Money laundering by Indians via foreign markets: Sebi probe hits hurdle


The Securities and Exchange Board of India’s (Sebi’s) investigation into money laundering by Indian nationals through foreign capital markets seems to have hit a hurdle. According to sources, the Indian regulator has sought several key pieces of evidence from foreign agencies, but a majority of these requests have been pending for months, stalling further investigations.
In many of the cases, foreign regulators are also reluctant to share information, especially the bank account details. Legal experts say Sebi has agreements with market regulators of 30 countries and can directly approach them for market-related information. However, documents like bank account statements and proofs of identity cannot be obtained from market regulators, so diplomatic channels have to be followed. Even for those countries whose regulators have arrangement with Sebi, there is no obligation to honour Sebi’s requests.
All these cases involve global depository receipts (GDRs) issued by listed Indian companies for capital raising funds from foreign markets. Many of the cases involve countries like Luxemburg, Austria, Portugal and other European destinations.
Typically, the regulator has to go through the channels specified in the Memorandums of Understanding (MoUs) signed with the respective countries. Usually, Sebi sends a request for information to the Overseas Indian Affairs (OIA) ministry, which in turn forwards the request to the Ministry of External Affairs (MEA). Then, MEA gets in touch with the foreign affairs department of the country concerned and the request reaches the relevant department.
“There have been several instances where Sebi is unable to get crucial information from overseas agencies. While anything like shareholding pattern or security account details is easy to obtain, statement of bank accounts and beneficiary details of such accounts are difficult to obtain, especially when the crimes are of a lower magnitude,” said a source privy to the development.
The market regulator is currently examining more than 70 listed firms which have, apparently, been part of such money-laundering activity. All the issues are said to have taken place in the period between 2007 and 2011, when Sebi had no jurisdiction over GDR issuances. However, in 2014, the Supreme Court of India gave Sebi the powers to investigate GDRs. Since then, the market regulator has cracked down on several suspect deals and already frozen the accounts of 51 companies.
GDRs are financial instruments used by companies in India to raise capital abroad. Typically, in such an issuance, there is a foreign bank that acts like a custodian and issues receipts to foreign investors willing to subscribe to the offering. These receipts are not shares but have shares as their underlying security. GDRs can be converted into domestic shares by the investor who can cancel the receipt, and it is automatically converted into domestic shares of the company.
“Obtaining information from a foreign agency is not an easy task. One needs to follow proper hierarchy for obtaining the information which is a time-consuming process.

Even in cases where Sebi has a treaty with a foreign regulator, there is no obligation on the foreign entity to share the information. The overseas regulators often have apprehensions of how the sought information would be used,” said Sudhir Bassi, partner, Khaitan & Co.
Since the 2014 judgment, Sebi has tightened both the framework and surveillance around GDRs significantly. The regulator is now also considering increasing the disclosure standard for GDR subscribers to bring them on a par with the requirements for participatory notes (p-notes). This tightening has led to a significant fall in GDR issuances. In fact, in the past two years, not even a single Indian entity has gone for a GDR issuance.
“The framework around GDRs is much tighter now and less prone to misuse. Due to the tighter framework, only the companies with a serious intention to raise foreign capital would come to the market,” said Sandeep Parekh, founder, Finsec Law Advisors.
Modus operandi
Some of the listed Indian companies come up with a GDR issuance in collusion with foreign banks and investors. The foreign bank that is part of the complete scheme not just acts as a custodian to the GDRs but also provides finance for the operation. The subscribed receipts go into a joint account between the investor and the custodian. The joint account is used to mislead Indian authorities as the Indian company discloses the custodian as an investor, thereby excluding the names of actual beneficiaries. Soon, the investor cancels the GDRs and coverts them into shares and sells them to some of the investors registered with Indian authorities as foreign institutional investors (FIIs). Now, these FIIs sell the shares in the Indian market to a select few domestic investors. These investors, in turn, sell the shares among themselves to jack up the share prices. Finally, when the price reaches a certain level, the domestic investors sell it in the open market, often to retail investors, who end up making enormous