Supreme Court upholds SEBI probe, turns focus on ‘conduct’ of Hindenburg

The court directs SEBI to probe and take “suitable action” if the losses suffered by Indian investors due to the short position taken by the U.S.-based firm in the Adani Group through U.S.-traded bonds and non-Indian traded derivative instruments involved any infraction of law

The Supreme Court also underscored that the report of the Organised Crime and Corruption Reporting Project cannot be relied upon to doubt the SEBI investigation. File | Photo Credit: Rajeev Bhatt

The Supreme Court on January 3 trained the spotlight on the “conduct” of Hindenburg Research, directing the Securities and Exchange Board of India (SEBI) and investigating agencies of the Centre to probe and, if necessary, take “suitable action” if the losses suffered by Indian investors due to the short position taken by the U.S.-based firm in the Adani Group through U.S.-traded bonds and non-Indian traded derivative instruments involved any infraction of law.

The direction came in a 46-page judgment based on petitions claiming “precipitate decline” in investor wealth and volatility in the share market due to a fall in the share prices of the Adani Group following a report published by “activist short seller” Hindenburg Research on January 24, 2023.

The report had alleged that the Adani Group manipulated its share prices and failed to disclose transactions with related parties in violation of the regulations framed by the SEBI and securities’ laws.

However, even as it directed the SEBI and probe agencies to open an enquiry into Hindenburg and “other entities”, a three-judge Bench headed by Chief Justice of India D.Y. Chandrachud noted that the volatility in Adani stocks in the aftermath of the Hindenburg report had an impact only at an individual scale and did not result in volatility in the market.

“While shares of the group fluctuated, it did not pose any systemic market-level risk. According to the Expert Committee [Justice A.M. Sapre 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,” Chief Justice Chandrachud noted.

24 investigations

The judgment said the investigation conducted by the SEBI into the Adani Group following the Hindenburg report “inspires confidence” and was prima facie comprehensive. The market regulator had already completed 22 out of the 24 investigations into the group. The remaining two were pending due to inputs awaited from foreign regulators.

It dismissed the idea of transferring the investigation from the SEBI to another agency like the Central Bureau of Investigation or to constitute a Special Investigation Team. The court said such judicial powers could only be exercised in extraordinary circumstances like “glaring, willful and deliberate inaction” by an agency.

The court ordered the SEBI to expeditiously complete the pending investigations, “preferably” within three months, and said the regulator could not leave the probe “open-ended and indeterminate in time”.

The judgment refused to accept petitioners’ contention that the SEBI’s amendments in the Foreign Portfolio Investors (FPI) Regulations and Listing Obligations and Disclosure Requirements (LODR) Regulations had been an exercise in “first opening a loophole and then plugging the loophole with deferred effect” and has now hindered the regulator’s investigation.

“The petitioners have not challenged the vires of the Regulations, but have contended that there is regulatory failure based on the SEBI’s alleged inability to investigate which is attributed to changes in the Regulations. Such a ground is unknown to this court’s jurisprudence. In effect, this court is being asked to replace the powers given to the SEBI by Parliament as a delegate of the legislature with the petitioners’ better judgment,” the Chief Justice noted.

The petitioners had claimed that the FPI Regulations of 2014, which mandated the disclosure of the identities of the ultimate beneficial owners of FPIs and conformity with the provisions of the Prevention of Money Laundering Act, was amended by the SEBI in 2018 and 2019. The Hindenburg report and newspaper articles had alleged that the FPIs investing in the Adani Group in the Indian stock market were actually shell companies located outside India owned by the brother of the chairperson of the Adani Group, creating an appearance of financial health and solvency by artificially boosting the value of stocks in violation of Indian law. The amendments in LODR law had thrown a veil over related party transactions by allegedly flouting minimum public shareholding regulations through FPIs.

“The critique of the regulations made as an afterthought and based on a value judgment of economic policy is impermissible. Additionally, we find no merit in the argument that the FPI Regulations, 2014 have been diluted to facilitate mischief. The amendments, far from diluting, have tightened the regulatory framework by making the disclosure requirements mandatory,” Chief Justice Chandrachud observed.

Newspaper reports

The apex court rubbished the petitioners’ reliance on investigative findings of the Organised Crime and Corruption Reporting Project (OCCRP) about alleged price manipulation by the Adani Group through two Mauritius-based funds and critical newspaper reports of SEBI investigation, saying no effort was made to verify the authenticity of these claims.

“The reliance on newspaper articles or reports by third-party organisations to question a comprehensive investigation by a specialised regulator does not inspire confidence. Such reports by ‘independent’ groups or investigative pieces by newspapers may act as inputs before the SEBI or the Expert Committee. However, they cannot be relied on as conclusive proof of the inadequacy of the investigation by the SEBI. Nor, as the petitioners state, can such inputs be regarded as ‘credible evidence’,” Chief Justice Chandrachud observed.

The court referred to how the petitioners had alleged that the SEBI had “concealed” an alert received from the Directorate of Revenue Intelligence (DRI) in 2014 about stock manipulation by the Adani Group by overvaluation. The DRI had subsequently found the allegations of overvaluation to be incorrect. The CESTAT and the Supreme Court too had dismissed the allegations.

Chief Justice Chandrachud cautioned lawyers and civil society that filing public interest litigation petitions (PILs) without adequate research and based on unverified material tend to be counter-productive.

The Chief Justice, along with Justices J.B. Pardiwala and Manoj Misra, said allegations of conflict of interest thrown by petitioners at the members of the Justice Sapre Committee were not even worth serious consideration.