Adani probe: Who owns India’s firms? Time to find out

A panel appointed by the Supreme Court recently stopped short of returning a finding of regulatory failure against the Sebi

By Andy Mukherjee

India’s stock-market watchdog seems to be on an urgent mission to rescue its credibility. A controversial, new proposal to track foreign money to its source is bound to run into resistance from vested interests. But without such powers, the regulator can never claaim to run a clean market.

A panel appointed by the Supreme Court recently stopped short of returning a finding of regulatory failure against the Securities and Exchange Board of India. But the committee’s characterisation of the Sebi’s ongoing probe into the country’s largest infrastructure behemoth as “a journey without a destination” wasn’t exactly a vote of confidence, either.

The regulator told the expert panel that it is investigating as many as 13 opaque entities based in Mauritius and Cyprus that, as of March 2020, held between 14 per cent and 20 per cent across five publicly traded stocks of the Ahmedabad-based Adani Group.

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Those are large numbers. Specifically, the Sebi wants to verify whether the 42 investors who put capital into these 13 vehicles — 12 funds and one overseas financial firm — are mere fronts for the tycoon Gautam Adani and his family. The conglomerate had strenuously denied those allegations in New York-based short-seller Hindenburg Research’s January 24 report and said that “innuendoes” that any of the public shareholders “are in any manner related parties of the promoters are incorrect.”

While the Adani Group is the most high-profile case of a large stock-market fortune propped up by a less-than-transparent source of foreign funding, it isn’t the only one. How will India ever be able to chase shape-shifting capital to its ultimate owners? The Sebi’s plan, which it has released for public consultation, is ostensibly simple and rules-based.

It will leave undisturbed all pension pools, as well as public funds with a diverse retail base. Foreign investors linked to a government or a central bank, such as sovereign wealth funds, will also be spared. Everyone else will be judged high-risk, and if their local portfolios happen to be bigger than Rs 25,000 crore ($3 billion), or if they have a concentration of more than 50 per cent in any one Indian business group, they will have to “provide granular data of all entities with any ownership, economic interest, or control rights on a full look–through basis” until the disclosures reveal names of individuals, retail funds or large, publicly traded firms.

Naysayers will argue that such a mechanical approach will throw up many false positives. The Indian market will get a bad rep for not being welcoming of foreigners. The other issue is of practicality. Suppose a legitimate, diversified fund is unlucky enough to get classified as high risk. It may be required to furnish information about the source of every dollar invested in it. But if the Sebi has been unable to get to the bottom of the 42 Adani investors in Cayman Islands, Malta, Curacao, British Virgin Islands, Bermuda, Ireland and the UK, what authority will a private fund manager have to peel away multiple layers of corporate veil and get everyone up to the ultimate owners to waive off their privacy rights?

The risk of excessive compliance can never be dismissed by anyone familiar with India’s bureaucratic overzealousness. For now though, the Sebi deserves a chance. The idea that it is about to open a Pandora’s Box is without merit. The regulator’s consultation paper says that it estimates 6 per cent of foreign investment — or less than 1 per cent of the total market capitalization — to be potentially high risk. Besides, it’s willing to grant a six-month grace period to funds that are scaling up or winding down. They can temporarily breach the 50 per cent rule without additional disclosures.

Similarly, a capital pool that invests in clean technologies worldwide may have a small Sebi-registered portfolio. It will be viewed as low or medium risk as long as a single Indian group accounts for less than 25 per cent of the global fund.

To me, false negatives are a bigger worry. Instead of a $1 billion opaque fund with 51 per cent allocated to one Indian business, the Sebi will be confronted by two such entities, each earmarking 49 per cent of its $500 million corpus to the same group. The drive to root out “briefcase investors,” or dodgy money masquerading as Mauritius-domiciled funds, could thus produce the opposite of the intended effect. Some discretion in classifying an investment vehicle as high risk may be warranted to prevent gaming of the proposed rules.

The only draconian part of the Sebi's proposal is the disclosure requirement for high-risk funds with more than $3 billion invested locally, regardless of concentration. The goal here is not to catch violations of minimum public-shareholding norms but to identify beneficial owners from a country that “shares a land border with India.” That’s a euphemism for China. Prime Minister Narendra Modi’s government doesn’t want firms from the People’s Republic to acquire interests in India Inc. without its permission. It’s possible that hard-to-penetrate entities in a third country are being used to get around those regulations, which have so far been spelled out only for foreign direct investments.

There’s no suggestion that any of Adani’s beneficial owners are from China. Taking on the border-country issue in the same consultation distracts from the Sebi's task of repairing its reputation, and gives a handle to those who do not want a new disclosure regime.

Adani shares have bounced off their post-Hindenburg lows, though their market value is still $100 billion lower than it was before the short-seller's attack forced tycoon Gautam Adani to cancel a share sale. The former centi-billionaire from Modi’s home state of Gujarat has won the backing of US-based GQG Partners and is once again ready to get institutional investors to validate billions of dollars in new fundraising. In a credit update on Monday, the group announced the completion of a $2.65 billion deleveraging program. Net debt was 3.27 times EBITDA in March, down from 3.81 times a year earlier. Cash balances and funds from operations will comfortably exceed the debt maturing over the current financial year and the next two, it said.

As Adani signals his intention — and financial ability — to move on from the controversy, the Sebi is at risk of being left on the platform, holding a bag of unanswered questions about who exactly owns India’s firms. Now that it has a plan, it should press ahead and show that when it comes to running a clean market, its aimless journey so far is finally going somewhere.