In January this year Hindenburg Research accused the Adani Group of fraud. One of Hindenburg’s main accusations was that the foreign investment funds which owned Adani stock were just a front for Adani himself. If Adani actually owns too much Adani stock, it’s a problem. It becomes easy for him to artificially push the price of his company stocks up. The whole thing is, of course, not nice and very illegal.
Last month, SEBI approved certain stricter disclosure requirements for foreign portfolio investors in India. In a press conference, SEBI chairperson Madhabi Puri Buch said that these stricter requirements had nothing to do with Adani and had been in the works for the last year-and-half. Sure, sure. We’ll believe her. [1]
Changing disclosures
If you’re looking to start an investment fund in India, you have quite a few regulations and disclosure requirements that you have to comply with. You’ll have to inform SEBI about where you want to invest, how the fund is structured, who your investors are, stuff like that. All this is inconvenient and generally not fun, so you might crib, but you don’t really have a choice.
If you’re starting an investment fund abroad, what your disclosure requirements are depends on where you’re incorporating this fund. You might prefer to incorporate in a jurisdiction where disclosure requirements are lax, like Mauritius.
If this foreign investment fund of yours now wants to invest in India, of course, you’ll need SEBI’s permission to do that. But now, SEBI really does want to give you permission! India is, from an equity investment point of view, a small market. Indian funds don’t have too much money. If you’re an Indian fund, you want SEBI’s permission. If you’re a foreign fund, SEBI wants to give you permission. (If it doesn’t you’ll just invest elsewhere.)
Up until now, here were the disclosure requirements that SEBI expected from foreign funds. From SEBI’s regulations:
[The foreign portfolio investor shall] undertake necessary KYC on its shareholders/investors in accordance with the rules applicable to it in the jurisdiction where it is organised.
That’s it! If you were a foreign investor that complied with the disclosure requirements in your own country, SEBI was happy to let you invest in India, even if those disclosures wouldn’t ordinarily be enough for an Indian fund. [2]
Anyway, that’s past. Here are the two main changes SEBI made last month in these disclosure requirements. From its board meeting:
To mandate additional granular level disclosures regarding ownership, economic interest, and control, of objectively identified FPIs meeting the below mentioned criteria, on a full look through basis, subject to the conditions and exemptions as specified by the Board from time to time:
FPIs holding more than 50% of their Indian equity AUM in a single Indian corporate group; (or)
FPIs that individually, or along with their investor group as defined under Regulation 22(3) of the SEBI (Foreign Portfolio Investors) Regulations, 2019, hold more than INR 25,000 crore of equity AUM in the Indian markets.
SEBI says now that if more than 50% of a foreign fund comprises a single company’s stock, the fund must disclose who the fund’s real investors are, no matter what the fund’s original disclosure requirements in its own country. [3]
The way journalists identified that there was something off with Adani’s foreign investors was by noticing that the foreign funds, all registered in Mauritius, held pretty much all—between 95 to 97%—of their Indian investments in Adani companies. So SEBI’s new disclosure requirement seems to be a direct result of the Adani mess.
Disease or symptom
If you were one of Adani’s foreign investors, what would you do now? Here are your options:
- Come out and say, “Okay boys, they’ve got us. We’ve gone through this hassle of incorporating in Mauritius and investing billions while keeping our investors anonymous. But damn, we now gotta tell SEBI who they are.”
- Or, you could just reduce the proportion of your assets in Adani. If 97% of your money is in Adani today, you can work on bringing this number down somehow to 49%.
If you’re a foreign company that takes money from corrupt Indian company owners only to invest it back into their companies, you presumably have more than one client. Before SEBI’s new regulations, you really did not care enough and might have had separate funds for separate clients. Let’s imagine your funds to look like this:
- ₹1000 crore ($120 million) in your “India Opportunities” fund, invested almost entirely in company A.
- ₹1000 crore in your “India Long Term Value” fund, invested entirely in company B.
- ₹1000 crore in your “Emerging India” fund, invested entirely in company C.
Individually, these funds invest in a single company and you would have to disclose who your investors are to SEBI. But combine these funds into a single “India Emerging Value Opportunities” fund and you now have a ₹3000 crore fund holding at most 33% in any one company—well below 50% and all kosher as far as SEBI’s new disclosure requirements go. Fun!
Does SEBI genuinely feel that Adani’s foreign funds will just roll over and disclose who their investors are? I don’t know. I don’t think they will. Instead, what SEBI’s regulations ensure now is that no journalist ever finds a fund holding an unusual amount of their assets in a single company. Which just makes it even more difficult for them to get caught.
Footnotes
[1] No, we won’t.
[2 Not that it’s a free pass for any foreign investor. They do have to comply with anti-money laundering laws, have limitations about how much of a company they can own, etc. They just get a bit of preferential treatment when it comes to disclosure requirements of their beneficial owners (that is, their own investors).
[3] SEBI has some sensible exceptions to this. If the foreign fund is a government fund, pension fund, or similar, they can invest wherever they like without having to through the trouble of making any additional disclosures.
