Karan Thapar 
One of SEBI’s most respected former chairmen has said reportage by the Financial Times based on documents shared by the Organised Crime and Corruption Report Project, which raises disturbing questions and makes worrying allegations about the Adani Group, is “very persuasive”.
Speaking on the report, M. Damodaran said it is “well-compiled and a credit to those who put it together”. He said there’s “a presumption some of this is correct”. However, Damodaran added that as yet the report is “not conclusive”, explaining that the distance between “very persuasive” and not “not conclusive” must be covered by a thorough and diligent investigation.
In a 30-minute interview to Karan Thapar for The Wire, Damodaran, who is at present the director of companies such as Larsen and Toubro, Hero MotoCorp, Tech Mahindra, CRISIL and Biocon and non-executive chairman of IndiGo, said this is “clearly a matter for investigation and it must be done quickly”. He added “most if not all elements (of the Financial Times story) need to be looked at.”
The following is a transcript of the interview. It has been edited for style and clarity.
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Karan Thapar: Hello and welcome to a special interview for The Wire. On the 31st of August, the Financial Times – arguably the world’s best known and most highly regarded financial paper – published a story raising worrying questions and disturbing allegations about the Adani Group. That story simply hasn’t got the attention it deserves in our country.
Two types of issues were raised: first, are the total shareholdings of the Adani Group, the promoters of the group, above SEBI [Securities and Exchange Board of India] stipulations? Secondly, if that is the case, does it suggest share price manipulation?
Joining me to discuss the allegations and the credibility with which they’ve been made, and what SEBI and the government should do in response, is the former chairman of SEBI, M. Damodaran.
Mr Damodaran, as I said in that introduction, an article in the Financial Times on the 31st of August based on documents shared by the Organised Crime and Corruption Reporting Project (OCCRP) has once again raised disturbing questions and allegations about the Adani Group.
The article reveals that two men – Nasir Ali Shaban Ahli of the UAE and Chang Chung Ling of Taiwan – have spent years trading hundreds of millions of dollars’ worth of Adani stock. The Financial Times describes them as associates of Vinod Adani and says their investments were overseen by a Vinod Adani employee. The paper says this raises questions about whether they are frontmen.
Now, you’ve read these reports, so can I start by asking how credible are the reasons for suspecting that these are frontmen for the Adani family?
M. Damodaran: First of all, the report is very well-compiled. I think one must give credit to those that put it together. Secondly, it is a very persuasive report. It’s not one that you can read and put aside because I think it raises interesting questions.
But, between being persuasive and being conclusive, there is an area that needs to be addressed. I think this is what we need to look at.
Are these persons frontmen? Well, I think what happens in circumstantial evidence is you have to put everything together. No link must be weak. So every relationship that exists in this chain of relationships needs to be examined.
It’s possible that they are frontmen, possible that there were transactions in shares made by funds that went out of India, which then makes it a case of round tripping. Clearly there are issues of whether the 75% limit that the promoters and promoter group can hold – has that been violated by resorting to this stratagem?
These are all issues that have been flagged in the report. Related party transactions (RPT), I think it’s important for these to be looked at. The report itself, I will not say is conclusive. It raises a number of issues. At best, there can be a presumption that some of this is correct.
But is there a proof beyond doubt or is this preponderance of probability – what is the degree of proof that you need? These are the number of related questions you need to [inaudible].
KT: Would I be right in saying that you therefore believe that the issues raised need to be examined thoroughly? That the suspicions justify a thorough investigation?
MD: I would say what the report has brought out certainly needs to be investigated. It shouldn’t be brushed aside, not just because it concerns one big group in India, but to see whether there are systemic issues that need to be plugged to ensure minimum public shareholding (MPS) of 25%.
So this can be used as a case in which you can examine what are the ways in which people are getting around or can get around minimum public shareholding of 25%.
Certainly, several aspects that need to be looked into – there are allegations of related party transactions. There’s a [inaudible] of disclosure. If some of this had happened, has it been disclosed, have the auditors looked at it, has the board looked at it?
I imagine that the board comprising several eminent persons would, after the report came out at least, have addressed some of these issues or looked into it or set in motion a kind of enquiry to determine whether this is right and actionable.
