The story so far: The Supreme Court today refused to transfer the ongoing probe by market regulator Securities and Exchange Board of India (SEBI) into Hindenburg Research’s allegations against the Adani Group to any other agency, saying that the scope of judicial review in such cases is “limited”.
On January 24 last year, the investment research firm Hindenburg Research LLC released a report alleging that the conglomerate had engaged in “brazen stock manipulation and accounting fraud scheme over the course of decades” and that key listed companies had “substantial debt”. A sharp fall in the share value of various Adani companies, reportedly to the tune of $100 billion, was seen soon after the report was published.
This led to a batch of petitions being filed before the top court alleging that changes to the Securities and Exchange Board of India Act (SEBI Act) had provided a ‘shield and an excuse’ for the Adani Group’s regulatory contraventions and market manipulations remaining undetected.
On March 2 last year, the court asked SEBI to independently investigate the matter, apart from constituting an expert committee headed by former Supreme Court judge Justice A.M. Sapre to scrutinise whether there had been a regulatory failure in dealing with the allegations leveled by Hindenburg. The committee also included former State Bank of India chairperson Om Prakash Bhatt; retired Bombay High Court judge Justice J.P. Devadhar; National Bank of Financing Infrastructure and Development chairperson K.V. Kamath; entrepreneur Nandan Nilekani; and advocate Somasekhar Sundaresan who was subsequently elevated to Bombay High Court judgeship.
In its report submitted in a sealed cover, the expert committee concluded that there had been “no regulatory failure” on the part of SEBI in the matter. However, SEBI sought an extension of its probe citing the complexity of the transactions involved.
After noting that SEBI had completed the investigation in 20 out of the 22 matters in connection with the allegations leveled against the Adani group, a bench led by Chief Justice of India (CJI) D.Y. Chandrachud today ordered the probe into the two pending cases to be completed expeditiously, preferably within three months.
Transfer of investigation from SEBI to any other agency not warranted
The court refused to transfer the ongoing investigation being carried out by SEBI to any other agency such as the Central Bureau of Investigation (CBI) or a separate Special Investigating Team (SIT) saying that the scope of judicial review when examining a policy framed by such a specialised regulator is limited to scrutinising whether it violates any fundamental right or is manifestly arbitary.
“The power of this Court to enter the regulatory domain of SEBI in framing delegated legislation is limited. The court must refrain from substituting its own wisdom over the regulatory policies of SEBI”, it observed.
Opining on the power of courts to transfer investigation, the court underscored that such powers must be exercised sparingly and in extraordinary circumstances. Unless the authority statutorily entrusted with the power to investigate “portrays a glaring, willful, and deliberate inaction” in carrying out the investigation, no such transfer is warranted, it added.
After taking into account that SEBI had already completed 22 out of the 24 investigations into the allegations, the court directed the regulator to complete the two pending investigations expeditiously; preferably, within three months.
Earlier, the court’s six-member expert committee headed by Justice A.M. Sapre had given a clean chit to SEBI saying that it would not be possible to return a finding of “regulatory failure” as it had an “active and working surveillance framework to take notice of high price and volume movements”.
“Unsubstantiated” allegations of bias against expert committee members
A plea filed in the top court by Anamika Jaiswal, through advocate Prashant Bhushan, had alleged that the court-appointed expert committee probing the allegations was hit by a “conflict of interest”. It had pointed out that one of the committee members, O.P. Bhatt, a former chairman of the State Bank of India, was working as the Chairman of Greenko, a leading renewable energy company. Allegations of bias were also leveled against advocate Somasekhar Sundaresan, another committee member who was recently appointed an Additional Judge of the Bombay High Court, on the ground that he had appeared for the Adani Group in 2006 and had been on “several SEBI committees”.
Dismissing such concerns, the court observed that the allegations are “belated”, which prima facie indicates that they have not been made in good faith.
“The allegations against certain members of the committee were raised by the petitioner for the first time only on 18 September 2023 almost six months after the constitution of the committee and several months after the Committee had submitted its report in May 2023. All the purported facts and documents relied on by the petitioner in this regard were available in the public domain well before the allegations were raised by the petitioner for the first time in September 2023,” the verdict authored by CJI Justice Mr. Chandrachud elaborates.
Addressing the allegations against Mr. Sundaresan, the court emphasised that the acceptance of a professional brief by a lawyer in 2007 cannot be construed to reflect “bias” or even a “likelihood of bias” in 2023.
“The petitioner has not established the link between these unsubstantiated allegations and the appointment of Mr Bhatt and Mr Kamath to the committee. Here too, the petitioner has only annexed newspaper reports published after the appointment of the committee by this Court, without any attempts to verify their authenticity or supplement them with independent research,” the court concluded.
