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  • Dhwanil Tandon, Vaibhav Nishad

Adani-Hindenburg Verdict: Striking a Balance between Judicial Intervention and Market Integrity

[Dhwanil and Vaibhav are students at Gujarat National Law University.]


Embarking on a judicial odyssey, the case of Vishal Tiwari v. Union of India and Others (Adani-Hindenburg case) has taken centre stage, with the Supreme Court of India delivering the significant judgment in the conundrum. The apex court has refused to transfer the ongoing Securities and Exchange Board of India’s (SEBI) probe into Hindenburg report damning allegations against the Adani Group, emphasizing the limited scope of judicial review. The court’s directive follows a meticulous examination of the conglomerate’s alleged stock manipulation and accounting fraud, triggered by a Hindenburg report causing a reported $100 billion fall in Adani company shares.


Delving into key aspects such as regulatory amendments, conflict of interest allegations, and the credibility of third-party reports, the judgment sets the stage for a comprehensive exploration of the intersection between legal scrutiny, financial markets, and regulatory dynamics. This post highlights the nuances and implications of the Adani-Hindenburg case, dissecting the court’s reasoning and its potential ramifications on market integrity and investor confidence.


Evolution of FPI Regulations and Its Impact on Beneficial Ownership Disclosure


Against the backdrop of the regulatory regime of Foreign Portfolio Investors (FPI), SEBI introduced the opaque structure clause (OSC) in 2014 as part of its FPI regulatory framework. Enshrined in the SEBI (Foreign Portfolio Investors) Regulations 2014 (FPI Regulations), this provision rendered FPIs ineligible for registration if they were found to lack transparency in their organisational structure and concealed the beneficial ownerships (BOs) of the funds. The intention was to curb the tendency of FPIs to organize their entities in ways that obscured essential BOs details.


However, a significant policy shift occurred in 2018 and 2019 when SEBI, without a clear explanation, shifted from stringent regulations to a more lenient approach. This shift from the stance which mandated all FPIs (excluding sovereign funds) to disclose beneficial ownership information led to the withdrawal of the requirement to disclose the economic interests of each ultimate beneficiary party in an FPI in 2019. The petitioner contends that these regulatory relaxations, by creating potential loopholes, have hindered the effectiveness of SEBI's probe, raising concerns about the adequacy of the regulatory framework in addressing intricate financial matters.


Decoding the Adani-Hindenburg Verdict


In addressing the intricacies of the Adani-Hindenburg case, the court delivered a nuanced judgment, carefully considering various key elements. First, it firmly rejected the proposal for an unwarranted transfer of SEBI’s ongoing investigation to external agencies, citing the court’s limited jurisdiction in specialized regulators’ policies. The emphasis was on the cautious approach needed for such transfers unless statutory authorities demonstrated wilful inaction. With 22 concluded investigations, the court directed SEBI to promptly conclude the remaining 2 within 3 months, underscoring the regulator's active surveillance framework, as acknowledged by the earlier committee led by Justice AM Sapre.


Turning to allegations of bias within the court-appointed expert committee, the court dismissed these claims, highlighting the lack of good faith and evidence in the belated accusations. Past professional engagements of committee members were deemed irrelevant to the present context, reinforcing the impartiality of the investigation.


Subsequently, addressing the issue of "credible evidence", the court dismissed claims by the Organized Crime and Corruption Reporting Project (OCCRP) regarding stock manipulation and fraud by the Adani Group, as well as concerns of information suppression by SEBI. The court’s stance emphasized the need for verifiable evidence, deeming third-party reports unreliable. It reiterated that revisiting settled issues lacked merit, reflecting a meticulous approach to evaluating the evidentiary foundation.


In a directive concerning Hindenburg's short selling, the court instructed SEBI and government investigative agencies to scrutinize whether the losses suffered by Indian investors violated laws and to take appropriate measures. This demonstrated the court's commitment to a thorough examination of potential legal violations arising from Hindenburg Research's actions.


The court's assessment of the amendments to the FPI Regulations and the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (LODR Regulations) formed a crucial part of its deliberation. It firmly stated that there were no substantial grounds to direct SEBI to revert the amendments, asserting that the regulatory procedures followed were devoid of irregularities or illegality. The petitioners' contention, which asserted that the modifications created loopholes by eliminating restrictions on FPIs with an "opaque structure" and diluting definitions in both the FPI Regulations and the LODR Regulations, was dismissed.


Furthermore, the court highlighted its directive to the Union government and SEBI regarding the expert committee's recommendations on regulatory amendments. Addressing concerns raised by petitioners about the market-level impact of Adani stocks' volatility post the Hindenburg report, the court, relying on the expert committee's findings, noted that the fluctuations were stabilized through market forces and mitigating measures. Contrary to systemic risks, the court clarified that the volatility primarily affected individual investors.


