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Accusations of stock-market manipulation by the Adani Group, strenuously denied by the conglomerate, have shone the spotlight on a festering global problem loosely estimated to amount to between 2% to 5% of the world’s output: Money-laundering. Obscure funds based in Cyprus and Mauritius, one of whom is linked to an intermediary that’s also alleged to have played a role in the $4.5 billion 1MDB looting from taxpayers in Malaysia, may be funneling someone else’s money into Adani stocks, the short seller Hindenburg Research has alleged.
But whose money is it and whose job is it to find out?
“A listed entity does not have control over who buys/sells/owns the publicly traded shares or how much volume is traded, or the source of funds for such public shareholders,” the Indian group said in its 413-page rebuttal. “Nor is it required to have such information for its public shareholders under laws of India. Hence we cannot comment on trading pattern or behavior of public shareholders.”
The Securities and Exchange Board of India, however, can and must talk — and act. A more than $100 billion rout in the share prices of the highly leveraged infrastructure owner has the potential to spark a broader contagion, especially if the local banking system gets infected. It’s SEBI’s job to restore trust in the Indian market.
Stripping off the layers of shell companies and gleaning hard evidence on people behind them is tough for regulators. Not all overseas jurisdictions are willing to share information without prima facie evidence of criminality. It’s a doubly knotty challenge in India, where families control large business empires and have a natural incentive to shortchange minority shareholders. While other developing countries struggle with money leaving their shores via mispriced trade invoices and other illegal means, India is one of the weightiest emerging markets after China in the schema of index providers like MSCI Inc. Illicit flows tend to come back, to profit at the expense of genuine investors.
To keep the market clean, SEBI has to rely on an 11,000-member club. The lot is known as foreign portfolio investors, the registered conduits through which funds flow into Indian exchanges from the rest of the world. Members comprise Wall Street and other banks, active and passive money managers, sovereign wealth repositories and pension plans. But they also include the likes of Cyprus-based New Leaina Investments Ltd.
New Leaina’s website claims to offer a variety of investment possibilities, though about 95% of its assets are in Adani Green Energy Ltd., according to public filings. The investment vehicle held a little over 17 million shares as their price surged nearly 18-fold between late 2019 and April 2022. Even with the stock losing nearly three quarters of its value since then, New Leaina continued to own the same number of shares all the way through to December, based on Bloomberg data. Regulators worldwide want long-term, patient money, but surely SEBI should ask questions if its registered investors are seen to be behaving irrationally?
Back in the summer of 2021, too, there were jitters in the market about Adani stocks. Ever since, there has been considerable public interest in wanting to know their actual beneficial owners, or at least the senior management professionals in instances where the people receiving the gains from the stock couldn’t be listed (as in the case of, say, BlackRock Fund Advisors buying shares for its exchange-traded funds).
In response to a question in parliament in July 2021, New Delhi provided a list of foreign investors in Adani Group. It named Margaret Sjak Shie-Sankatsing, Jan Scheelings, and Collin de Wit as the people behind New Leaina. Hindenburg alleges they are likely employees of “Amicorp Group, a corporate services firm with extensive ties to Adani’s web of offshore entities.” Shie-Sankatsing did retire from Amicorp in 2015 as a managing director. Scheelings worked there as well, according to their LinkedIn profiles.
But so what? “Amicorp is a recognized firm that provides secretarial services to various entities and corporate groups from across the globe and not just the Adani portfolio entities,” the Indian conglomerate countered. “We are not concerned with these completely unrelated ‘scandals’ that you refer to in a blatant attempt to build a false narrative around our group,” Adani said in response to the short seller’s allegation that Amicorp also played a key role in Malaysia’s 1MDB fraud, “creating money laundering entities masquerading as mutual funds.”
“Short sellers come up with whatever allegations they want in the hope something sticks,” Toine Knipping, a co-founder and chief executive of Amicorp, said in an email reply to my questions. “If there would be anything strange going on in an entity Amicorp is in any way connected to, I am sure it would be part of our ongoing conversations with any relevant regulator.” None of the three New Leaina functionaries responded to my queries sent via LinkedIn.
While nobody has accused them of wrongdoing, their presence in this drama serves to illustrate a frustrating problem. The regulators’ goal in lifting the veil from opaque corporate structures offshore is to arrive at real people. In the 1MDB scam, the investigation reached bank accounts in the name of the then-Malaysian Prime Minister Najib Razak, through which the proceeds of the loot from the state fund allegedly flowed. That’s how Najib was convicted.
Such breakthroughs are rare, however. When the trail ends with officers of a corporate secretarial firm in a tax haven, the regulator has no further layers to peel — and no case that’ll stand up in court.
But the stakes are too high for SEBI to hide behind legal difficulties. French energy giant TotalEnergies SE has put a multi-billion dollar plan to produce green hydrogen with Adani on hold for now. Total owns about a fifth of Adani Green, where some of its recent fellow investors have been Elara India Opportunities Fund, LTS Investment Fund, Vespera Fund and Albula Investment Fund, all SEBI-registered foreign investors from just a couple of addresses in Mauritius. Together with New Leaina from Cyprus, they owned 120 million shares between them in December; Total had a little over 300 million.
The SEBI has written to custodian banks asking for details on beneficial owners of offshore funds and foreign portfolio investors by September, Reuters reported this week. However, there’s nothing the custodians can tell it by September that it doesn’t already know. To do more than just spruce up its database, the regulator will need to get creative, and arm itself with additional powers so that the fruit of its more robust supervision can withstand scrutiny by the appellate authority and India’s courts. Illicit flows must be stopped at the gate, but delicately. Or else, genuine investors will get irritated with India’s compliance burden.
Madhabi Puri Buch, the former banker who last year became the first woman to head SEBI, has the chance to shape investors’ perception of Indian markets for the next 20 years. Politically, too, it’s an opportune moment. As opposition politicians try to corner Prime Minister Narendra Modi for his proximity to Adani, and the government tries to distance itself from the saga, she can afford to get tough against powerful business families. India, it is said, always does the right thing in the end — when there’s a crisis. Hopefully, this time won’t be different.
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