Adani-Hindenburg | Supreme Court Enquires About Background Of Legislative Changes Made By SEBI In Regulatory Framework

In the Adani Hindenburg matter, the Supreme Court enquired about the background of the legislative changes introduced by SEBI in the regulatory framework. This was after Advocate Prashant Bhushan, appearing for a petitioner seeking probe into the Hindenburg allegations, pointed out that as per the Expert Committee, SEBI's investigation will not reach anywhere owing to their own amendments and changes made to the definition of "opaque structure", "related party" etc. 

The bench comprising CJI DY Chandrachud, Justice PS Narasimha, and Justice Manoj Misra decided to next hear the matter on August 14, 2023 - the extended deadline given by the Supreme Court to the SEBI to complete its probe.

At the outset, the Solicitor General of India Tushar Mehta, appearing for SEBI, submitted that SEBI had filed a response to the Expert Committee's report.  He said–

"We received the report of the expert committee. So far as reference made to SEBI, some guidelines are given. We have filed our response. It's a constructive response. Since it was filed late, it's not before your lordships...The investigation is going on, with full speed as much as possible."

On May 19, the Expert Committee had filed its report in the matter and investigated in three areas- first, whether there has been a violation of Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (relating to maintaining public shareholding of at least 25%); second, 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 third, whether there was any manipulation of stock prices in contravention of existing laws. While the expert committee had said that it cannot, as of now, arrive at a finding of "regulatory failure" of SEBI in dealing with the alleged contravention of securities law, in its report, it had also cited several amendments the SEBI made between 2014-2019 that constrained its ability to investigate. 

Advocate Prashant Bhushan, appearing for the petitioners, argued–

"It was filed yesterday and given to the whole media so that media covered it but filed late enough so that court doesn't have it. The expert committee has stated that there is no chance of SEBI proceeding anywhere with the investigation given what they have done. They have done things fatal to investigation."

He then added–

"The committee says that the SEBI investigation cannot go anywhere because they amended definition of opaque structure, they also made amendments with regards to related party transactions - in order to prevent this kind of fraud being exposed."

Taking note of the same, the CJI orally remarked–

"Apropos this submission, Mr SG you may go into the background of amendment- why was the amendment passed?"

To this, the SG responded that the SEBI has explained the reasons for the amendment in the latest affidavit, which would be placed on record soon.

[Also Read] Adani-Hindenburg : Did The Supreme Court Panel Ask The Right Questions?

Background

It was on January 24 that US-based Hindenburg published its report accusing Adani group of widespread manipulations and malpractices to inflate its stock prices. Adani Group refuted the allegations by publishing a 413-page reply.

On March 2, 2023, the court constituted a committee and appointed the following persons as the members of the committee – Mr OP Bhat (former Chairman of SBI), retired Justice JP Devadhar, Mr KV Kamath, Mr Nandan Nilakeni, Mr. Somasekharan Sundaresan. The Committee was held to be under the head of former Supreme Court judge Justice AM Sapre. The court directed the committee to submit its report in a sealed cover before this court within 2 months. However, the court remarked that the constitution of the expert committee did not divest SEBI of its powers or responsibilities in continuing with its investigation into the volatility in the securities market in India. SEBI was also directed to submit a status report within a period of two months.

Later, the SEBI filed an application in the Supreme Court seeking a six-month extension to complete its probe into allegations. The regulatory body said that examinations/investigations for which further time would be required would fall into three broad categories:

- Those where prima facie violations have been found and a period of 6 months would be required to arrive at conclusive finding;

- Those where prima facie violations have not been found, a period of 6 months would be required to revalidate the analysis and arrive at conclusive finding;

- In cases where, further examination/investigation is required and most of the data that is required for this purpose is expected to be reasonably accessible, a conclusive finding is expected to be arrived at in 6 months.

In May, while hearing an application filed by SEBI to grant an extension of six months to complete the probe, a bench comprising Chief Justice DY Chandrachud, and Justices PS Narasimha and JB Pardiwala indicated that it could not allow more than three months to finish the entire exercise. The two months’ time originally allowed by the apex court as per its March 2 order ended on the day of the last hearing, i.e., May 2.

In defence of its request, SEBI filed a rejoinder affidavit in the Supreme Court giving additional reasons for seeking more time to probe into the Adani-Hindenburg issue. SEBI stated that the transactions are complex and require more time to examine. SEBI has informed the apex court bench that it has already approached eleven overseas regulators under the Multilateral Memorandum of Understanding (MMOU) with the International Organisation of Securities Commissions (IOSCO) with respect to its investigation into Minimum Public Shareholding (MPS) norms.

The top court agreed to grant SEBI an extension till August 14, 2023, to complete its probe in the matter. 

Case Title: Vishal Tiwari v. Union Of India And Ors. W.P.(C) No. 162/2023 PIL-W and connected matters

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