On March 2, 2023, a 3-Judge Bench of Supreme Court headed by Chief Justice (Dr.) Dhananjaya Y. Chandrachud, Justices Pamidighantam Sri Narasimha and J.B. Pardiwal passed an order on petitions concerning "the loss of investor wealth in the securities market over the last few weeks because of a steep decline in the share price of the Adani Group of companies. The decline in the share price was
precipitated by a report published by Hindenburg Research on 24 January 2023."
According to the report of the Hindenburg Research, "the Adani Group of companies has manipulated its share prices; failed to disclose transactions with related parties and other relevant information concerning related parties in contravention of the regulations framed by SEBI; and violated other provisions of securities laws. The report also states that Hindenburg Research has taken a short position in the Adani Group companies through US traded bonds and non-Indian traded derivative instruments."
The order provides an overview of the petitions in this regard. "WP(C) No. 162 of 2023 states that public money amounting to thousands of crores is at risk because public institutions like the State Bank of India and the Life Insurance Corporation of India are exposed to the Adani Group. It inter alia seeks the issuance of directions to the Union of India and the Union Ministry of Home Affairs to constitute a committee headed by a retired judge of the Supreme Court to investigate the contents of the report published by Hindenburg Research."
The order records that "WP(Crl) No. 39 of 2023 is for the issuance of directions to the Union Ministry
of Home Affairs to register an FIR against Mr. Nathan Anderson (founder of Hindenburg Research) and his associates for short selling, and for directions to recover the profits yielded by the short selling to compensate investors".
It also records that "WP(C) No. 201 of 2023 inter alia states that “the Adani Group has been in flagrant violation of ... Rule 19A of the Securities Contracts (Regulation) Rules by surreptitiously controlling more than 75% of the shares of public listed Adani group companies, thereby manipulating the price of its shares in the market.” It inter alia seeks a court monitored investigation by a Special Investigation Team or by the Central Bureau of Investigation into the allegations of fraud and the role played by top officials of leading public sector banks and other lender institutions".
The order records: "WP(Crl) 57 of 2023 is for directions to any investigative authority to: (i) investigate the Adani Group companies under the supervision of a sitting judge of this Court; and (ii) investigate the role of LIC and SBI in these transactions."
It records that " SEBI has placed on record a brief note on the factual and legal aspects describing the existing statutory regime, regulatory mechanisms and frameworks in place for the protection of investors. It has also laid out the regulatory framework governing short selling."
In its note SEBI has submitted that: a. It has adopted a disclosure based regulatory regime for both issuance of and trading in securities. This is in line with the discontinuation of pricing control for capital issues in favour of the principle of free discovery by the markets based on demand and supply from informed investors; and b. It is “strongly and adequately empowered to put in place regulatory
frameworks for effecting stable operations and development of the securities markets including protection of investors.” It has also detailed the extant framework governing investor protection in the context of the
subject matter at hand. It has stated that the key pillars of investor protection are:
“11.1 Mandatory disclosures by listed companies to facilitate free and fair price discovery and to ensure that all investors have equal access to material information for them to be able to take informed investment decisions;
11.2 Market systems to ensure seamless trading and settlement including volatility management;
11.3 Enforcement action in the event of misconduct in the market including fraud or violations of SEBI regulations.”
On the subject matter of these petitions, SEBI has stated that "SEBI is already enquiring into both, the allegations made in the Hindenburg report as well as the market activity immediately preceding and post the publication of the report, to identify violations of SEBI Regulations including but not limited to SEBI (Prohibition of Fraudulent and Unfair Trade Practices I relating to Securities Market) Regulations 2003, SEBI (Prohibition of Insider Trading) Regulations 2015, SEBI (Foreign Portfolio Investors) Regulations 2019, Offshore Derivative Instruments (ODI) norms, short selling norms, if any. As the matter is in early
stages of examination, it may not be appropriate to list details about the ongoing proceedings at this stage.”
In its order, the Court has recorded that "it appears that SEBI is seized of the investigation into the allegations made against the Adani Group companies. SEBI has not expressly referred to an investigation into the alleged violation of the Securities Contracts (Regulation) Rules 1957 which provide for the maintenance of minimum public shareholding in a public limited company. Similarly, there may
be various other allegations that SEBI must include in its investigation."
The Court has directed that "As a part of its ongoing investigation, SEBI shall also investigate the
following aspects of the issues raised in the present batch of petitions: a. Whether there has been a violation of Rule 19A of the Securities Contracts (Regulation) Rules 1957; b. Whether there has been a failure to disclose transactions with related parties and other relevant information which concerns related parties to SEBI, in accordance with law; and c. Whether there was any manipulation of stock prices in contravention of existing laws." It has directed, "SEBI shall expeditiously conclude the investigation within two months and file a status report." SEBI is supposed to file its report in the first week of May.
The Court has constituted an Expert Committee headed by Justice Abhay Manohar Sapre, a former judge of the Supreme Court of India for the assessment of the extant regulatory framework and for making recommendations to strengthen it. The committee consists of O P Bhatt, Justice J P Devadhar (retired), KV Kamath, Nandan Nilekani and Somashekhar Sundaresan. The remit of the Committee is as follows:
a. To provide an overall assessment of the situation including the relevant causal factors which have led to the volatility in the securities market in the recent past;
b. To suggest measures to strengthen investor awareness;
c. To investigate whether there has been regulatory failure in dealing with the alleged contravention of laws pertaining to the securities market in relation to the Adani Group or other companies; and
d. To suggest measures to (i) strengthen the statutory and/or regulatory framework; and (ii) secure compliance with the existing framework for the protection of investors
SEBI has been asked to apprise the expert committee of the action that it has taken in furtherance of the directions of this Court as well as the steps that it has taken in furtherance of its ongoing investigation. Secretary, Ministry of Finance has been asked to appoint a nodal officer to provide logistic assistance to the committee.
In its previous order dated 10 February 2023, the Court had noted that there was a need to review existing regulatory mechanisms in the financial sector to ensure that they are strengthened with a view to protect Indian investors from volatilities in the market." The Expert Committee constituted in this regard has also been asked to furnish its report in "sealed cover" to the Court by first week of May 2023.
Will the Court's committee and the SEBI succeed in uncovering the Rs 81, 000 crore scam? The total bank debt to the top five Adani Group companies is estimated to be over Rs 81,000 crore as of January 26, 2023.
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