[Manas and Smruti are students at Gujarat National Law University.]
The Adani Group, one of India’s largest and most diversified conglomerates, has been embroiled in the Hindenburg controversy since January 2023. The Securities and Exchange Board of India (SEBI) initiated an investigation into the matter, under the supervision of the Supreme Court of India (SC). After considering various allegations challenging the regulator’s competence in handling the case, on 4 January 2024, SC delivered its verdict in the case of Vishal Tiwari v. Securities and Exchange Board of India, validating SEBI’s power to investigate and dismiss the allegations of regulatory failure.
This article seeks to provide a comprehensive overview and backdrop to the controversy, explains the petitioner’s allegations, SC’s verdict including its rationale, and ramifications for SEBI, the Indian securities market, and the stakeholders involved.
Backdrop of the Controversy
The Adani group had been accused of several allegations which suggested that the group utilized complex offshore structures and shell entities to conceal the true ownership of significant shareholders, some of whom may be related parties or promoters. The minimum public shareholding requirement mandates that every listed company must have at least 25% of its shares held by the public, as per Rule 19A of the Securities Contracts Regulation Rules 1957 (SCR) and Regulation 38 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015. The disclosure of related party transactions is essential to prevent conflict of interest, ensure transparency, and protect minority shareholders.
The group had been alleged to have violated beneficial ownership disclosure norms applicable to foreign portfolio investors (FPIs) holding substantial stakes in its companies. These allegations were initially raised in a Hindenburg Report and subsequently supported by a report from the Organised Crime and Corruption Reporting Project (OCCRP). In response to the allegations, SEBI initiated an investigation into the Adani group following a directive from SC. The investigation faced several challenges due to weaknesses and loopholes in the existing FPI regulation framework. These loopholes allowed FPIs to evade transparency and scrutiny. Criticism was directed at the removal of the opaque structure clause in 2018, which previously required FPIs to disclose the economic interests of all ultimate natural persons. Furthermore, accessing information regarding 13 foreign entities holding shares in the Adani group, located in tax haven jurisdictions, posed limitations to the investigation. To circumvent the challenges encountered during the investigation, SEBI issued a circular dated 24 August 2023, introducing stricter additional disclosure requirements for FPIs (as analysed here) with an aim to enhance transparency and scrutiny in the securities market.
Contentions, Issues Delineated, and Ruling of the Court
The steps taken by SEBI were challenged before SC in a writ petition, wherein the petitioner alleged that the Adani group manipulated its share prices and failed to disclose transactions with related parties and other relevant information in violation of the regulations framed by SEBI and the provisions of securities legislation, based on external reports. It violated Rule 19A of the SCR by surreptitiously controlling more than 75% of the shares of publicly listed Adani group companies. It was alleged that SEBI failed to act on the above allegations and take adequate action against the Adani group, and also amended its regulations to facilitate the mischief by the Adani group.
Additionally, allegations were raised that some members of the Expert Committee appointed by the SC had a conflict of interest and a likelihood of bias and thus asserted a transfer of the investigation from SEBI to another agency or a court monitored Special Investigation Team (SIT). On the other hand, SEBI contended that it has conducted a comprehensive and independent investigation into the allegations and has taken appropriate enforcement actions where applicable and defended the validity of amended regulations.
The SC, after examining the submissions of the parties and the report of the expert committee, addressed the following issues viz. (i) the scope of judicial review over SEBI’s regulatory domain; (ii) the existence of any apparent regulatory failure attributable to SEBI; (iii) the plea to transfer the investigation from SEBI to another agency or to an SIT; and (iv) the allegations of conflict of interest against members of the expert committee.
SC held that the writ jurisdiction is not meant to interfere with the regulatory domain of SEBI, which is a specialized and expert body entrusted with the statutory duty of regulating the securities market. It was observed that SEBI has the necessary powers, functions, and resources to conduct investigations, issue directions, and impose penalties for violations of securities laws.
The court found no apparent regulatory failure attributable to SEBI, as it has been conducting a comprehensive and ongoing investigation into the Adani group since November 2020 and had completed 22 out of 24 investigations by August 2023. It held that SEBI had not diluted its regulations but had tightened them by making the disclosure of beneficial ownership by FPIs mandatory and by expanding the definition of 'related party' to include persons holding 10% or more of the listed company. It was observed that the Hindenburg report, OCCRP report and other publications relied upon by the petitioners could not be considered as conclusive proof.
