, which is why an investigation by a Joint Parliamentary Committee (JPC) into the various allegations against the Adani Group appears to be necessary.

However, a lawyer representing the Adani Group recently told NDTV—a news channel now owned by Gautam Adani— that putting pressure on the government to form a JPC is an attempt to tarnish the image of the Modi government (and the Prime Minister).