Gautam Adani.
Credit: PTI Photo
The Organized Crime and Corruption Reporting Project (OCCRP), the organisation which has brought to light many scams which shook the foundation of many corporates all over the world, has turned the heat on the Adani Group, which was already struggling to recover from a tipping point on account of the Hindenburg Research published in January. The allegations of the OCCRP, read together with the Hindenburg Research, seems to depict a complete narrative of the Adani Group’s attempts at using its offshore allies to manipulate fund-flow as well as price and market share.
The Hindenburg Report, among other things, accused the conglomerate of ‘brazen stock manipulation and accounting fraud’, which led to a major toppling of investor trust and the ensuing share price fall. The report accused that the Adani family participated in setting up offshore shell entities to fake forex transactions for exaggerated turnover as well as siphoning of funds. Vinod Adani, a close family member, was accused of being responsible for managing a network of offshore shells to facilitate frauds through close associates. These offshore shells also constituted a chunk of the ‘public shareholding’ stipulated to be at minimum 25 per cent of the total shareholding by securities laws in India.
The OCCRP closes a part of the loop by revealing that two of these close associates as Nasser Ali Shaban Ahli and Chang Chung-Ling. The investigation traces back business connections of Adani family members with Ahli and Chang, and have also been shareholders and directors of some of its group companies.
Written statements from Adani representatives emphasises that the Indian entities in the group follow and comply with the Indian corporate laws. But can any law exhaustively define and determine a close relationship between people? Common violations in the corporate context, whether in India or globally, suggest that most of the intended outcome of these legislation get lost in translation, especially when they try to define relationship of any nature between persons. This has brought up issues in matters ranging from transactions with related parties, composition of promoter group, ultimate beneficial owners (UBO), insider trading, ‘independence’ of Independent Directors — basically the very essence of all the allegations against the Adani Group. There is a play of emotions which traverse the definitions that determine what constitutes an ‘interest’ in all these issues — it probably can never be defined without being outplayed by the application of the law in letter.
Another major issue is the access to information on foreign entities. The report of the expert committee constituted by the Supreme Court of India states that the Securities and Exchange Board of India (Sebi) had kept a few of the overseas investor companies in the Adani Group under its radar since October 2020 to ensure that the public shareholding of the group is truly public. However, it faced a major setback when it could not successfully trace the UBO of these entities.
With the current global business scenario where borders of countries are becoming practically irrelevant for investments, it is vital that a collaboration between Sebi and its counterparts in other countries be established through government intervention. This collaboration should enable these regulators to co-operate with each other in instances which require information on entities that cannot be tracked by the regulators from another country. This collaboration should also be wide enough to enable Sebi’s counterpart to initiate a probe against an entity governed by it based on a Sebi recommendation. If such an arrangement can be worked out, it would be a phenomenal development towards curbing frauds instigated in companies using untraceable offshore entities.
With the OCCRP investigation revealing names involved as well as proof of a few communications which suggests a connection between their interested entities to the Adani family, it would be ideal for Sebi to extend its probe into the matter — even if it means a delay in the report of the investigation, which is scheduled to be publish next month.
A combined reading of the definitions in the Securities Contracts (Regulation) Act, 1957 and the Sebi regulations signify a wide inclusion in the definitions of ‘promoter’, ‘promoter group’, ‘public’, and ‘public shareholding’. If the allegations raised against the Adani Group are found to be true, it would attract a wave of compliance issues starting from a possibility of delisting to investor outcry on the reliability of the disclosure and compliance norms for listed companies.
The need of the hour is to establish a mechanism through which Sebi can approach the Financial Services Commission, its Mauritian counterpart. The Memorandum of Understanding (MoU) that currently exists between these countries does not seem to be strong enough to uncover credible information on Mauritian entities and, hence, a stronger mechanism to yield information of any nature in the moment of crisis.
When the Indian government is determined about increasing foreign investment in India on one side, a balance should be brought in by ensuring accessibility of information on the source of funds being brought in, among other things.
(Puzhankara Sivakumar is a Kochi-based practising company secretary, and Anju Panicker is a Chennai-based practising company secretary.)
Disclaimer: The views expressed above are the author's own. They do not necessarily reflect the views of DH.