Adani scandal prompts a change in Indian investment regime
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Adani scandal prompts a change in Indian investment regime

While no charges have been laid against the Adani Group, a new Sebi rulebook addresses a key concern that came from the January stock-market controversy.

Photo: Reuters

The scandal that engulfed the Adani Group earlier this year has proven to be bigger on noise than consequences so far.

Investigations into Adani by the Securities and Exchange Board of India (Sebi) have yet to yield a charge; the Supreme Court, which appointed a panel to oversee that investigation, has yet to announce an outcome.

But on November 1, a change finally came as a consequence of short-seller Hindenburg’s detailed allegations against the conglomerate.

One key allegation Hindenburg made was around the use of offshore funds and company structures as investment vehicles. Several Mauritius-based organizations were found to hold almost exclusively Adani stocks, which prompted concerns about a practice known in India as round tripping.

There is a sense these rules won’t have an impact on previous alleged transgressions, but will make it easier for Sebi to work out what’s happening from now on

This involves the circular trading of shares to drive up the stock price of listed companies, and despite the appearance of being offshore organizations and foreign investors, can in theory be exploited by domestic promoters.

These vehicles can also, in theory, circumvent a rule that Indian listed companies must have a 25% minimum public free float. One concern about the Adani Group was that its true free float might actually have been much thinner than appeared, allowing the share price to be more easily influenced by promoters.

The Adani Group has categorically denied wrong-doing, including the improper use of offshore vehicles such as these. “Innuendos that [the Mauritius vehicles] are in manner related parties of the promoters are incorrect,” it said in its detailed rebuttal to the Hindenburg report in January.

Foreign investors

Sebi is changing the disclosure rules for foreign investors with large stakes in single stocks – or linked corporate groups – in a set of measures that took effect on November 1.

Chiefly, they require a lot more information, specifically about the ultimate owners of concentrated investment vehicles. Once the regulations are in force, any identified suspicious investor will have between two weeks and three months to provide the information or risk losing any licence they hold to trade Indian securities.

Specifically, foreign portfolio investors (FPIs) with more than 50% of their equity in a single Indian corporate group will have 10 trading days to bring down their holdings or explain them to the satisfaction of the regulator. Those with more than Rs25,000 crore (Rs250 billion, or $3 billion) of equity AUM in Indian equities will have 90 days.

The establishment of two different thresholds for disclosure, and a set of exemptions for other investment vehicles such as exchange-traded funds, suggests that Sebi is looking at something specific: an organization with an exposure to one group so extreme that it looks odd.

It has previously been reported that more than 200 FPIs will be impacted by the new disclosure regime. Data from, cited in local Indian media, showed 227 FPIs with more than 50% of their equity investments in a single stock, or related group, of National Stock Exchange listed companies. Of them, 122 had the entirety of their holding in one company or group. While they had invested more than Rs1.98 lakh crore ($22.8 billion) in 140 different corporate organizations, the most prominent ones are Adani, OP Jindal, GMR and the Hinduja Group.

There is a sense that these rules won’t have an impact on any previous alleged transgressions, but will make it easier for Sebi to work out what’s happening from now on.

But one wonders what latitude Sebi has to enforce meaningful disclosure upon organizations that are, presumably, based outside India for a reason: to avoid regulatory oversight. The power Sebi has is the ability to withdraw a licence and therefore to stop overseas organizations being able to trade. That might help, but it is a power to be used sparingly in a market that aspires towards gradually increasing openness.

Meanwhile, the Sebi investigation into Adani continues. In October, it was reported to be studying the conglomerate’s relationship with a fund incorporated in the British Virgin Islands: Gulf Asia Trade & Investment. Indian state institutions are not known for rushing things, so expect a wait before this saga reaches its endgame.

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