The Congress has slammed the Securities and Exchange Board of India for engineering the “regulatory failure” that has virtually nixed the investigation to determine whether or not the Adani group had violated rules that require every privately owned listed company to maintain a minimum public float of 25 per cent at all times.

The group has also been accused of failing to disclose all of its related party transactions and manipulating its stock prices.

Last week, the six-member expert panel established by the Supreme Court and headed by retired Judge Abhay Manohar Sapre said it “would not be possible to return a finding of regulatory failure” because the market regulator had diluted a key proviso in the regulations governing foreign portfolio investors (FPIs) in 2018.

A key element in the FPI regulations which were drawn up in 2014 was a stipulation that the FPI must not have an “opaque structure.”

Until 2018, FPIs were required to disclose the name of the “last natural person above every person owning any economic interest in the FPI” under an “opaque structure” clause that was designed to lift the veil of secrecy cloaking shadowy persons or groups funnelling funds into India.

The expert panel said there were 13 overseas entities in at least seven tax havens that had routed funds into the Adani group entities. Sebi found that there were “42 contributories” to the assets under management of the 13 overseas entities but these could not be unmasked because the FPIs did not disclose their identities after the sudden and arbitrary change to the regulation in 2018.

The expert panel concluded that the investigation had “hit a wall” as a result of this.

When it first started investigating the Adani group in October 2020 — long before the Hindenburg Research came out — Sebi tried to sidestep this regulatory lacuna by trying to seek information on the ultimate owners of the funds routed via the FPIs through various avenues including the Directorate of Enforcement, Central Board of Direct Taxes and various securities market regulators in the seven jurisdictions where the 42 contributories were situated.

The market regulator drew a blank — and the Sapre panel said it had created a piquant chicken-and-egg situation.

Diluting the rule

On Tuesday, a report in The Economic Times explained how the FPI regulation was diluted – providing the Congress with the necessary ammunition to train its guns on the regulator and, by association, the Modi government.

“A report today in a leading economic daily provides details as to how the rule prohibiting investment by opaque funds, i.e. Regulation 32(1)(f) of Sebi (FPI) Regulations, was done away with on weak grounds,” Congress communications chief Jairam Ramesh said in a statement.

The report said the 13 overseas entities — which included one financial institution and 12 foreign portfolio investors (FPIs) — had held between 6 per cent and 21 per cent in the listed Adani group companies between March 2017 and March 2020.

It went on to add that the suspicious firms had the “highest holding” of 20.39 per cent in Adani Green Energy followed by Adani Transmission (18.05 per cent), Adani Total Gas (17.91 per cent), Adani Enterprises (15.56 per cent) and Adani Power (14.11 per cent).

The report said the change to FPI regulations was made on the basis of the recommendations made by a Sebi-appointed committee headed by former RBI deputy governor H.R. Khan which had been asked to suggest measures to “rationalise and simplify” the FPI regime.

Regulation 32(1)(f) of the FPI Regulations had prescribed an obligation on every designated depository participant at the time of registration to ensure that none of the FPIs had an opaque structure. “The objective of restriction on opaque structure was to prohibit those entities where beneficial owner (BO) information is not available or accessible.”

However, the Khan committee suggested that this rule should be diluted on the basis of a principle called ring-fencing.

The committee said ring-fencing was common among funds across many jurisdictions. It went on to say: “Structures where the beneficial ownership (BOs) are known but are ring-fenced against each other either because of regulatory requirement or contractual arrangement, cannot be considered as ‘opaque’.”

The Congress wanted to know what had prompted the Sebi to buy into this specious argument and allow opacity where none was allowed until 2018.

“Can Sebi explain the pressures placed on it to move in this unexpected direction? How is improving the Ease of Living of those suspected of money laundering and round-tripping consistent with promises of ‘Na khaoonga, na khane doonga’?” Ramesh said.

“It is now clear that, far from a clean chit, the Supreme Court Expert Committee on the Modani Mega Scam has unveiled how Sebi’s investigations of suspicious Adani transactions have been blocked or reached an impasse, which is why Sebi’s report deadline was extended to August 14.

“The Expert Committee had revealed that this was partly of Sebi’s own making, after the regulator did away with the requirement on identifying the ultimate beneficial owner of foreign funds and deleted provisions on ‘opaque structures’. This despite PM Modi’s frequent and evidently empty rhetoric against black money and offshore tax havens.

“It is therefore hardly surprising that Sebi has been unable to find the true beneficiaries of 42 companies based in offshore tax havens that have invested in Adani companies. It cannot run with the hares by diluting reporting requirements and hunt with the hounds pretending to identify beneficial ownership in opaque tax havens like the Cayman Islands, Malta, British Virgin Islands and Bermuda.”

Ramesh hoped that Sebi’s final report — expected to be filed on August 14 — would throw more light on the issue instead of covering it up.