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KT: Let me, Mr. Damodaran, put one or two of the points made in that Financial Times story to you. The Financial Times says, and I’m quoting, “According to [the] documents, in January 2017 Ahli and Chung, secretly controlled at least 13% of the free float … in three out of [the] four Adani companies listed on the stock exchange at that time.”
Doesn’t this mean that if these men were fronts for the Adani family, its shareholding will have substantially breached the SEBI regulation – that 25% of shares must be freely traded and in public hands?
MD: If this is established – at present and as you said in your introductory remarks, these are allegations – if this is established, then clearly there is some cause of action that arises.
If, on the other hand, it’s difficult to prove this or this cannot be proved, then I think we should not draw too many conclusions.
What is important in my view is to note that SEBI has looked at all the points that they were expected to look at except two, and they are to file a report to the Supreme Court, they’ve already filed one which says we need a little more time to look at two of these because we’ve sought information from overseas regulators, they haven’t come in yet, and therefore we cannot put it all together and draw conclusions in your report.
So, I would want to wait till SEBI puts this together, see what they’ve got and what conclusions they draw, because they’re going to file it with the highest court of the land.
KT: Absolutely. Now, let’s take the example of Adani Enterprises, which is the flagship company. According to the Financial Times, in January 2017 the promoters owned 74.9%, which meant that the free float should have been 25.1%.
However, the Financial Times says that it turns out that of that 25.1% free float, 13.5% was the Ahli-Chung stake. So if these two men were fronts, this presumably would prove that the flagship company, Adani Enterprises, was in flagrant breach of SEBI regulations.
MD: I’m sure SEBI is looking at it since this is in the public domain, it’s not that all of us are looking at it and SEBI’s not looking at it – that’s unlikely to be the case, especially since they have to file a report to the court.
So whether these are persons holding on behalf of the promoters and therefore breaching the 75% limit is a matter that SEBI will certainly look at, and if there is a violation, there will be penal consequences, I have no doubt at all about that.
Now, the question is that there are several other regulators involved. If you look at the whole series of transactions and get beyond this, look at what the Hindenburg report mentioned for example, you have issues of whether money has gone out, has it been brought back, is there round tripping, that’s not a matter within SEBI’s remit. That has to be looked at by some other regulator.
In 2017 or thereabouts, if memory serves me right, I recall reading about this that an appellate authority looking at the case made out by the DRI [Directorate of Revenue Intelligence] had come to the conclusion that what was alleged was not established, and therefore, in some sense – I don’t know whether closure was applied, but certainly, it looked like there was a plausible explanation given to them.
[inaudible]
Now that is one element. RPT certainly needs to be looked at. If there are allegations that these are related parties and they have done transactions, you need to look at them, that’s important. What is within SEBIs remit is clearly RPT, is clearly MPS, is clearly the manner in which the transactions have been conducted, and I’m sure it is a work-in-progress [inaudible].
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KT: Can I reach the second issue that the Financial Times raises? If these are frontmen and if, therefore, it transpires the shareholding of the Adani family, the promoters, has exceeded SEBI stipulations, does that also then hint towards share price manipulation? Is that a legitimised suspicion to have in mind?
Certainly, people that both OCCRP and the Financial Times have spoken to – these are Indian authorities – believe that if the shareholding of the family has crossed 75%, then there [are] clearly grounds to suspect share price manipulation. Would you agree that that’s a legitimate second suspicion?
MD: Let me move away from this particular case and look at why MPS exists. Twenty-five percent public shareholding of an entity that is listed in the securities market is, among other things, a method by which you can help to establish what should be the price.
So, if that is breached, if persons are investing in the stocks, if the promoter and the promoter group together hold more than 75%, clearly they are in a position to influence the prices. Because it is a very large chunk, above 75%, if you get to 80-83% to the numbers that you mentioned, would take it closer to 85% or even above that I imagine. Clearly you are in a position to influence.
Is this the only group that has this situation? No. Several others also have, hasn’t come in to the public. Government undertakings, of course, are exempt and therefore government continues as a majority shareholder and [holds] above 90% in several entities.
Will this lead automatically? [sic] It can be an instrument. Has it happened? I don’t know.
KT: So what you’re saying, Mr Damodaran, I’m just simplifying it for the audience who may not be technically proficient, if the shareholding of the Adani group, the promoters, is in excess of 75%, then clearly there are grounds to suspect – only suspect – that there could be share price manipulation, and that is therefore something else that needs to be looked into.
