A recent SEBI consultation paper recommending higher ownership by NRIs in foreign portfolio investors (FPIs) based on GIFT IFSC is out of good intentions. Currently, NRIs can jointly hold up to 50% of shares in an FPI, or 25% individually. The idea seems to be to help NRIs increase their investments in the stock market while trying to keep tabs on such investments – getting information from IFSCA will be much easier than letting authorities in low-tax jurisdictions leak it. The move to create a more flexible regulatory framework is also welcome, which will make GIFT IFSC attractive to foreign investors. But these concessions are unlikely to make it easier for SEBI to identify the beneficial owners of foreign portfolio investors.
SEBI’s move should be viewed in conjunction with Hindenburg Research’s report on Adani, which stated that entities belonging to the group impersonated foreign portfolio investors and manipulated the stock price. SEBI has been investigating 13 overseas entities holding Adani Group shares for beneficial owners since 2020 but has been unsuccessful as the ultimate beneficiaries of such FPIs are hidden behind layers of corporate ownership. A recent report by the Organized Crime and Corruption Reporting Project established the relationship between Gautam Adani’s brother Vinod Adani and two FPIs investing in Adani Group – Emerging India Focus Fund and The report may only add to the pressure on SEBI due to its links to the Emerging Markets Recovery Fund (EMRF). To be sure, it’s unclear whether the regulator has picked up on leads over the past few months, as its status report to the Supreme Court has not been made public. But the fact is that regulators now have to establish beneficial owners in other FPIs too, if only to ensure that other promoters don’t use this avenue to drive up their companies’ share prices.
Notably, SEBI acknowledged in the consultation paper that NRI-controlled entities continue to pose challenges. It states that “certain issues associated with OCB (a relaxed version of an NRI-owned entity), including its low capitalization, proximity/possible proximity to Indian promoters, difficulty in identifying beneficial owners, etc., persist even today.” The problem It cannot be resolved by inviting them to invest through the GIFT IFSC, as entities that want to conceal beneficial ownership prefer to operate outside jurisdictions where data privacy regulations are strict or anti-money laundering rules do not require disclosure of similar information. Conforms to Indian regulations.
Asking more single-group focused FPIs to provide SEBI with detailed data on beneficial owners would indeed help. But the government also needs information-sharing agreements with low-tax jurisdictions favored by Indian entities to end such practices.
