India’s market regulator has asked all foreign funds investing in the country to identify their parent financial institution to help unravel opaque ownership structures, according to a letter seen by Reuters. The letter was sent by the Securities and Exchange Board of India (Sebi) to custodian banks, through which funds flow into the country, earlier this month with a request for the information to be provided by September.

The move follows a regulatory investigation into suspected violations in overseas investments in the Adani group of companies. The Adani group has denied all allegations. A panel appointed by the Supreme Court to oversee the investigation cited difficulties in obtaining information from offshore entities as one reason the regulator has struggled to reach any conclusion.

In its letter, Sebi wrote that it has found instances of foreign portfolio investor (FPI) registration being granted to branches of banks. “Since the branch of a bank is not a separate legal entity, (the custodian bank) shall ensure that their client is a legal entity,” Sebi said. Custodian banks are also required to identify a senior officer of the legal entity as a beneficial owner in the case that no single investor holds more than 10 per cent of the fund.

The reporting requirement aims to make transparent the sources of money coming into India, said two sources with direct knowledge of the matter, declining to be named as they are not permitted to speak to the media. “Sebi wants the parent financial institution to be a separate, identifiable legal entity regulated by the appropriate regulator of a cooperative jurisdiction,” said one of the sources.

Sebi said funds which fail to identify their parent institutions by September would have to wind up by March 2024. This is Sebi’s “endeavour to pierce through opaque structures and discover actual beneficial owners who ultimately own, control or influence an FPI entity”, said Prakhar Dua, leader for financial services and regulatory practice at law firm Nishith Desai Associate.

The latest attempt by the market regulator to try and “pierce” the veil and identify the beneficial owners of the money that is being routed through FPIs is a roving enquiry, our bureau adds. The enquiry into the antecedents of the money through the FPIs linked to the Adani group has “hit a wall” — the evocative expression that the Supreme Court-appointed committee of experts used in its report — because FPI regulations were diluted in 2019 by tossing out an “opaque structure” clause.

Under this clause, FPIs were required to disclose the name of the “last natural person above every person owning any economic interest in the FPI”. This effectively was designed to lift the veil of secrecy cloaking shadowy persons or groups funnelling funds into India. In October 2020, when it first started to investigate certain “suspicious transactions” relating to Adani group companies, Sebi tried to sidestep the regulatory lacuna by trying to seek information on the ultimate owners of the funds routed via the FPIs.

The Justice Abhay Sapre panel of experts said this created a piquant situation where the weakened regulations and the enforcement were pulling in opposite directions. Naturally, these attempts to unearth the identities of the natural persons behind all the entities drew a blank. There is no reason to believe that the regulator will turn up anything worthwhile through this roving enquiry since the other FPIs must have complied with lowered standards of disclosure.

The experts’ panel had put out the list of beneficial owners of the funds that were routed through the FPIs linked to the Adanis. All the 13 entities that were being investigated have already complied with the watered-down version of the regulation after the “opaque structure” clause was thrown out. The larger question is why Sebi is launching a roving enquiry into FPI disclosures of beneficial owners now? Is it designed to smother the strident criticism from the Congress and other critics of the Modi government — or send a scare through the community of foreign investors?