Supreme Court rejects Mahua Moitra's plea for public disclosure of AIF, FPI beneficial owners

The Supreme Court on Thursday declined to direct the Securities and Exchange Board of India (SEBI) to mandate full public disclosure of the ultimate beneficial owners, meaning the last natural persons who ultimately own or control investments, and portfolios of Alternative Investment Funds (AIFs), Foreign Portfolio Investors (FPIs) and their intermediaries in India.

A bench comprising Justice BV Nagarathna, Justice R Mahadevan and Justice DK Upadhyaya disposed of a writ petition filed by Trinamool Congress MP Mahua Moitra, holding that the relief sought could not be granted in the absence of an existing legal or regulatory framework requiring such public disclosure.

The Court noted that although AIFs and FPIs disclose their investments to SEBI or their custodians, the current framework does not mandate the public disclosure of entity-wise investments and ultimate beneficial owners in the manner sought by the petitioner.

The bench held that it could not issue a writ of mandamus under Article 32 of the Constitution to introduce such a disclosure requirement without an existing legal framework or regulation. It nevertheless observed that the respondents could consider the issue in light of the discussions during the hearing.

Mahua Moitra's counsel argues lack of transparency risks market manipulation

Advocate Prashant Bhushan, appearing for Moitra, argued that the absence of public disclosure of the ultimate beneficial owners of investment vehicles had created opacity in the stock market and could facilitate manipulation.

He submitted that substantial amounts of money were being invested in Indian companies through foreign entities, while the identities of the actual investors remained unknown. According to him, this made it difficult for investors and the public to determine whether the investments complied with SEBI regulations.

“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,” Bhushan told the Court.

He contended that a requirement to disclose ultimate beneficial owners, which had existed earlier, was given up in 2018. Following the change, entities were required to comply with the Prevention of Money Laundering Act (PMLA), he argued.

Bhushan also referred to the observations of the expert committee appointed by the Supreme Court in the Adani-Hindenburg case, arguing that the removal of the earlier disclosure requirement had weakened the regulatory framework.

Explaining the potential consequences for retail investors, he said a company's share price could rise sharply because its promoters were buying shares through an AIF or an FPI, artificially boosting the price. Retail investors might then be persuaded by stockbrokers to purchase the shares without knowing what was driving the increase, he argued.

Bhushan said investors would be better placed to make informed decisions if they knew who was buying the shares and whether the price movements were being artificially driven.

Right to information versus privacy and economic concerns

Bhushan maintained that the right to information was a fundamental right and pointed out that several countries required public disclosure of beneficial ownership.

He relied on earlier Supreme Court judgments, including the Association for Democratic Reforms (ADR) and People's Union for Civil Liberties (PUCL) cases, in which the Court had directed candidates contesting elections to disclose their assets, liabilities, criminal antecedents and educational qualifications despite the absence of a prior statutory framework for such directions.

“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 opposed the relief, submitting that the proposed disclosure requirement could have significant implications for the national economy. “Do you want to destroy it?” he asked.

Bhushan responded that the implications would be no different from those before 2018, when the disclosure requirement was in place. He also said the proposed measure was consistent with the recommendation of the expert committee appointed in the Adani-Hindenburg case.

Justice Nagarathna questioned whether the Court could issue a mandamus when no policy requiring such public disclosure was in existence.

“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?” she asked.

When Bhushan argued that disclosure was necessary to protect citizens' fundamental right to know who was purchasing shares and artificially boosting or dumping prices, Justice Nagarathna questioned the potential impact on the markets. Mehta responded that the consequences would be “devastating”.

Bhushan countered that informing investors about the identities of those buying shares could not itself be devastating. He argued that retail investors were often lured into buying shares whose prices had been unnaturally inflated.

Justice Nagarathna remarked that investors were not naive. Bhushan disagreed, saying ordinary investors were “very naive” and that even major investors might not know who was driving share prices upwards.

Mehta responded that investors were “more intelligent than we think. They get up at 3:00 a.m. and they study on their own.”

Bench questions whether mandamus can be issued without a regulatory framework

Justice Nagarathna identified two aspects of the matter during the hearing. While greater transparency might produce positive outcomes, she said, persuading the Court to grant the relief in the absence of an existing disclosure regime would be a “herculean task”.

“If we grant this prayer it should be for the good of the market,” she observed.

Mehta alleged that the petitioner's objective was to ensure that foreign investment did not flow into India. Bhushan rejected the allegation, reiterating that disclosure of ultimate beneficial ownership could not harm anyone.

The Court was informed that Bhushan had previously submitted a representation to SEBI raising the same concerns and had subsequently challenged the regulator's response.

Mehta submitted that the relevant disclosures were already being made to SEBI and the custodians. The petitioner's demand, he argued, was to make that information available publicly rather than restrict access to the regulator and custodians.

Justice Nagarathna observed that the central concern raised in the representation appeared to be that AIFs and FPIs were opaque and inadequately governed.

Supreme Court says public disclosure cannot be mandated under Article 32

In its order, the bench recorded that Moitra had sought a direction requiring SEBI to mandate full public disclosure of the ultimate beneficial owners and portfolios of AIFs, FPIs and their intermediaries.

After examining SEBI's reply, the Court found that there was no existing legal framework mandating public disclosure of entity-wise investments in the manner requested. It noted, however, that investment disclosures by AIFs and FPIs were being made to SEBI or their custodians, allowing the regulator to oversee their activities.

“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 observed.

The bench held that the relief could not be granted under Article 32 of the Constitution because a requirement for full public disclosure would need to be supported by 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 order stated.

“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,” it added.

Bhushan urged the bench to reconsider its position, pointing out that the Supreme Court had issued directions in earlier cases even when no specific law or regulation existed. Citing the ADR case, he said he could produce at least a dozen judgments supporting his argument.

The bench maintained its view that it could not issue the requested direction without an existing legal or regulatory framework. It left the matter to the respondents to consider in light of the issues discussed during the hearing and accordingly disposed of the writ petition.