Simplified Laws Guide to Taxation and Legal Concern A quick recap. Earlier this week (14th June) Economic Times reported that trading accounts of three Mauritius-based funds that have invested in Adani Group Shares are frozen by National Share Depository Limited (NSDL) due to non-compliance. As a fallout of this news, the Adani Group company share prices tumbled in the last four days. (Note: Later NSDL clarified that the accounts were not frozen)
Whenever an issue creeps up like this, I look forward to Dr. Subramanian Swamy’s reaction! As expected, he tweeted on 15th June – “All the three firms that invested Rs.45,000 crores in Gautam Adani’s companies have the same address in Mauritius. Who are the owners of these three firms?”
The three Foreign Portfolio Investors (FPIs) referred above, are Albula Investment Fund, Cresta Fund, and APMS Investment Fund, all having their office at 33, Edith Cavell Street, Port Louis, Mauritius.
Another headline caught my attention – Mr. Andy Mukherjee, Bloomberg said “Gautam Adani Needs Investors Who At Least Have A Website”
I am confident that the Regulator will deep-dive and get to the bottom of the issue. I am also hopeful that Dr. Swamy, a person of high integrity, enormous courage, and who can stand up against anyone will stay focused on this matter till its logical conclusion.
The purpose of this short note is not about Adani Group or its investors. I am not getting into the juicy news. This is to give a fair understanding of the law behind non-compliance or lapses.
The basics of regulations –
Who are Foreign Portfolio Investors (FPS)? FPIs refer to investment groups, regulated by the Securities and Exchange Board of India (SEBI) who buy stocks (also invests in mutual funds, bonds, etc.) in the Indian Market. These FPIs, as part of regular compliances, have to submit certain documents to SEBI. One of the documents is Know Your Client (KYC) wherein the FPI has to submit –
- Applicant-level document such as Proof of address, Board Resolution, MoA, etc.
- List of Authorized Signatories; and
- List of Ultimate Beneficial Owners (UBO)
UBO are the natural persons who ultimately own or control an FPI and should be identified in accordance with Rule 9 of the Prevention of Money Laundering Act (PMLA).
Why should the Regulator know the UBO?
It is essential to know the real owner! For example, Mr. A gives money to B, B gives to C and in turn, C gives to D. D purchases shares with that money. The capital appreciation and profits earned by D will ultimately benefit Mr. A because he is the ultimate beneficiary in the deal. In order to cover-up (or hide the illegal wealth), A moved money through 4 layers B, C, and D. In a situation like this, it is difficult for the Regulator to identify, the original source of the funds with which the shares are purchased by D.
So, the regulator wants to know the identity of those Individuals/persons who have laundered (routed) the money through multiple layers. Is any money going out of India through an illegal route and coming back (round-tripping) in some other form as clean money? Whether any terrorist money is coming to Indian financial markets? It is fair and justified to plug this loophole and therefore, the Central Government had framed a law called the Prevention of Money Laundering Act (PMLA) in 2005.
The Rule under PMLA –
As per PMLA Act every banking company, financial institution or intermediary, etc. shall have to maintain a record of all transactions and report suspicious transactions. One of the best methods of preventing and deterring money laundering is to know more about the investor. Thus Know Your Client (KYC) rules are framed to identify the investor, his background, and who finally owns the company.
Now, let me stitch the above points together! It is reported that three investors (FPIs) based out of Mauritius who invested in Adani Group have not submitted KYC documents, which means, the ultimate beneficial owners are not revealed to the Regulator. (Thus, Dr. Swamy asked – who are the real owners?) As per the regulation, the accounts of non-compliant FPIs are suspended. This is what has happened with the FPI investors of Adani Group.
Prima facie, it looks like a simple issue, Non-submission of KYC documents! As it happens in all other real-life instances, at times, even an elementary issue may cause colossal damage. The current fall of Adani Group share prices is a classic example.