MD: Oh, clearly that is an aspect that needs to be looked into, because if you have a very, very large shareholding in the promoted group, clearly that can impact on share prices. Now, is that manipulation, are there things that are done in order to push prices up, and therefore you get other people to buy in, it gives the group much better numbers in the market. These are issues that need to be investigated.
I think as you said rightly, it’s a suspicion, it’s an allegation, but the report’s been put together well. I must say a lot of documents have been looked at and that is why I said at the outset [that it is] very persuasive. Is it conclusive? I’m not so sure, that’s for the regulator to find.
SEBI headquarters in Mumbai. Photo: Jimmy Vikas/Wikimedia Commons. CC BY-SA 3.0.
KT: Absolutely, but the distance, as you said, between very persuasive and conclusive, is a distance that must be covered by investigation and that investigation has to be done by regulators.
MD: That’s absolutely correct, because if there is so much information that is coming out in the public domain, clearly it’s a matter for investigation. I would go one step further and say that these investigations ought to be conducted quickly, so that confidence in the market is not adversely impacted.
That said, we can’t second-guess the regulator on this. I am sure they seize of the matter and especially since this is a matter where they are to report back to the Supreme Court saying that we’ve completed this.
Also, let me remind you that a six-member committee of experts headed by a retired Supreme Court judge had looked at some aspects of this – arising out of this, the brief that was given to them by the Supreme Court, and then concluded that there is no evidence that the regulator had been ignoring what it needed to [inaudible].
Then, of course, they went off on a tangent to talk about how to protect investors, what to do with people whose shares had been lost, all of which I think was completely unnecessary because it took the eye off the ball.
They needed to focus on the principal requirement that the Supreme Court had asked them to look at, which was the regulator measuring up, and I think the report – I won’t say it gives the regulator a clean chit – but certainly comes to a conclusion that we don’t have evidence to show the regulator [inaudible].
KT: But now, actually, we have very good grounds given to us by the Financial Times, to be honest, given to us by The Guardian as well, and all of this put together for both papers by the Organised Crime and Corruption Reporting Project, and therefore, these are credible grounds for suspicion which require in-depth, honest, diligent and thorough investigation. If we don’t do that, we will be remiss.
MD: I would think we should not jump to conclusions and think that that is not being done – an honest diligent, investigation as you put it. The problem is some of this takes time.
KT: Sure.
MD: Especially because you’ve got to collect information from overseas regulators, and SEBI has said as much in its report to the Supreme Court. It said that in these two cases, we need to get in from these two items in our inquiry, the others they have said our report [inaudible].
KT: Can I put to you, sir, two other facts before I move to something else, and ask you whether these two are the facts reported by the Financial Times are grounds for believing this suspicion – that these two men are fronts – could be correct.
The first is this: according to the Financial Times, these two men Ahli and Chung, made their investments in Adani companies through two funds. The two funds are the Emerging India Focus Fund and the EM Resurgent Fund.
The FT says and I’m quoting, “Behind the scenes, all but two million dollars out of 260 million dollars in Adani stock held by the funds in September 2014 were controlled by Ali and Chung’s companies.”
And the question is this, is this huge and deliberate investment in Adani stock another reason for suspecting Ahli and Chung are frontmen?
MD: I think you need to also look at… This is an issue that has not been addressed. How were these funds set up? Did these funds invite public investment? If so, what is it that was promised? Because there are funds that have significant investment in some companies and small investments in some other companies.
That by itself is not, let’s say, violative of any regulations unless the constitution of the fund itself says that you should be widely dispersed, just the kind of directions you have for mutual funds, for example – you can’t have concentration beyond a certain level in a particular stock.
Now, there are other regulators that also need to look at these. Overseas regulators need to look at what was happening, because I would imagine that information sharing under the memorandum of understanding that IOSCO [International Organization of Securities Commissions] has should enable regulators to share information that is critical for the stability and growth of the markets.
I think SEBI seized of all of this. I think they’re working it in… The nature of the investigation is such that it’s time-taking because they need – I’m saying what they have told the court – to get information from outside regulators and that hasn’t come in [inaudible].
