TMI Blog2024 (1) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... inancial health and artificially boost the value of stocks in the market, in violation of Indian law; Adequacy of SEBI s investigation - scope of judicial review over SEBI s regulatory domain - transfer of investigation from SEBI to another agency or to an SIT - Whether SEBI has prime facie conducted a comprehensive investigation? - Allegations of conflict of interest against members of the Expert Committee - petitioner s case appears to rest solely on inferences from the report by the OCCRP, a third-party organization involved in investigative reporting . The petitioners have made no effort to verify the authenticity of the claims. Whether there is no apparent regulatory failure attributable to SEBI? - petitioners have submitted, based on the Hindenburg Report and other newspaper reports, that the FPIs investing in Adani group stocks in the Indian stock market are shell companies outside India owed by the brother of the Chairperson of the Adani group HELD THAT:- In a consistent line of precedent, this Court has held that when technical questions arise particularly in the financial or economic realm; experts with domain knowledge in the field have expressed their v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring, willful and deliberate inaction in carrying out the investigation. The threshold for the transfer of investigation has not been demonstrated to exist. The reliance placed by the petitioner on the OCCPR report to suggest that SEBI was lackadaisical in conducting the investigation is rejected. A report by a third-party organization without any attempt to verify the authenticity of its allegations cannot be regarded as conclusive proof. Further, the petitioner s reliance on the letter by the DRI is misconceived as the issue has already been settled by concurrent findings of DRI s Additional Director General, the CESTAT and this Court; The allegations of conflict of interest against members of the Expert Committee are unsubstantiated and are rejected. The Union Government and SEBI shall constructively consider the suggestions of the Expert Committee in its report detailed in Part F of the judgment. These may be treated as a non-exhaustive list of recommendations and the Government of India and SEBI will peruse the report of the Expert Committee and take any further actions as are necessary to strengthen the regulatory framework, protect investors and ensure the orderly f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ehensive investigation ...... 25 iii. Reliance on the OCCRP report and the letter by DRI is misconceived 28 E. Allegations of conflict of interest against members of the Expert Committee .......................................................................................................... 30 F. Other recommendations by the Expert Committee ................................. 32 i. Volatility and short selling ...................................................................... 32 ii. Investor Awareness ................................................................................. 36 iii. Recommendations of the Expert Committee to strengthen regulatory framework and secure compliance to protect investors ............................ 39 G. Conclusion .................................................................................................. 43 1. A batch of writ petitions filed before this Court under Article 32 of the Constitution in February 2023, raised concerns over the precipitate decline in investor wealth and volatility in the share market due to a fall in the share prices of the Adani Group of Companies. Adani gro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that there was a need to review the existing regulatory mechanisms in the financial sector to ensure that they are strengthened with a view to protect Indian investors from market volatility. This Court sought inputs from the Solicitor General on the proposed constitution of an Expert Committee for the purpose. This Court observed: 4 We have suggested to the Solicitor General that he may seek instructions on whether the Government of India would facilitate the constitution of an expert committee for an overall assessment of the situation, and if so, to place its suggestions on the constitution and remit of the committee on the next date. Meantime the Solicitor General shall place on the record a brief note on factual and legal aspects so as to further the deliberations during the course of the next hearing. 4. The batch of cases came up for hearing on 17 February 2023. This Court heard detailed submissions on behalf of the parties and reserved further orders. In its order dated 2 March 2023, this Court took note of the loss of investor wealth in the aftermath of the report by Hindenburg Research and recognized the dire need to protect Indian investors from unanticipate ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as well as the steps that it has taken in furtherance of its ongoing investigation. The constitution of the expert committee does not divest SEBI of its powers or responsibilities in continuing with its investigation into the recent volatility in the securities market. 6. On 6 May 2023, in compliance with the above interim order, the Expert Committee submitted its report to this Court. In its order dated 17 May 2023, this Court directed that copies of the report shall be made available to the parties and their counsel to enable them to assist the Court in the course of further deliberations. This Court also granted SEBI an extension of time till 14 August 2023 to submit its status report about its investigation. 7. SEBI filed an interlocutory application on 14 August 2023 intimating this Court about the status of the twenty-four investigations which were undertaken by them. Further, SEBI submitted a status report dated 25 August 2023 providing details about the twenty-four investigations. Both SEBI and the counsel for the petitioners have also filed their responses to the Expert Committee s report. 8. In the above background, this matter came up for hearing before this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ich have altered the definition of related party ; g. SEBI's inability to establish a prima facie case of regulatory non-compliance and legal violations by the Adani group promoters despite starting an investigation in November 2020, appears to be prima facie self-inflicted. The unprecedented rise in the price of the Adani scrips occurred between January 2021 and December 2022, over a period when the Adani group was already under SEBI investigation; h. A few members of the Expert Committee may have a conflict of interest and there is a likelihood of bias, which was not brought to the notice of the Court by the concerned members; and i. SEBI has willfully delayed the submission of its status report on the investigation into the Adani group within the time granted by this Court. 