The advocacy group, Peoples’ Commission on Public Sector and Public Services (PCPSPS), which includes eminent academics, jurists, erstwhile administrators, trade unionists and social activists as its members, has demanded appointment of an independent commission headed by a member of judiciary into the Hindenburg-SEBI accusations "to protect the integrity of domestic capital market."
In a statement, PCPSPS, which carries out in-depth consultations with all stakeholders and people concerned with the process of policy making, especially on the government’s decisions to monetise, disinvest and privatise public assets/enterprises, said in a statement that such an inquiry is especially necessary because, despite allegations and counter-allegations, "the government has adopted a nonchalant attitude as if nothing has happened".
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The PCPS issued a detailed statement on 10th February 2023 on how the Adani-Hindenburg controversy at that time brought to the fore several deeply worrying facets of the regulatory regime governing India’s capital markets. The latest accusations made by Hindenburg Research against a possible conflict of interest on the part of the present Chairman of SEBI once again raise similar concerns about capital market regulation in India.
While the accusations made by Hindenburg against the present Chairman of SEBI are serious, we do not wish to jump to any conclusion on the veracity of those accusations, pending an independent investigation.
Meanwhile, we find that, while the government at the Centre has not cared to order an investigation to dispel any doubt about the role of SEBI and its Chairman, the Chairman, in her personal capacity, has issued a joint public statement with her husband contradicting Hindenburg's accusations, attracting in turn a prompt rebuttal from Hindenburg, followed by several additional facts revealed through other investigative reports. Instead of clearing doubts, such accusations and counter-accusations have raised additional public concerns about the integrity of the domestic capital market. In view of the fact that the present government has deliberately adopted policies that tend to encourage small retail investors to invest their hard-earned savings in the stock market, it is of paramount importance that its regulation remains beyond reproach.
Instead of responding to such public concerns, it is worrisome that the government has adopted a nonchalant attitude as if nothing has happened. For example, a spokesperson of the DEA is reported to have summarily dismissed the accusations by saying, “SEBI has issued a statement, and the concerned person has given a statement. I have nothing further to add... All the disclosures have already been made as said by SEBI. There is no financial scandal involved. In addition to this, SEBI (Chairman) has already stated that she recused herself from cases wherever there was a conflict of interest”.
We feel that the government cannot afford to adopt such a hands-off indifferent approach and, instead should clear doubts by ordering a quick, independent investigation to ascertain the factual correctness of the accusations.
While the SEBI Chairman may say that she has disclosed the details of her investments to SEBI, since she had been a full-time member of SEBI from April 2017 to March 2022 and the Chairman of SEBI thereafter, it is the government that would have appointed her to those senior positions. If any disclosure were to be made by her, she ought to have made such a disclosure not only to SEBI but also to the Ministry of Finance. One is not sure whether the Ministry of Finance had been informed of it by her and if the Union Cabinet had also been kept informed. In principle, since Hindenburg had made accusations against her as an individual, she cannot give a clean chit to herself.
The accusations against the Chairman of SEBI also raise concerns about similar conflict of interest in the case of the other full-time members of SEBI. All such matters need to be subject to an independent investigation.
The larger picture of overseas shell companies used by some business houses:
While looking into the veracity of Hindenburg's accusations is important, it should not divert the attention of the nation from the larger picture of how the present government has systematically and deliberately encouraged and nurtured a shadow economy to flourish overseas for unethical private corporate entities to set up dubious shell companies to stash their illicit wealth, round-trip it funds at their will, not only for evading taxes but also for manipulating the domestic stock market to profiteer at the cost of millions of small investors in India. One should not be surprised how such dubious shell companies have also been used to fund the political party in power through several illegal instruments including the infamous Electoral Bonds scheme.
Overseas shell companies:
Hindenburg's accusations against the Adani Group and the Chairman of SEBI revolve around a number of dubious shell companies flourishing in tax-haven countries, outside domestic regulatory oversight. Many big business houses in India are known to have set up such shell companies to preclude domestic regulation.