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KT: Let me put the second fact to you, again to ask whether the second fact corroborates the suspicion that these two men are fronts. According to the Financial Times, Ahli and Chung’s investments were overseen by an employee of Excel Investment and Advisory Services, which is a Vinod Adani company.
And Excel was paid an advisory fee related to these investments. In fact, OCCRP goes one step further – it says the agreement between Excel and the funds used by Ahli and Chung was signed by Vinod Adani himself. Is that another reason for saying this suspicion that the two men are fronts is one that needs to be seriously investigated?
MD: It certainly needs to be investigated. I don’t think it’s anyone’s case that you can brush it aside, ignore it, turn a Nelson’s eye… no, certainly not. But does that lead us to conclude that these were frontmen, that these were Vinod Adani’s persons, that Vinod Adani had used them in order to invest money and that it was meant for violating the MPS etc.? I think it’s a matter for investigation.
As you said rightly, there are a lot of elements in this report. Most of these elements, if not all, need to be looked at by someone who has both the responsibility as well as the skill sets to get to whatever is the truth. Until that emerges, I wouldn’t jump to conclusions and say this is open and shut.
KT: No, absolutely not. These are just suspicions that…
MD: Yeah. Because it’s entirely possible… it’s a well-researched report, let me say that. But a well-researched report that throws up facts and information, it does not present a complete enough picture for an investigator to say ‘I got it, I don’t need anything more to do’, or for a regulator to say ‘There’s no need for investigation, I’ll take this at face value’.
No, far from that. It casts a responsibility on them to investigate this quickly, thoroughly, honestly, diligently – I am using all the words that you used.
KT: Let me then ask you this question, and I do it because you are a former chairman of SEBI and someone who is a leading director in some of India’s top companies. You have said clearly this is a matter for investigation and you added it must be done quickly. Then you said most, if not all elements, need to be looked at diligently and thoroughly.
How confident are you that SEBI will do this? Both thoroughly and diligently, and in fairly quick time?
MD: I think they will do it thoroughly; they will do it diligently. I’ve said this in an earlier interview with you, maybe it’s a function of my growing years, but I tend to get impatient with the time taken, so…
You would want to see results quicker, that’s also good for the system, but that said, they have to follow a process, they can’t leave any loose ends and therefore I think we must respect their judgment and trust that they’re doing the right things in the right way.
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KT: But you’re saying, by that very carefully crafted answer, that the SEBI will do it diligently [and] thoroughly, but you’re not so sure they’ll do it quickly?
MD: Well, I think it’s the nature of the beast. You’ve got to get information from various places, and unlike persons like me who are now outside the system [and] who can jump to conclusions, I don’t think SEBI can do that.
They must, in these matters, build a watertight case that survives scrutiny at the appellate level, and perhaps it will even if there is a case against somebody, it travels right up to the apex court, where it will have to be defended. Therefore, all of that clearly will take time.
KT: Let me tell you why some people have doubts not just about the speed with which SEBI will investigate, but also the diligence and the thoroughness.
And this is the reason: the FT has revealed and so did OCCRP as well as The Guardian, that SEBI, as far back as January 2014, was informed by the Directorate of Revenue Intelligence of fears of suspicious investment and disinvestment in the Adani Group.
Now, we don’t know what SEBI did, but it seems SEBI may not have taken the tip-off seriously. And if that is true, would you accept, (a) it was a mistake and (b) it will have damaged confidence in SEBI?
MD: No, I think a lot of people have jumped to conclusions and said that after getting that letter that we did nothing about it or buried the matter etc. I don’t think any of us has any evidence to suggest that.
KT: Can I interrupt you there, sir? Can I interrupt you there?
MD: Yeah, please. Yeah.
KT: I’ll tell you why I raised that question. In February, when the Hindenburg report came out, I interviewed you. Roughly a few days later, maybe a week later, I interviewed Mr U.K. Sinha. Mr U.K. Sinha was chairman of SEBI from 2011 to 2017 and this letter of January 2014 from the Directorate of Revenue Intelligence was addressed to him by name.
Now, I said to Mr Sinha in that interview that allegations about Adani, speculation and concerns about Adani existed long before the Hindenburg report came out. That is one reason why Indian mutual funds have by and large avoided Adani Group stock.
