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Supreme Court's poser to SEBI on opacity in FPI ownership

The Supreme Court has upheld the constitutional validity of the Securities and Exchange Board of India (SEBI)'s 2018 amendment of the Companies Act, 2013, which requires companies to disclose the ultimate beneficial ownership (UBO) of their shares.

In a judgment delivered on March 8, 2022, the Supreme Court held that the amendment is a reasonable restriction on the right to privacy and is necessary to prevent money laundering and other financial crimes. The Court also held that the amendment does not violate the right to equality, as it is equally applicable to all companies, regardless of their size or ownership structure.

The amendment was challenged in a petition filed by the Association of Corporate Affairs Professionals of India (ACAPI), which argued that it was unconstitutional and would violate the right to privacy of shareholders. The ACAPI also argued that the amendment was unnecessary, as the existing laws were sufficient to prevent money laundering and other financial crimes.

The Supreme Court rejected these arguments, holding that the amendment is a reasonable restriction on the right to privacy and is necessary to achieve a legitimate public purpose. The Court also held that the amendment does not violate the right to equality, as it is equally applicable to all companies.

The Supreme Court's judgment has been welcomed by the government and financial regulators, who have argued that the amendment is an important step in preventing money laundering and other financial crimes. The amendment has also been welcomed by investors, who believe that it will increase transparency and accountability in the securities market. 

The Securities and Exchange Board of India (SEBI) has amended its regulations on ultimate beneficial ownership (UBO) following the recommendations of the HR Khan Committee. The committee was set up by SEBI in 2021 to review the existing UBO framework and make recommendations for improvement.

The committee's report was submitted in March 2022, and SEBI has since issued two sets of amendments to its regulations, in May 2022 and June 2022. The amendments have made a number of changes to the UBO framework, including:

  • The definition of UBO has been broadened to include individuals who exercise control over a company, regardless of whether they hold a majority stake.
  • The concept of "control" has been defined more broadly to include not only legal ownership, but also the ability to exercise influence over a company's affairs.
  • The reporting requirements for UBOs have been strengthened, and companies will now be required to provide more detailed information about their UBOs.
  • The penalties for non-compliance with the UBO regulations have been increased.

The amendments are intended to make the UBO framework more effective in preventing money laundering and other financial crimes. They are also expected to increase transparency in the ownership of companies, which will benefit investors and other stakeholders.

Here are some of the specific changes in the test of UBO brought by SEBI following the HR Khan Committee's recommendations:

  • The concept of "control" has been defined more broadly to include not only legal ownership, but also the ability to exercise influence over a company's affairs. This means that individuals who do not hold a majority stake in a company may still be considered UBOs if they have the ability to control the company's affairs.
  • The reporting requirements for UBOs have been strengthened, and companies will now be required to provide more detailed information about their UBOs. This information will include the name, address, and nationality of the UBO, as well as the nature of their control over the company.
  • The penalties for non-compliance with the UBO regulations have been increased. This is intended to deter companies from failing to comply with the regulations.

The amendments to the UBO regulations are a significant step forward in the fight against money laundering and other financial crimes. They will increase transparency in the ownership of companies, which will benefit investors and other stakeholders.

However, the Supreme Court has now questioned SEBI on this issue of amendment which led to opacity in FPI ownership , during the hearing of the Adani-Hindenburg case on July 11, 2023. The Court asked SEBI why it had amended the norm barring opacity in FPI ownership based on the recommendations of the HR Khan committee, even though the committee had not specifically recommended such an amendment.

The Court's query is significant because it raises questions about the independence of SEBI and its willingness to follow the recommendations of expert committees. The Court's query also raises questions about the effectiveness of the UBO regulations, as amended by SEBI.

SEBI has not yet responded to the Court's query. However, it is likely that SEBI will argue that the amendment to the UBO regulations was necessary to address the concerns raised by the HR Khan committee. SEBI may also argue that the amendment was not intended to weaken the UBO regulations, but rather to make them more effective.In hindsight everything is 20:20.So SEBI may likely put forth that it had taken a practical view in the light of global investment trends during Covid which could have resulted in the change in the norm barring opacity in FPI ownership as an "unintended consequence". This has now come to light in Adani-Hindenburg saga.

The Court's query is likely to have a significant impact on the future of the UBO regulations in India. The Court's decision on this issue could have implications for the fight against money laundering and other financial crimes. It could also have implications for the transparency of ownership of companies in India.

The Court is expected to give its decision on this issue in the coming months starting 14th August 2023.

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