OCCRP’s report cannot be regarded as “credible evidence”
The court also dismissed the findings of the NGO Organised Crime and Corruption Reporting Project (OCCRP) about alleged stock manipulation and accounting fraud by the Adani Group, as well as concerns of suppression of information by SEBI.
A significant revelation by the OCCRP relates to correspondence between the director general of the Directorate of Revenue Intelligence (DRI) and the SEBI chief in January 2014 on “the dealings of the Adani Group of companies in the stock market”. One of the letters was accompanied by a CD of evidence from a DRI probe into allegations of over-invoicing of capital equipment imports against Adani power projects, stating that “there are indications that a part of the siphoned-off money may have found its way to stock markets in India as investment and disinvestment in [the] Adani Group.”
The revelation of the DRI letter suggested that either SEBI has suppressed facts and provided false information, which amounts to perjury; or that the then SEBI chairperson, instead of acting on the DRI letter, preferred to close the ongoing investigations into the Adani group.
The court said that such reports by “third-party organisations” can neither be relied on as conclusive proof of the inadequacy of the investigation by SEBI nor regarded as “credible evidence”.
“The veracity of the inputs and their sources must be demonstrated to be unimpeachable. The petitioners cannot assert that an unsubstantiated report in the newspapers should have credence over an investigation by a statutory regulator whose investigation has not been cast into doubt on the basis of cogent material or evidence”, the court asserted. It added that the petitioners are re-agitating an issue that has already been settled by concurrent findings of the DRI’s Additional Director General, the Customs, Excise and Service Tax Appellate Tribunal (CESTAT) and the court itself.
SEBI and Centre to probe if Hindenburg’s short selling amounted to a violation of law
In a notable directive, the court directed SEBI and the Centre’s investigative agencies to probe into whether the loss suffered by Indian investors due to the conduct of Hindenburg Research and any other entities in taking short positions involved any infraction of the law and if so, to take “suitable action”. In its report, Hindenburg Research admitted to taking a short position in the Adani group through US-traded bonds and non-Indian traded derivative instruments.
Also Read: Explained | Adani Group stocks: What is Hindenburg Research, and how does a short seller operate?
No valid ground to direct SEBI to revoke amendments to FPI and LODR regulations
The court opined that there existed no valid grounds to direct SEBI to revoke its amendments to the FPI (Foreign Portfolio Investments) and LODR (Listing of Obligations and Disclosure Requirements) regulations.
“The procedure followed in arriving at the current shape of the regulations do not suffer from irregularity or illegality. The FPI and LODR regulations have been tightened by the said amendments,” the verdict pointed out.
During the proceedings, the petitioners argued that the amendments did away with restrictions on FPIs having an “opaque structure” and diluted the definitions of “beneficial owners” in FPI regulations and “related party” and ”related party transactions” in the LODR regulations. This resulted in regulatory loopholes, enabling the Adani Group promoters to conceal the ultimate beneficiary of the FPIs while claiming regulatory compliance.
In July last year, SEBI tightened disclosure norms for listed companies over agreements entered into by shareholders, promoters, related parties, directors, key managerial personnel, and employees of the listed entity or of its subsidiary, which can impact the management and control of such firms. They are required to disclose such agreements to stock exchanges within 12 hours in case a listed entity is a party and within 24 hours where the listed entity is not a party.
Expert committee’s recommendations on regulatory amendments to be considered
The Union government and SEBI were also directed to take into account the recommendations of the expert committee in its report to ensure that regulatory mechanisms are strengthened to protect the interests of the investors and ensure the orderly functioning of the securities market.
“SEBI has submitted that only recently, it has made a regulatory intervention in terms of supervising the construction of stock indices. SEBI must consider directing index writers to construct indices to compute the volatility of stocks that are constituents of indices so that volatility in these stocks can be compared with volatility in the indices. The availability of such data on a real-time basis would enable the market to be more informed in making its investment and divestment decisions. SEBI must ensure that there are secular norms and periodic reviews for construction and design changes in indices”, the report outlined.
Volatility in Adani stocks in the aftermath of the Hindenburg Report did not pose any systemic market-level risk
The petitioners had flagged that there had been a “precipitate decline” in investor wealth and volatility in the share market due to a fall in the share prices of the Adani Group following the publication of Hindenburg Research’s report. However, the court observed that such volatility in Adani stocks had an impact only on an individual scale and did not result in any volatility in the market.
Relying on the expert committee’s report, the court pointed out — “The volatility in Adani stocks in the aftermath of the Hindenburg Report was stabilised due to market forces and mitigatory measures. While shares of the group fluctuated, it did not pose any systemic market-level risk. According to the Expert Committee the trend observed in volatility in the Indian market in comparison with the global volatility index has been consistent since the COVID-19 pandemic and was maintained even during the period when volatility was observed in the Adani stocks.”