For regulatory authorities to be able to investigate overseas shell companies, they need to be duly empowered under the laws under which they function. The term, “shell companies” both domestic and overseas, needs to be defined properly in those laws. Those laws include the Companies Act, the Prevention of Money Laundering Act, the SEBI regulations and so on.
For example, the US Security Exchange Commission, the OECD countries and others have not only defined what a shell company is but also enlarged their authority to regulate an overseas shell company. Unfortunately, the Indian laws have remained silent on this, suggesting a conscious measure to protect their interests rather than safeguarding the public interest.
Answering a Rajya Sabha Question on shell companies on 6-2-2018, the Corporate Affairs Minister stated'
"The Companies Act, 2013 does not define the term Shell Company. However, the Organisation for Economic Cooperation and Development (OECD) defines a Shell Company as a company which is formally registered or otherwise legally organised in an economy but which does not conduct any operation in that economy other than in a pass through capacity. Under the Companies Act, 2013, Section 248(1)(c) provides for removal of name of company from the register of companies if it is not carrying on any business or operation for a period of 2(two) immediately preceding financial years and has not made any application within such period for obtaining the status of a dormant company under Section 455. Based on the above mentioned provision, 2.97 lakh (domestic) companies were identified under this category as on 31.03.2017 and after following due process names of 2,26,166 companies were struck off from the register of companies as on 31.12.2017”.
It is clear that the Ministry of Corporate Affairs referred only to domestic shell companies, not overseas shell companies, which have been at the centre of the controversy all along.
The Corporate Affairs Ministry did set up a “task force” to indicate a fool-proof definition of the term, “overseas shell companies” but the proceedings of that task force have not seen the light of the day since 2018. Meanwhile, many business houses are exploiting that legislative loophole, offered to them by the government on a silver platter and using their funds in overseas shell companies to play havoc with our economy.
SEBI in cahoots with the NDA government:
The SEBI (Foreign Portfolio Investors) Regulation issued on 7th of January, 2014 dealt with the opaque structure of FPIs and categorically required them to disclose the very ultimate natural person at the end of the chain of every owner of economic interest in an FPI in order to dismantle their opaque structure and make it mandatory for them to inform the capital market regulator of the underlying ownership of an FPI. This was considered necessary to unmask the identity of the true owners of investments made in India through FPIs by overseas investors. Such a stringent requirement would have helped SEBI to readily investigate the ownership of FPIs in cases such as those relating to the Adani Group.
The SEBI (Foreign Portfolio Investors) Regulation issued on December 31st, 2018 diluted the above mandate making it difficult for SEBI to investigate the beneficiary ownership of FPIs, for reasons best known to it. In fact, the expert committee appointed by the apex court to look into accusations made against the Adani Group in the first Hindenburg report, in their report of 2nd March 2023, expressed their surprise at this and wondered how SEBI would be able to investigate the overseas shell companies reported to be associated with the Adani Group.
Corporate Affairs Ministry set up a task force for fool-proof definition of overseas shell companies, but nothing has come of it since 2018.
It is thus clear that SEBI has deliberately or otherwise disabled itself from conducting a thorough investigation as required by the apex court.
Investigation against the Adani Group for more than six years -- Is there an end in sight?
Even prior to the first Hindenburg report, there were accusations against overseas shell companies associated with the Adani Group. In a reply given on 19th July 2021 to Question No. 72, in Lok Sabha, the Ministry of Finance admitted that even at that time, some Adani Group companies had already been under investigation by SEBI and DRI, while the provisions of the Income Tax Act prohibited disclosing the status of investigation under that Act. In other words, investigations against the Adani Group have been going on for more than six years, with no end in sight, suggesting that both the government and its agencies have been deliberately dragging their feet for reasons best known to them.
For lesser mortals accused of offences far less serious in nature, the Central investigating agencies seem to be moving at a lightning speed, detaining the accused at the drop of a hat and harassing them unduly.