And my question to Mr Sinha was, ‘Why did SEBI not carry out its own investigation?’ Long before Hindenburg happened, why did SEBI not do its own investigation, because these concerns were known.
And this is in fact what Mr Sinha said to me in reply. I’m quoting him, “Let me say that to the best of my information, the fact that there is round tripping happening and that is why the share prices have gone up like this, according to my understanding and knowledge, that has come in public domain for the first time after the Hindenburg report.”
But now, FT revealing this letter from the DRI dated January 2014 means it was known well before the Hindenburg report and Mr Sinha can’t be correct when he says it has come in the public domain for the first time with the Hindenburg report. That’s why people today ask, ‘Will SEBI be diligent and thorough, and will it be fast and quick?’
MD: I think Mr. Sinha himself – and I’ve seen this in the newspapers – has said that the substance of that letter was also the substance of what DRI looked at, and the DRI’s appellate authority came to a conclusion that there was not enough merit in the allegations for whatever reasons.
So, therefore, it is likely that SEBI had done something. It’s likely that he would not want to reveal in public what happened by way of investigations [and] what was concluded because that’s an unfair expectation; to actually expect him to say all of this in public. And therefore, he said, ‘I don’t think there was evidence of round tripping’.
But round tripping is an offense that some other regulator ought to look at. Has that been established as of today?
Watch: Not Convinced by Hindenburg But Adani Claim of Attack on India Is Wrong: M Damodaran
KT: But… You’re absolutely right in one thing Mr Damodaran, that the DRI investigation after three years was called off, but the DRI was specifically investigating into siphoning off of money through overpricing.
[The] DRI was not investigating mysterious and unexplained investment and disinvestment in the Adani Group. They were alerting SEBI to that, but they weren’t investigating it.
So, when [the] DRI called off their investigation three years later, it was only to do with siphoning of money. The charge or the suspicion or the fear that inexplicable investment and disinvestments happening remains, and that is round tripping in a sense, and that is share manipulation.
Clearly SEBI had been forewarned of these fears. We don’t know what they did, but for Mr Sinha to say we didn’t have any reason to believe this was happening before Hindenburg can’t be correct. That was brought to their attention by [the] DRI, which is why I raised this question about whether SEBI will be upfront, transparent and diligent.
MD: I have absolutely no doubt that it will be. It cannot afford not to be, and not just because of the credibility of a system and the people there, but also because if it didn’t do that, every action of its would be a suspect, and it’s not just in relation to Adani.
Which is why I think both in enlightened self-interest as well as for maintaining the credibility of the system, SEBI will do a thorough job. As I said, my only concern is the time that these processes take and I gave you a valid explanation – it could be a function of advancing years that you tend to get impatient.
KT: Can I add, impatience is a wonderful quality.
My last question, Mr Damodaran, given that this story in the Financial Times, The Guardian and done by OCCRP will have an adverse impact on India as an investment destination, which in turn could affect the prime minister’s strategy to grow the Indian economy.
Are there steps you believe the Indian government itself should take in response to what the FT has put up?
MD: Well, I think the government would have seen the report. The government would have looked at what is actionable at the level of the government, what is actionable at the level of different regulators. I’m sure all of that is something that is happening within the government.
But let me also say this, that if there was such concern as the Financial Times says, that investors would have post the publication of this report – this report’s been around for some time, not that it happened yesterday only – you would have seen some impact of that by way of some funds moving out of India. Nothing of the kind is happening.
I think there have been significant investments in the market. There have been significant announcements regarding impending FDI. So it’s not just portfolio, it’s also foreign direct investment. And therefore, the confidence in the Indian system that India is in the vanguard of the growth economies, none of that will go away.
Yes, these allegations will have to be investigated. It’s not my case that this has to be ignored – far from it. And I’m sure that somebody is working on it quietly, unseen by us.
KT: Mr Damodaran, thank you very much for agreeing to this interview. Thank you very much also for helping us understand and appreciate the seriousness of the suspicions and allegations which are not conclusive, but as you said, they are very persuasive.
And as you said we need to look at this, we need to look at it diligently and thoroughly and relatively quickly. And you’re confident SEBI will do precisely that. Let’s hope your confidence is borne out. I thank you for this interview, take care sir.
MD: Thank you, thank you Karan. Thank you.
Transcribed by Karizma Ahmed.