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Nov 08, 2023

Adani scandal forces SEBI to crack whip on foreign investment rules

Indian conglomerate faced ‘misappropriation’ allegations in January

The Securities and Exchange Board of India is tightening its regulation around foreign investment in the wake of the Adani crisis that hit earlier this year. 

The new rules, which came into effect last week, aim to enhance the disclosure requirements for foreign investors holding large stakes in single stocks or an Indian corporate group. 

The rules require public companies to offer more transparency regarding ownership, economic interest and control of objectively identified foreign portfolio investors. Currently, Indian public companies are predominantly controlled by one main promoter – such as the founder – who has a vested interest and majority stake in a company, which is the case with Adani Group. 

The added transparency will look at restoring consumer trust in investments and shedding more light on the decision-making of those owning a majority share in a company.

The changes come after a series of misappropriation allegations were unearthed in a Hindenburg Research report on Adani Group in January this year. One of the accusations that sparked an investigation from the regulator concerns using offshore entities as vehicles to conceal promoter or insider ownership. 

‘Our source stressed that Mauritius-based funds were a vehicle to cut the trails and conceal the identity of an investor bringing cash from overseas into the Indian market,’ the report states. 

Sketchy dealings 

The short-seller report also accuses Adani Group of engaging in stock manipulation and ‘flagrant fraud’, stating that the $36 bn company’s ‘obvious accounting irregularities and sketchy dealings seem to be enabled by virtually non-existent financial controls. Evidence of stock manipulation in Adani listed companies shouldn’t come as a surprise.’ 

In the original media statement responding to the report, Adani Group said the ‘maliciously mischievous’ unresearched report had adversely affected the group, shareholders and investors. 

‘The volatility in Indian stock markets created by the report is of great concern and has led to unwanted anguish for Indian citizens,’ it stated. ‘We are deeply disturbed by this intentional and reckless attempt by a foreign entity to mislead the investor community and the general public, undermine the goodwill and reputation of the Adani Group and its leaders, and sabotage the [follow-on public offering) from Adani Enterprises.’