Ministry of Finance's role:
The Ministry of Finance has also played a dubious role in helping overseas shell companies to flourish.
For example, the Dept of Economic Affairs (DEA) in the Ministry of Finance issued a relaxation in overseas investment rules in August 2022 [GSR 646(E) dated 22-8-2022], which implied that an overseas investment in a foreign entity by a resident in India would be permissible, even if the foreign entity in question invested into India, either directly or indirectly, either through another subsidiary registered in the main overseas location or in a third country, irrespective of whether the location was in a tax-haven country, which has facilitated round-tripping and tax evasion.
A former SEBI Chairman on the Boards of Adani companies:
U K Sinha who served as Chairman of SEBI, given extension after extension for a record tenure of six years from February 2011 must have been aware of references from DRI to SEBI on investigation against some Adani Group companies. He has since joined the Boards of some Adani Group companies, raising questions about his role in dealing with the matter when he was the SEBI chief.
Post-1991 reforms -- Emergence of the stock market as the primary destination of investments:
Ever since the launch of the1991 “economic liberalisation” measures that deified the role of the private sector, without ensuring transparency, competition and public accountability, the successive governments have been trying to hand over valuable public assets to private monopolies and forcing small savers into investing their hard-earned savings in a volatile stock market that helped syphon off those savings into the waiting hands of predatory business houses.
The experiment in allowing private companies to make an entry into the banking sector started with the setting up of the Global Trust Bank (GTB) in February, 1994. Within 10 years, GTB got embroiled in a stock market scam involving GTB's promoters who were found to have syphoned off its depositors' funds. Consistent with the saying, “socialise losses, privatise profits”, A PSU bank was forced by RBI to go to the rescue of GTB's affected depositors.
More recently, LIC which runs primarily using policy holders' funds, which has become a national symbol of social security provided for millions of small families, came on the harsh anvil of the government's ill-advised disinvestment programme, pushing its small policyholders into the hands of predatory stock market sharks. The PCPS issued a detailed response to this, questioning the underlying logic.
Today, senior political leaders, instead of worrying about continuing poverty and undernourishment, increasing income inequities and concentration of wealth and under-investment in education, health, livelihood generation and food security, seem to be more obsessed with corporate glory, deification of the stock market and twisting policies to help oligarchies.
For example, during recent elections, it is ironic that two senior leaders holding responsible positions in the government should go to the unbecoming extent of using elections to mislead small investors into investing their savings in the stock market.
No less than the Prime Minister himself, ably endorsed by the Home Minister, “predicted” a stock market to surge on the 4th of June, 2024, namely, the date of counting of votes in the elections, conveying a hint that investors should invest in the stock market, as his government’s return to power would usher in further so-called “reforms”. Such an irresponsible statement resulted in a stock market boom prior to counting of votes, followed by a sharp fall, after the results were known, raising concerns over predatory big investors taking full advantage of the consequent volatility, to aggrandise themselves at the cost of millions of unwary small investors. Instead of probing it as a regulator ought to, SEBI gloried itself in inaction.
What next? An independent statutory enquiry commission is the only answer:
The policy twists and turns referred above suggest a well-orchestrated set of moves made by the government and its regulatory agencies to systematically and consciously place the economy and its valuable resources in the hands of a few unethical oligarchs. While earlier and the latest Hindenburg revelations do call for a thorough investigation, the larger picture of the government's connivance with a few oligarchs can be brought to light only through an independent enquiry covering a time frame over the last several years.
Whether due diligence was followed in appointing the SEBI board members and Chairman also needs to be investigated.
Since the present government seems to have a direct hand in this, we appeal to the President of India to make a reference to the apex court under Article 113 and appoint a commission headed by a member of the higher judiciary under the Commissions of Enquiry Act to examine the above-referred policy changes, their adverse impact on the economy and people's savings and their implications from the point of the unholy nexus between big businesses and the political party in power and recommend corrective measures.
Such a Commission of Enquiry is necessary to safeguard the integrity of the economy and the future of our democracy.
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