It was also held that there was no justification to transfer the investigation from SEBI to any other agency or to an SIT, as SEBI had the requisite expertise, experience, and authority to conduct the investigation, and there was no allegation of bias, prejudice, or incompetence against SEBI. The court also held that the transfer of investigation would cause undue delay, disruption, and confusion in the securities market, and would undermine the confidence of the investors and the public in SEBI’s regulatory role and powers.
Petitioners raised allegations of conflict of interest and bias against certain members of the Expert Committee appointed by SC to assess the securities market. The petitioners specifically named three members, citing their association with the Adani group or other related entities. However, it was held that there were no allegations of conflict of interest against the members of the expert committee, as the members were eminent persons with impeccable credentials and reputation and had no direct or indirect connection with the Adani group or SEBI. The acceptance of a professional brief by a lawyer in 2007 could not be construed to reflect bias or even a likelihood of bias in 2023 and thus the court found no proximity in terms of time and subject matter between the alleged appearance and the appointment to the committee. The court noted that the allegations were raised after the committee had submitted its report and that the facts and documents relied upon by the petitioners were already in the public domain. It was further stated that the committee had performed its task diligently and objectively and had submitted a comprehensive and well-reasoned report.
Based on these findings, the court dismissed the writ petitions and upheld SEBI’s regulatory role and powers while expressing its appreciation for SEBI’s efforts and initiatives to strengthen the securities market regulation and protect the investor interests. It also directed SEBI to expedite the remaining investigations and take appropriate action against any violations of securities laws by the Adani group or any other entity within three months. It instructed the Adani group to cooperate with SEBI’s investigation and comply with the disclosure norms and the minimum public shareholding requirement. The expert committee was asked to continue its work and suggest further measures to improve the regulatory framework and the governance standards in the market.
Verdict’s Ramifications and Way Forward
SC’s verdict has consequences for the Adani Group, the SEBI, and the Indian market. For the Adani Group, the verdict is a mixed bag. On the one hand, the group has managed to avoid a more intrusive and politicized probe by a court-monitored or a parliamentary committee, which could have adversely affected its reputation and business interests. On the other hand, the group still faces the risk of adverse findings and actions by SEBI, which could result in monetary penalties, disgorgement of profits, debarment from the securities market, or cancellation of listing, depending on the nature and extent of the violations, if any.
The verdict is a reaffirmation of the regulator’s powers, responsibilities and a recognition of its autonomy and expertise in dealing with complex and sensitive issues. SEBI possesses the authority to initiate investigations and take action against transactions or individuals that pose a threat to the securities market or infringe upon the provisions of the SEBI Act 1992. It can issue directives, impose penalties, conduct adjudications, and initiate criminal proceedings.
To address similar allegations more effectively, SEBI can consider implementing several reforms. These include establishing a specialized unit to handle complex and cross-border cases, bolstering its capabilities in areas like stock manipulation and beneficial ownership disclosure through dedicated expertise and resources. Adopting a risk-based approach, leveraging data analytics and artificial intelligence, can help in prioritizing and detecting instances of market abuse. Streamlining investigation and enforcement processes by reducing procedural delays, ensuring timely completion of inquiries, and imposing appropriate sanctions can expedite the resolution of cases.
Conclusion
SC’s validation of SEBI’s regulatory powers in the Adani-Hindenburg case reinforces the autonomy and expertise of the regulatory body in safeguarding the Indian securities market. The ruling affirms SEBI’s proactive measures to address complex issues, emphasizing transparency and investor protection. For the Adani Group, the verdict presents a nuanced scenario, steering clear of external politicization while underscoring potential repercussions based on SEBI’s findings. Moving forward, the decision signals a positive direction for strengthening legal and regulatory frameworks, particularly in areas of share price manipulation, related party transactions, and disclosure norms for FPIs, thereby calling for continuous collaboration between SEBI and expert committees to enhance the quality and credibility of investigations, ensuring a fair, thorough, and timely resolution of securities market issues.