SC panel on Sebi's Adani investigation: A journey without a destination

It seems that a change in rule in 2018 by SEBI is going to be an Albatross around the neck as it investigates the Adani affairs.

The previous law, regarding disclosure of the ultimate beneficiary of any foreign entity operating in the Indian market, required disclosure of both the beneficial owner and the ultimate beneficial owner of that entity.

This compliance was in accordance with the Prevention of Money Laundering Act, 2002 (PMLA).

According to the Act, while a beneficial owner may be the owner, or senior managing official, or director of that entity, the ultimate beneficial owner may be another human being/s with stake or control in the entity. However, in 2018, the Public Money Laundering Act amended the definition of ultimate beneficial owner and considered the beneficial owner as the ultimate beneficial owner.

Following the suit, SEBI also removed the clause regarding mandatory disclosure of ultimate beneficial owner in 2019. Consequently, foreign entities were not required to reveal their stakeholders or contributors to SEBI and supply only the details of the Senior Managing Official of that entity.

SEBI’s investigation on 13 FPIs found that there were 42 separate entities spread across 7 countries that were contributing funds to these 13 FPIs. However, the ownership of the 42 entities behind the 13 FPIs is not clear to SEBI as it is not within the current rules for FPIs to provide such disclosures. Thus the regulator is now taking help from other bodies like the Directorate of Enforcement et al to identify the real people behind the foreign companies who invested heavily in Adani Group stocks. Without finding out the end of the chain of beneficiaries in these companies, SEBI can neither conclude that there has been no violation done by the Adani Group, nor can it let them completely off the hook.

Upon accessing SEBI’s approach towards the investigation, the committee stated that ‘it is noteworthy that SEBI, in its legislative capacity, did away with the prohibition against any FPI having an opaque structure on the premise that declaration of the beneficial owner flows from rule (9) of the PMLA rules and that such a stipulation is sufficient for its regulatory purposes. Such compliance having been affected by the FPIs, coupled with the repeal of the provision on opaque structure, the chicken and egg situation of hoping to get evidence, can become a perpetual one.’

Which means that the limitation of existing laws regarding the identification of the ‘Ultimate Beneficiary’ behind a Foreign Portfolio Investor, enacted by SEBI itself, is the reason that SEBI has been facing issues in delivering conclusive evidences pertaining to the investigation. And these issues may never get resolved.      

Spirit of Law Versus Letter of Law

SEBI has submitted to the committee that while the transactions of various entities entangled in the Adani case may be technically compliant with the letter of the law, they may have violated the spirit of the law.

The concept of spirit of law can be understood through the ‘Mischief Rule’, which is one of the oldest tenets used in interpretation of statutes by the judiciary.

Using the ‘Mischief Rule’, a law is interpreted in a manner such that it serves the purpose for which a particular statute or rule was made, rather than interpreting just the literal meaning. As literal interpretation may be ineffective in dealing with the ‘mischief’ that the law was brought to curb.  

SEBI has been investigating the Group since 2020 and even now the Regulator admits that although there may not be technical violation of rules, the spirit of law may have been violated. As even the Committee report noted “it is evident that such an exercise could be a voluminous one but potentially a journey without a destination”.