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Why Adani shares fell, why the FPI accounts were frozen and what are Sebi’s KYC rules, explained

If you are wondering why Adani shares were in free fall, why the accounts of the FPIs were frozen and what is the fuss all about, here is a primer to bring you up to speed

June 15, 2021 / 08:12 AM IST
Gautam Adani

Gautam Adani

Shares of Adani group companies fell sharply on Monday after reports emerged that accounts of three foreign portfolio investors (FPIs) that collectively have a major stakeholding were frozen due to non-compliance with KYC (Know Your Client) norms. Albula Investment Fund, Cresta Fund and APMS Investment Fund, which together own shares worth more than Rs 43,500 crore in Adani Enterprises, Adani Green Energy, Adani Transmission, and Adani Total Gas.

Adani has clarified to exchanges that the reports are false. If you are wondering why this development led to the free fall in share prices of the port-to-energy conglomerate, why the accounts of the FPIs were frozen and what is the fuss all about, here is a primer to bring you up to speed.

Why are Adani Group stocks down?

Shares of Adani Group, owned by Ahmedabad-based billionaire Gautam Adani, had a magnificent rally on the stock markets in the past one year. These stocks have outperformed the benchmarks by a huge margin.

On Monday, however, shares of the group company fell sharply after the market reacted to reports that the National Securities Depository Limited (NSDL) has frozen the accounts of three foreign portfolio investors (FPIs). These FPIs are a big deal at least with regard to Adani stocks because they hold shares in four listed companies of the diversified business conglomerate worth more than Rs 43,000 crore.

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APMS Investment Fund, Albula Investment Fund and Cresta Fund, the three FPIs, are all registered in Port Louis, Mauritius, with Albula and APMS sharing the exact same address as well.

To be sure, it is not known when exactly the accounts were frozen. Market sentiment, however, has been hit due to this development as there are concerns over the possible effect of the FPI accounts being frozen.

Institutional holding is looked upon by many investors as one of the important parameters of analysing the fundamental strength of the company and the potential ROI of a stock and any such news is bound to have a negative effect on the price movement.

Why have the three FPI accounts been frozen?

It has been reported that the accounts have been frozen due to insufficient disclosure of information related to the beneficial ownership of the accounts. Capital markets regulator Securities and Exchange Board of India (SEBI) lays down the regulatory framework for FPIs and has, on many occasions, reviewed and amended the norms to keep them in sync with important other laws related to Prevention of Money Laundering Act (PMLA) or requirements under global arrangements like Foreign Account Tax Compliance Act (FATCA) or Common Reporting Standard (CRS) among others.

Compliance with these regulations require FPIs to furnish greater details related to the ultimate beneficial owner of the account like personal details of the key people and fund managers. Globally, regulators have been trying to force foreign investors to furnish as many details as possible to ensure that money is coming from legal and fair channels.

SEBI has also been trying hard to ascertain the ultimate beneficial owner of all FPIs and have amended the norms to factor in global regulatory developments. SEBI had given time till 2020 to FPIs to furnish additional information as mandated by the new disclosure laws and any failure to comply would lead to the regulator freezing the accounts of the foreign investor.

Do Indian rules allow for such sudden freezing of FPI accounts?

SEBI rules clearly lay down that non-compliance with its framework can lead to various kinds of regulatory actions, including monetary penalty, suspension of registration and also freezing of the trading account. Such actions are not limited to FPIs but are applicable to all market intermediaries. There have been many instances in the past when promoters have found their accounts frozen due to non-compliance with the listing or disclosure norms.

Typically, the accounts are not frozen in an abrupt manner and the entity is given time to comply. If a deadline has not been met then a show-cause notice or a formal communication is sent and even after that if there is no remedial action by the entity in question then a step like freezing of the accounts is initiated. Market intermediaries such as stock exchanges and depositories have been vested with the power to freeze accounts of certain categories of participants.

What is the way ahead for the FPIs?

If the accounts have been frozen due to non-compliance with certain regulatory requirements, then the FPIs have to comply with the norms as soon as possible. Once the regulator or the depository is satisfied with the compliance, it can direct the depository to unfreeze the accounts.

While this is the simple and straightforward solution, at times the entity or entities in question feel that the regulator’s actions are not justified or are not fair and hence they challenge the order at a tribunal like the Securities Appellate Tribunal or a high court. Since reports suggest that the issue in question specifically relates to furnishing additional KYC details, the regulatory action can be revoked if the required information is submitted by the FPIs.
Ashish Rukhaiyar is a financial journalist
first published: Jun 14, 2021 03:34 pm

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