SEBI rejected settlement applications from 13 Foreign Portfolio Investors (FPIs) holding significant stakes in Adani Group companies because their proposed terms failed to align with the regulator's requirements. The decision, communicated under Regulation 15(1) of the Settlement Regulations, 2018, followed the High-Powered Advisory Committee's recommendation and acceptance by the panel of whole-time members.
At the core of the standoff was the FPIs' reluctance to fully disclose information SEBI considered essential—specifically, details about ultimate beneficial owners. Some FPIs were also unwilling to disgorge the hundreds of crores SEBI sought as settlement. This resistance fundamentally undermines SEBI's enforcement strategy against potential round-tripping, where funds flow through offshore structures to circumvent minimum public shareholding (MPS) norms. Without full transparency, settlement becomes impossible. The message is clear: come clean or face litigation.
For flagged FPIs like Elara India Opportunities Fund, Vespera Fund, and LTS Investment Fund, the rejection transforms a potentially manageable settlement into a protracted legal battle with existential implications.
The trade-offs are stark. Accepting SEBI's settlement terms involves monetary penalties, disgorgement, and non-monetary conditions like temporary trading bans, but allows business continuity without admitting guilt. Registration cancellation, however, triggers mandatory liquidation within six months, a 5% penalty on sale proceeds payable to SEBI's Investor Protection and Education Fund, and potential permanent market exit. The reputational damage from public enforcement action can be devastating, making settlement the rational choice despite its costs.
SEBI's proposed Settlement Regulations, 2026, significantly alter this calculus. The regulator proposes reducing the settlement amount multiplier from an average of eight times the penalty ultimately imposed to approximately four times.
This change makes settlement far more attractive. Under current rules, a rejected application effectively forces FPIs toward litigation due to the prohibitive cost of refiling. The proposed 20% surcharge creates a manageable path to resolution, encouraging entities to engage constructively rather than abandon the process. For FPIs facing potential cancellation, this provides a viable off-ramp that balances compliance costs with operational survival.
SEBI's investigation centers on a critical question: are these 13 FPIs genuine public shareholders or fronts for Adani Group promoters? The answer determines compliance with MPS norms requiring at least 25% public shareholding.
Promoter holdings in these companies hovered between 74-75%.
This would necessitate forced equity sales of 13-19% across affected companies, potentially triggering market volatility and requiring substantial ownership restructuring. The investigation covers seven Adani stocks between March 2020 and December 2022, examining price-volume manipulation, MPS breaches, FPI investment limit violations, and offshore derivative instrument norm breaches.
Contrary to popular perception, SEBI's investigation predates the Hindenburg Research report by over two years. The regulator's surveillance systems first flagged unusual concentration of FPI holdings in October 2020. However, Hindenburg's January 2023 allegations of round-tripping served as a powerful catalyst, triggering a $150 billion market value loss and bringing judicial oversight through multiple Public Interest Litigations.
The Supreme Court's January 2024 verdict directed SEBI to bring investigations to a "logical conclusion in accordance with law". This creates prolonged uncertainty for Adani Group's ownership structures. While the Court upheld SEBI's authority and rejected calls for a Special Investigation Team, the extended timeline—now spanning nearly six years—affects investor confidence and may constrain access to foreign capital through FPI routes. A finding of violations would fundamentally alter the conglomerate's capital access strategy and market positioning.
SEBI identified 42 contributories to the FPIs' assets under management but hit a wall trying to trace ultimate beneficial owners, hampered by lack of cooperation from foreign counterparts. The investigation reveals multi-layered structures: FPIs registered in Mauritius, owned through feeder entities in Bermuda and Cayman Islands, with contributories scattered across tax haven jurisdictions.
This inability to establish beneficial ownership creates critical regulatory gaps. For FPIs like Asia Investment Corporation (Mauritius), APMS Investment Fund, and Emerging India Focus Funds, SEBI cannot effectively monitor who ultimately benefits from investments, whether related parties are circumventing disclosure requirements, or if round-tripping schemes are in operation. This undermines enforcement of MPS norms and detection of market manipulation through offshore derivative instruments (ODIs).
SEBI has signed 27 bilateral MoUs with capital market regulators globally and participates in the IOSCO Multilateral MoU framework. However, these mechanisms have limitations. The IOSCO MMoU does not provide for technical assistance, and coverage of critical offshore jurisdictions like Mauritius, Bermuda, and Cayman Islands remains inadequate.
To address these gaps, SEBI needs to prioritize MoU negotiations with these critical jurisdictions, establish automatic information exchange protocols for beneficial ownership data, and develop joint investigation frameworks. Leveraging diplomatic and economic channels—linking information sharing to trade agreements and coordinating through G20, FATF, and OECD—can create pressure for cooperation. Additionally, investing in regulatory technology like blockchain-based registries and AI-powered analytics could enhance monitoring capabilities across borders.
SEBI's rejection of the settlement applications represents a watershed moment in Indian securities regulation. It demonstrates a firm commitment to full transparency as a non-negotiable precondition for resolution, even at the cost of prolonged litigation. For the Adani Group, the investigation's outcome will determine whether it must restructure its ownership to comply with MPS norms, potentially requiring significant equity sales and altering its access to foreign capital.
For FPIs operating in India, the message is equally clear: complex offshore structures designed to obscure beneficial ownership will face intense scrutiny. The proposed settlement rule revisions, particularly the 20% additional penalty for refiling, offer a more predictable path to compliance. As SEBI continues its push for enhanced cross-border cooperation, the era of regulatory arbitrage through opaque FPI structures appears to be drawing to a close.
