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India is tightening transparency rules for “high risk” foreign investors, as part of the fallout from allegations of stock manipulation made by short seller Hindenburg against the Adani conglomerate this year.
The securities regulator Sebi is introducing a new disclosure regime on Wednesday for foreign investors with large stakes in single stocks or corporate groups. Sebi aims to curtail foreign funds’ ability to mask the extent of their ownership through complex company structures.
The regulator considers these concentrated investment vehicles “high risk” because of the chance that Indian company insiders could be controlling the funds through shell companies, and using them to influence stock prices or circumvent India’s 25 per cent minimum public float requirement.
Indian securities law stipulates that one-quarter of a company’s shares should be publicly owned to reduce the dominance of company owners.
The move to strip secrecy from certain foreign investors comes after US-based short seller Hindenburg in January accused Indian tycoon Gautam Adani’s infrastructure conglomerate of share price manipulation. Hindenburg Research alleged Adani had ties to a series of obscure foreign funds with holdings in Adani Group companies.
Adani strongly denied Hindenburg’s allegations, which have not been verified by an ongoing Sebi investigation. A panel appointed by India’s Supreme Court to oversee the probe reported that the regulator had “drawn a blank” in its investigation of more than a dozen offshore entities it deemed suspicious. Sebi has repeatedly requested more time from the Supreme Court to gather its findings.
Meanwhile, the regulator has been refining its new disclosure policy through consultations with investors and banks. The disclosures are aimed at helping simplify investigations into suspicious investors, with detailed information about the ultimate owners of concentrated investment vehicles now required within three months of the regulation coming into force. Failure to provide this could result in the loss of any licence to hold and trade Indian securities.
Some lawyers have critiqued the move as heavy-handed. Cyril Shroff, managing partner at Cyril Amarchand Mangaldas, said Sebi appeared to have “charted its own path on a disclosure regime disproportionate to the needs of the capital markets” and added that the change was “susceptible” to legal challenge.
The regulatory shake-up has spooked some investors, said Sumit Agrawal, founder and partner at Regstreet Law Advisors and a former Sebi official. “There is a shared apprehension that an overly rigorous approach from Sebi could potentially disrupt their carefully crafted investment strategies,” he said.
Foreign investors holding 50 per cent of their Indian assets under management in one company or corporate group, or having more than Rs250bn ($3bn) invested in Indian equities, will have to reveal the identities of all the people controlling or profiting from the investment vehicle.
Moin Ladha, a partner focused on financial regulation at Mumbai-based law firm Khaitan & Co, said there was a reason Sebi had introduced two different thresholds. The first “is you’re really focused or exposed to a single group, which makes the regulator suspicious, the second one is that you’re systemically important” to the market.
The regulator has introduced some exemptions in order to avoid ensnaring genuine investment firms that pool funds, including exchange traded funds.
“What remains to be seen is how the implementation and enforcement will be,” said Ladha. “It will certainly be a challenge to track, and a lot of this will be dependent on declaration by such portfolio investors.”
Agrawal said the more stringent regime “sends a clear message that India is committed to transparency and is open to quality investments”, which could “bolster confidence among investors”. However, the regulator would need to strike a balance “to avoid overregulation that could stifle market dynamics”, he warned.
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