Striking a Balance: Judicial Intervention and Market Integrity


Earlier this year, the Hindenburg Report alleged “accounting fraud and stock manipulation” by the Adani Group, prompting a SEBI investigation. Identifying the economic interests and BOs of thirteen overseas FPIs, labelled as public shareholders due to their location in tax havens, posed a challenge in the investigation. This hindrance was largely the result of the withdrawal of the OSC, inhibiting a more exhaustive investigation directed by the Supreme Court of India. The judgment, emphasizing the limited scope of judicial review and the importance of procedural soundness, raises concerns about the potential hindrance in SEBI’s investigation due to perceived regulatory relaxation resulting from the removal of the OSC in FPI norms.


Petitioners alleged that the FPIs investing in Adani group stocks are shell companies owned by the brother of the Adani group's Chairperson. These entities purportedly lack clear ownership, exclusively trade in Adani stocks, and artificially inflate their value, posing a risk to the Indian market. The petitioners argue that this may lead to a violation of Rule 19A of the Securities Contracts (Regulation) Rules 1957, breaching the mandated 25% public shareholding. The court, taking note of SEBI's ongoing investigations in 2020, directed a further inquiry into the alleged violation of Rule 19A. The petitioners criticize SEBI's regulatory changes in 2018 and 2019, removing OSC disclosure requirements, deeming it a major regulatory failure allowing the manipulation in Adani Group stock.


The court found no substantive grounds justifying its intervention to instruct SEBI to retract amendments within the scope of its legislative authority. Regulations are typically subject to judicial review if found to be ultra vires the parent legislation or the Constitution of India. The petitioner failed to assert any such legal grounds before the court. Consequently, the court concluded that the plea seeking directives for SEBI to revoke amendments to the FPI Regulations and the LODR Regulations lacked a valid legal foundation and, therefore, could not be upheld.


While the expert committee in the Adani group case concluded that there was "no evident pattern of manipulation," it is imperative to recognize that the withdrawal of OSC disclosure norms in FPI and the relaxed regulatory framework may create opportunities for potential misuse in the future. The absence of a discernible pattern of manipulation in the current case does not guarantee immunity against future instances of exploitation of regulatory changes. Vigilance and a proactive regulatory approach remain essential to prevent any potential misuse and uphold the integrity of financial markets.


The significant reliance on procedural aspects may inadvertently overlook the need for a robust accountability mechanism within SEBI. Investor protection, a cornerstone of financial stability, demands a proactive approach. A judicious infusion of judicial authority could instigate more vigilant enforcement of regulations by SEBI, fostering a system of checks and balances.


Further, referring to the expert committee’s findings, the court underscored that the volatility in Adani stocks after market forces and effective mitigatory measures stabilized the Hindenburg report. Despite fluctuations in the group’s shares, the court asserted that these did not pose significant systemic risks at the market level. In a sensitive securities market, proactive regulations are paramount to anticipate and address potential future risks. Waiting for a disaster to occur because of relaxed regulatory mechanism is not a prudent regulatory approach; instead, regulations should foresee potential loopholes and be tailored accordingly. This preventive, rather than reactive, regulatory stance is crucial for maintaining the integrity and stability of the capital market.


The importance of investor protection in the Indian financial landscape suggests that a slight tilt towards judicial intervention might have fortified the regulatory framework, ensuring a heightened commitment to implementing and upholding regulations for the greater good of market integrity and investor confidence in the coming future.


The Way Forward


The Adani-Hindenburg case, culminating in the Supreme Court of India’s judgment, marks a pivotal moment in the regulatory scrutiny. The court’s emphasis on the limited scope of judicial review, procedural soundness, and rejection of unwarranted transfers underscores a cautious approach to specialized regulators’ policies. The examination of the FPI Regulations, particularly the withdrawal of the OSC, raises concerns about potential regulatory loopholes and the need for a robust accountability mechanism within the SEBI.


The court’s decision not to intervene in the amendments to the FPI Regulations and the LODR Regulations, while highlighting the absence of legal grounds, prompts reflection on the proactive role of judicial authority in reinforcing regulatory frameworks. The significance of investor protection and market integrity suggests that a judicious infusion of judicial oversight could enhance vigilance and enforcement by SEBI, ensuring a preventive stance against potential loopholes.


As financial markets evolve, a delicate balance between regulatory measures and judicial intervention becomes crucial for maintaining the integrity, stability, and investor confidence in the Indian capital market. The Adani-Hindenburg case thus serves as a call for a strategic synergy between legal, regulatory, and judicial forces to fortify the financial landscape and pre-emptively address emerging challenges.

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