A recent SEBI consultation paper proposing a higher ownership stake for NRIs in foreign portfolio investors (FPIs) based out of GIFT IFSC is well intended. Presently, NRIs can hold up to 50 per cent jointly or 25 per cent individually in FPIs. The idea seems to be to help increase investments by NRIs in the stock market while simultaneously trying to keep a sharper eye on such investments — obtaining information from the IFSCA will be far easier than making authorities in low tax jurisdictions divulge information. The move to set up a more flexible regulatory framework is also welcome to make the GIFT IFSC attractive to foreign investors. But it is unlikely that these concessions will make it easier for SEBI to identify the beneficial owners of foreign portfolio investors.

SEBI’s move should be seen in the context of Hindenburg Research’s report on Adani which pointed to entities belonging to the group posing as foreign portfolio investors and manipulating the stock price. Since 2020, SEBI has been investigating the 13 overseas entities holding stocks of Adani group to find the beneficial owners, but it has not been successful because the ultimate beneficiaries in such FPIs are hidden behind multiple layers of corporate ownership. The recent report from Organised Crime and Corruption Reporting Project, which established the link between Vinod Adani, Gautam Adani’s brother, and two of the FPIs investing in the Adani group — Emerging India Focus Fund and EM Resurgent Fund (EMRF) — may only have increased the pressure on SEBI. To be sure, it is not known if the regulator has unravelled the trail in the last few months because its status report submitted to the Supreme Court is not public yet. The fact though is that the regulator will now have to establish the beneficial owners in other FPIs too if only to ensure that this route is not used by other promoters to bid up share prices of their companies.

Of note is that SEBI has admitted in the consultation paper that NRI controlled entities continue to pose a challenge. It states, “certain issues… relating to OCBs (relaxed version of NRI owned entities) including their low capitalization, proximity / likely proximity to Indian promoters, difficulty in identification of actual beneficial owners etc., exist even today.” This problem cannot be resolved by inviting them to invest through the GIFT IFSC since the entities which want to conceal the beneficial owner will prefer to operate out of jurisdictions which have tight data privacy regulations or where the anti-money laundering rules do not require disclosures similar to Indian regulations.

Asking FPIs with larger concentration to a single group to provide granular data on beneficial owners to SEBI does help. But the government too needs to pursue information sharing agreements with low tax jurisdictions favoured by Indian entities, to put an end to such practices.