Supreme Court Refuses Mahua Moitra's Plea To Mandate Disclosure Of Ultimate Beneficial Owners Of AIFs & FPIs

The Supreme Court on Thursday declined to issue a direction to the Securities and Exchange Board of India (SEBI) to mandate full public disclosure of the ultimate beneficial owners (last natural persons) and portfolios of Alternative Investment Funds (AIFs), Foreign Portfolio Investors (FPIs) and their intermediaries in India.

Citing the lack of an existing legal or regulatory framework, the bench comprising Justice BV Nagarathna, Justice R Mahadevan and Justice DK Upadhyaya disposed of the writ petition filed by Trinamool Congress MP Mahua Moitra.

Advocate Prashant Bhushan, for the petitioner, argued that the lack of public disclosure of the ultimate beneficial owners of these investment vehicles had created opacity in the stock market and enabled potential manipulation.

Bhushan submitted that large sums of money were being invested in Indian companies through foreign entities, but the identity of the actual investors remained unknown. “These people who are investing into our companies through foreign entities, we don't know who they are and whether they are violating SEBI regulations. Today there is a lot of suspicion that stock markets are being manipulated by these companies which are investing huge sums,” he said.

He contended that the requirement of disclosing the ultimate beneficial owner, which existed earlier, was given up in 2018, after which entities were only required to comply with the Prevention of Money Laundering Act (PMLA). Referring to the observations of the expert committee appointed by the Supreme Court in the Adani-Hindenburg case, Bhushan argued that the removal of the disclosure requirement had weakened the regulatory framework.

He said: “Let's say shares of a company are going up very rapidly and very steeply. Then some stock broker tells the retail investor that the share is going up, why don't you put money into this share… This person does not know that the reason the share price is going up is because the promoters of that very company are buying the shares through an AIF or an FPI, thereby boosting the share price. Then he will not buy the share.”

Bhushan emphasised that the right to information was a fundamental right and that many countries mandated public disclosure of beneficial ownership. He relied on earlier Supreme Court judgments, including the ADR and PUCL cases, where the Court had directed candidates contesting elections to disclose their assets, liabilities, criminal antecedents and educational qualifications even in the absence of a prior statutory framework.

“Just disclosure of who is the ultimate beneficial owner cannot hurt anybody. They are saying it may affect the privacy. How does privacy trump the right of the citizens and the investors to be informed as to who is investing money?” he argued.

Solicitor General of India Tushar Mehta submitted that the reliefs sought had implication on the national economy. "Do you want to destroy it?” he asked.

Bhushan responded that the implication would be the same as it was before 2018, when such disclosure was required, and that this was also the recommendation of the expert committee.

Justice Nagarathna observed: “If there is a policy that there has to be a public disclosure and then you are seeking a mandamus that it be implemented, that is one thing. But if there is no policy in existence, can we issue a mandamus?”

When Bhushan pressed that a policy of disclosure was necessary to protect the fundamental right of citizens to know who was purchasing shares and artificially boosting or dumping prices, Justice Nagarathna asked about the impact on the markets.

SG Mehta replied that it would be “devastating.”

Bhushan countered: “How can information be devastating? Implication will be that the people will be informed who are the people who are purchasing the shares which are unnaturally boosted. Unfortunately the retail investors get lured into these things…”

Justice Nagarathna remarked that investors were not naive. Bhushan disagreed, saying ordinary investors were “very naive” and even major investors would not know who was boosting share prices. SG Mehta responded that investors were “more intelligent than we think. They get up at 3:00 a.m. and they study on their own.”

Justice Nagarathna noted two aspects: first, that something good might come out of greater transparency; and second, that in the absence of any existing disclosure regime, it was a “herculean task” to convince the Court to grant the prayer. “If we grant this prayer it should be for the good of the market,” she said.

SG Mehta alleged that the petitioner's attempt was to ensure that foreign investment does not come into the country. Bhushan rejected the suggestion, insisting that mere disclosure of the ultimate beneficial owner could not hurt anyone.

The Court was informed that Bhushan had earlier made a representation to SEBI raising the same issues and had subsequently challenged SEBI's reply. SG Mehta submitted that all relevant disclosures were already being made to SEBI and the custodians; the petitioner wanted them to be made public.

Justice Nagarathna observed that the core concern of the representation appeared to be that AIFs and FPIs were opaque and inadequately governed.

In its order, the bench recorded that the petitioner had sought a direction to SEBI to mandate full public disclosure of ultimate beneficial owners and portfolios of AIFs, FPIs and their intermediaries. On examining SEBI's reply, the Court found that there was presently no legal framework to mandate public disclosure of entity-wise investments, though disclosures of investments by every AIF/FPI were in fact made to SEBI/custodian, enabling regulation.

“On a reading of the reply there is no legal framework or any regulatory framework as such which entails mandatory disclosure as sought by the petitioner,” the Court noted. It held that under Article 32 of the Constitution, such a prayer for public disclosure could not be granted in the absence of an existing legal framework or regulations.

“We find that in exercise of jurisdiction under Article 32 of the Constitution such a prayer cannot be granted for the reason that the framework of full disclosure as sought for by the petitioner herein would mandate an existing legal framework or regulations. In the absence of such a legal framework or regulation the Court cannot direct public disclosure of ultimate beneficial owners etc.,” the bench held.

“In the absence of any such framework this Court cannot exercise its discretion and issue a writ of mandamus to respondents to mandate a full public disclosure,” the order stated. The writ petition was accordingly disposed of.

Bhushan urged that the Court had in the past issued directions even without an existing law or regulation, citing the ADR case and saying he could produce at least a dozen such judgments. The bench, however, maintained its view and observed that it was for the respondents to consider the matter in light of the discussions that had taken place during the hearing.