Sebi defends rules on opaque models, probe timelines before SC

Post the Adani-Hindenburg saga, various petitions were filed in the Supreme Court regarding certain aspects of Sebi’s functioning. The apex court had formed an expert committee to weigh in on the matter and come up with recommendations that would tighten the Indian securities market. The expert committee submitted its report to the apex court in May. Now, Sebi has provided responses to various recommendations given by the expert committee.

In its 46-page response, Sebi said before 2019 FPIs were required to provide beneficial ownership (BO) information only when sought by Sebi, hence there was a prohibition saying FPIs should not have opaque structures. However, in 2018 and 2019, Sebi tweaked FPI rules making it mandatory for all FPIs, excluding sovereign funds, to submit BO information upfront. Hence, opaque structure prohibition clause became redundant and was removed, it said.

The expert committee report suggested that the difficulties experienced by Sebi in identifying beneficial owners of certain FPIs was partly because of repeal of opaque structures provision in 2018.

Had existing “opaque structure" clause been retained, not only would there be an element of redundancy (since upfront BO disclosure was now mandated), but there could also be an element of “significant ambiguity," Sebi said in the petition.

“Specifically, the opaque structure provision allowed for FPIs with opaque structure-like characteristics to register, inter alia, by giving an undertaking of providing BO as and when asked by SEBI. This clause could have been a route to circumvent the 2018 requirement of providing BO details upfront," Sebi added.

The affidavit comes in wake of Sebi’s probe into allegations of corporate malfeasance by US short seller Hindenburg Report on the Adani Group in January. The group has denied these allegations as being “maliciously mischievous."

To be sure, Sebi’s affidavit did not cite Adani Group. SC has directed the regulator to submit its report on Hindenburg allegations by 14 August.

The panel recommended stipulation of strict timelines for initiation and completion of Sebi probes. However, Sebi said such an idea would not be ‘appropriate’. It added investigations were complex matters and time taken in a case depends on various factors of the case. So, there cannot be a universal timeline for all cases.

“Prescribing specific timelines to complete the investigation may compromise the quality of investigation. Additionally, completion of investigation also depends on various factors including the information provided by the persons being investigated, whether such persons are cooperative or not...," Sebi said.

In its report, the panel had said Sebi was adding newer legal requirements on companies in terms of related party transactions (RPTs). The committee said such new rules “cannot change the underlying approach prospectively and then call into question past transactions based on the former approach."

Sebi responded saying all its rules on RPTs were being applied only prospectively.

“Whenever amendments are made to any provisions of law, SEBI applies the law prospectively," Sebi said in its petition. “It is a different case whether a provision of law has been circumvented before the amendment to such law has been made. Even in such cases where there is a case of circumvention, SEBI applies on the extant law on circumvention, and does not take enforcement actions based on the amended provisions of law,"

Sebi also dismissed the observations made by the expert panel saying number of cases where Sebi initiated regulatory actions has skyrocketed in the last two years. The expert committee had suggested that Sebi should focus only on major violations and minor violations should be settled so that regulatory resources are preserved for important cases.

Sebi said the increase in number of cases being taken up for regulatory action by Sebi increased in the last two years due to illiquid stock options probe which resulted in Sebi filing 13,000 cases for non-genuine trades. The total number of cases taken up by Sebi increased to 7,195 in FY22 from 562 in FY21.

“If ISO (illiquid stock options) matters, being the anomaly, are netted out for FY 2021-22, the total number of proceedings initiated in FY 2021-22 would only be 416," Sebi said in the petition.

The expert panel suggestion that orders issued by various Sebi officers need to be consistent. In its response, Sebi noted each of its whole time member and adjudication officer are ‘independent authorities’ who are required to deal with merits of a case independently.

In the petition, Sebi also highlighted various surveillance measures it undertakes to ensure smooth functioning of the market.