Investigate If Losses To Indian Investors Due To Short Selling In Adani Shares By Hindenburg & Others Violated Law : Supreme Court

While refusing to order an SIT probe into allegations levelled regarding stock price manipulations against the Adani Group in the Hindenburg Research Report, the Supreme Court today ordered the Securities and Exchange Board of India (SEBI) and the investigative agencies of the Union government, to probe into whether the loss suffered by Indian investors due to the conduct of the Hindenburg research and any other entities in taking short position involved any infraction of law.

The Bench, comprising Chief Justice of India DY Chandrachud, Justices JB Pardiwala and Manoj Misra, added that if it was so found, suitable action shall be taken.

"The SEBI, and the investigative agencies of the Union government, shall probe into whether the loss suffered by Indian investors due to the conduct of the Hindenburg research and any other entities in taking short position involved any infraction of law, and if so, suitable action shall be taken."

In the judgment, short selling is explained as "a sale of securities which the seller does not own but borrows from another entity, with the hope of repurchasing them at a later date with a lower price, thus, attempting to profit from an anticipated decline in the price of the securities."

The Bench noted that Hindenburg Research admitted to taking a short position in the Adani group through US-traded bonds and non-Indian traded derivative instruments.

Taking into account SEBI's contention that short selling is a desirable and essential feature, recognized as legitimate investment activity by securities market regulators in most countries, and the further assertion that International Organisation of Securities Commission recommends regulation of short selling but not its prohibition, the Bench recorded the statement of the Solicitor General of India that measures to regulate short selling will be considered by the Union government and SEBI.

"The loss which has been sustained by Indian investors as a result of the volatility caused by the short positions taken by Hindenburg Research and any other entities acting in concert with Hindenburg Research should be probed," the court said.

Notably, speaking of the power to transfer investigation carried out by an authorized agency to SIT or the CBI, the Bench opined:

"In an appropriate case, this court does have the power to transfer an investigation being carried out by an authorized agency to an SIT or to the CBI. Such a power is exercised in extraordinary circumstances when the competent authority portrays a glaring, willful and deliberate inaction in carrying out the investigation. The threshold for the transfer of investigation has not been demonstrated to exist."

It was concluded that the facts of the case at hand did not warrant transfer of investigations from SEBI.

Other reports about the judgment can be read here.

Case Title : Vishal Tiwari v. Union of India W.P.(C) No. 162/2023 and connected cases.

Citation : 2024 LiveLaw (SC) 2

Click here to read the judgment