New Delhi: The Supreme Court on July 11 asked the Securities and Exchange Board of India (SEBI) to explain why the law was tweaked in 2018 that allegedly limited the markets regulator's ability to investigate opacity in the ownership structure of foreign portfolio investors (FPIs).

On March 2, the top court had passed an order to set up a five-member expert committee to investigate the allegations made by Hindenburg Research against Adani Group.

The expert committee, headed by former Supreme Court judge A.M. Sapre, had said that the provisions of requiring FPI to disclose “ultimate natural person” were done away with in 2018.

And this led to SEBI hitting a wall in its investigation on the Hindenburg-Adani case, the expert committee report had said.

According to The Hindu, advocate Prashant Bhushan, on the petitioners’ side, said that "SEBI’s change of its FPI law in 2018 is absolutely fatal to its current investigation. They have removed the very definition of ‘opaque structure’ in the FPI Regulations…"

"SEBI cannot do anything now in its present investigation. The amendments to provisions concerning opaque structure of FPIs, its beneficial owners and related party transactions were made to prevent such frauds from being exposed,” he added.

Also read: Because of Repealed Provisions, SEBI Hit ‘Opaque Structure’ Wall While Investigating Adani: SC Panel

Chief Justice D.Y. Chandrachud, therefore, asked Solicitor General Tushar Mehta, appearing for SEBI: “Mr. Solicitor, we certainly would like to know why you [SEBI] made these changes. Apropos what Mr. Bhushan said, SEBI may be prevented from going into the layers of transactions because of these amendments."

CJI Chandrachud asked 'what are the circumstances under which you had changed the provisions dealing with ‘opaque structure’... "

Solicitor General Mehta responded saying that the SEBI investigation “is going on at full speed”, the newspaper reported.

The Supreme Court had given it time till August 14 to complete the investigation into the Adani matter.

Ahead of the hearing, SEBI had defended the changes in the law saying the alteration did not make it tougher to identify the ultimate beneficiaries of offshore funds.

In a 41-page affidavit, as reported by Business Today, the capital markets regulator said it did not agree with the expert committee's observations of difficulties in identifying holders of economic interest behind an offshore fund.

It also opposed the expert committee's recommendation that the regulator must be given a firm timeline to complete its probe and that must be ''embedded into the law''.

SEBI said prescribing such limits ''may compromise the quality of investigation'', create constraints and increase litigation.

The Hindu reported SEBI as saying that the difficulty to probe the allegations against Adani Group lay in the existence of thresholds for determination of beneficial owners of the FPIs.

“Since granular details of all underlying investors with ownership, economic, or control interest in entities below the threshold was never required to be made available to the Designated Depository Participants/Custodian of Securities, there was a possibility that the same natural person could hold a significant aggregate economic interest in the FPI via different investing entities, each of which were individually below the threshold for identification as a BO [beneficial owner],” SEBI, represented by advocate Pratap Venugopal, said in its report.

Also read: Analysing the Adani Debacle

Further, SEBI said there had never been any requirement to disclose the “last natural person above every person” owning any economic interest or, in other words, the ultimate owner, of an FPI.

However, this statement appears to be contradictory with a Business Standard report which said that SEBI had in July 2021 written to the custodians of FPIs owning shares in six Adani Group firms, seeking information on their ultimate beneficial owners.

These funds included Albula Investment Fund, Cresta Fund, and APMS Investment Fund.

Interestingly, according to OpenCorporates, these funds have the same address.

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