Shares of Adani group companies tumbled substantially on Monday following allegations that three foreign portfolio investors (FPIs) with a combined stake of more than 10% had their accounts frozen due to non-compliance with KYC (Know Your Client) regulations. Albula Investment Fund, Cresta Fund, and APMS Investment Fund collectively possess shares in Adani Enterprises, Adani Green Energy, Adani Transmission, and Adani Total Gas worth more than Rs 43,500 crore.
Adani has confirmed that the reports are untrue in exchanges.
Three foreign funds with significant stakes in Adani group entities have not had their accounts frozen, a senior official of the National Securities Depository Ltd (NSDL) notified the port-to-energy conglomerate. On Monday, reports of an account freeze sent shares of many Adani group companies plunging.
The NSDL website still lists the three so-called foreign portfolio investors (FPIs) as having their accounts frozen. However, this punitive measure is limited to older cases, NSDL officials told news organisations on condition of anonymity.
Separately, Reuters reported that an unnamed NSDL official stated that the freeze is not new and applies to the accounts of funds that hold certain other securities. “NSDL has taken no action at the moment,” a source told Reuters.
According to market analysts, the fact that a regulator or depository has frozen an entity’s account does not mean that all of the entity’s shares or transactions in the Indian market have been suspended or frozen.
They cite numerous examples of regulatory actions taken against brokerages in which proprietary deals were prohibited and new client onboarding was also prohibited, but current clients may continue to trade through the broking platform.
Additionally, when prosecuting accused offenders, the regulator frequently permits them to sell their shares but prohibits them from taking new ones.
Why did the Adani Group’s stock price fall?
The Adani Group’s shares, which are held by Ahmedabad billionaire Gautam Adani, have seen a spectacular one-year surge on the stock exchanges. These equities have significantly exceeded their benchmarks.
However, on Monday, the group company’s shares plummeted dramatically in response to reports that the National Securities Depository Limited (NSDL) had frozen the accounts of three international portfolio investors (FPIs). These FPIs are significant, at least in terms of Adani stock, as they own shares in four listed firms of the diversified business conglomerate valued at about Rs 43,000 crore.
The three FPIs, APMS Investment Fund, Albula Investment Fund, and Cresta Fund, are all registered in Mauritius, with Albula and APMS having the same address.
Market mood has taken a knock as a result of this move, as there are fears about the likely impact of freezing FPI accounts. Many investors view institutional ownership as a critical factor in determining a company’s fundamental soundness and prospective return on investment, and any such news is certain to have a negative impact on the price movement.
According to reports, the accounts were blocked due to insufficient disclosure of information regarding the accounts’ beneficial ownership. The capital markets regulator, the Securities and Exchange Board of India (SEBI), establishes the regulatory framework for FPIs and has reviewed and amended the standards on numerous occasions to ensure they are consistent with other important laws, such as the Prevention of Money Laundering Act (PMLA) or requirements under international agreements such as the Foreign Account Tax Compliance Act (FATCA) or Common Reporting Standard (CRS).
Compliance with these requirements requires FPIs to provide more information about the account’s ultimate beneficial owner, such as the personal information of key personnel and fund managers. Globally, regulators have been pressuring foreign investors to provide as much information as possible to ensure that funds are coming from legal and ethical routes.
SEBI has also made a concerted effort to establish the ultimate beneficial owner of all FPIs, amending the rules to reflect global regulatory changes. SEBI had given FPIs until 2020 to provide extra information required by the new disclosure legislation, and failure to do so would result in the regulator freezing the foreign investor’s accounts.
Accounts are often not stopped abruptly and the organisation is given time to comply. If a deadline is missed, a show-cause notice or formal communication is made, and if the entity in question does not take corrective action, a step such as account freezing is undertaken. Market intermediaries, such as stock exchanges and depositories, have been empowered to freeze the accounts of specific types of players.
SEBI laws make it very apparent that non-compliance with its framework can result in a variety of regulatory actions, including monetary penalties, registration suspension, and account freeze. These steps do not apply only to FPIs, but to all market intermediaries. Numerous cases have occurred in the past where promoters’ accounts were blocked owing to non-compliance with listing or disclosure standards.
If accounts have been blocked for non-compliance with specific regulatory requirements, FPIs must comply with the standards immediately. Once the regulator or depository is satisfied with compliance, the regulator or depository may direct the depository to unfreeze the accounts.
While this is the simplest and most obvious method, there are situations when the entity or entities in question believe the regulator’s actions are unjustified or unjust, and thus appeal to a tribunal such as the Securities Appellate Tribunal or a high court. Given that reports indicate that the issue is specifically related to the provision of extra KYC information, the regulatory action can be rescinded if the required information is submitted by the FPIs.
Smrutirekha Bhoi