10. On the other hand, the learned Solicitor General, appearing on behalf of SEBI made the following submissions: a. Twenty-two out of twenty-four investigations being conducted by SEBI are complete. In these investigations, enforcement actions/ quasi-judicial proceedings would be initiated, wherever applicable; b. The delay by SEBI in filing the report is only ten days which is uninten ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of the securities market in India. SEBI is empowered to regulate the securities market in India by the SEBI Act 1992, the SCRA and the Depositories Act 1996. SEBI s powers to regulate the securities market are wide and include delegated legislative, administrative, and adjudicatory powers to enforce SEBI s regulations. SEBI exercises its delegated legislative power by inter alia framing regulations and appropriately amending them to keep up with the dynamic nature of the securities market. SEBI has issued a number of regulations on various areas of security regulation which form the backbone of the framework governing the securities market in India. 13. Section 11 of the SEBI Act lays down the functions of SEBI and expressly states that it shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit . Further, Section 30 of the SEBI Act empowers SEBI to make regulations consistent with the Act. Significantly, while framing these regulations, SEBI consults its advisory committees consisting of domain experts, including market experts, leading mark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hanges and securities market. The Board provides for the registration and regulation of stock brokers, share transfer agents, depositories, venture capital funds, collective investment schemes, etc. It also has the power to prohibit various transactions which interfere with the health of the securities market. 34. In the exercise of its adjudicatory powers under Section 15-I, SEBI has the power to appoint officers for holding an inquiry, give a reasonable opportunity to the person concerned and determine if there is any transgression of the Rules prescribed. The Board has the power to impose penalties for violations and also restitute the parties. The adjudicatory power also includes the power to settle administrative and civil proceedings under Section 15-JB of the SEBI Act. 35. The regulatory jurisdiction of the Board also includes ex-ante powers to predict a possible violation and take preventive measures. The exercise of ex-ante jurisdiction necessitates the calling of information as provided in Sections 11(2)(i), 11(2)(ia) and 11(2)(ib) of the SEBI Act. Where the Board has a reasonable ground to believe that a transaction in the securities market is going to take p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... existential purpose. 17. From the above exposition of law, the following principles emerge: a. Courts do not and cannot act as appellate authorities examining the correctness, suitability, and appropriateness of a policy, nor are courts advisors to expert regulatory agencies on matters of policy which they are entitled to formulate; b. The scope of judicial review, when examining a policy framed by a specialized regulator, is to scrutinize whether it (i) violates the fundamental rights of the citizens; (ii) is contrary to the provisions of the Constitution; (iii) is opposed to a statutory provision; or (iv) is manifestly arbitrary. The legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review; c. When technical questions arise particularly in the domain of economic or financial matters and experts in the field have expressed their views and such views are duly considered by the statutory regulator, the resultant policies or subordinate legislative framework ought not to be interfered with; d. SEBI s wide powers, coupled with its expertise and robust informationgathering mechanism, lend a high level of credibility ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y Laundering Act, 2002 PMLA and thereby under Rule 9 of the Prevention of Money Laundering Maintenance of Records Rules, 2004. These requirements were amended by SEBI in 2018 and 2019 by removing the requirement of disclosing ownership of the FPIs by a natural person. The petitioner submits that this amounts to a regulatory failure on the part of SEBI. 21. The petitioner further argues that the LODR Regulations, 2015 defined a related party transaction in Regulation 2(1)(zb) as a transaction involving a transfer of resources between a listed entity and a related party , regardless of whether a price is charged. The term related party , in Regulation 2(1)(zc) had the same meaning that is ascribed to related party under Section 2(76) of the Companies Act, 2013. Based on a report of the Committee on Corporate Governance dated 5 October 2017 the definition was amended on 1 April 2019 to provide that any person or entity belonging to the promoter or promoter group of a listed entity that held 20% or more of the shareholding in the listed entity shall be deemed to be a related party. 22. On 21 November 2021, substantial amendments were made to the definition of related ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... FPI Regulations and LODR Regulations or make suitable changes. It may be pointed out that these arguments and prayers were not present in the initial petitions. They have only propped after the report of the Expert Committee dated 6 May 2023. The Report stated that in view of the amendments to the regulations, it cannot return a finding of regulatory failure by SEBI. Thereafter, the petitioners have made arguments to belie the finding of the Expert Committee Report. 25. SEBI in its affidavit dated 10 July 2023 has submitted that the entire rouse around regulatory failure caused by amendments to FPI Regulations and LODR Regulations was initiated because of SEBI s submissions before the Expert Committee in the context of challenges faced in obtaining information regarding holders of economic interest. SEBI had used the term opaque to describe the FPIs which it submits was mistaken by the Expert Committee to imply the rules on opaque structures under the FPI Regulations, 2014. 26. SEBI claims no disability in its investigation into the Adani group on account of the amendments to the FPI Regulations. On merits, SEBI has argued that the FPI Regulations, 2014 in fact did not pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is Court is being asked to replace the powers given to SEBI by Parliament as a delegate of the legislature with the petitioners better judgment. 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 and removing the requirement of it being disclosed only when sought. The disclosure requirement therefore is now at par with PMLA. 29. We do not see any valid grounds raised for this Court to interfere by directing SEBI to revoke its amendments to regulations which were made in the exercise of its legislative power. A regulation may be subject to judicial review based on it being ultra vires the parent legislation or the Constitution. None of these grounds have been pressed before the Court. Therefore, we find that the prayer seeking directions to SEBI to revoke its amendments to the FPI Regulations and LODR Regulations must fail. 30. SEBI has completed twenty-two out of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on this principle, this Court further observed: 17. the Court could exercise its constitutional powers for transferring an investigation from the State investigating agency to any other independent investigating agency like CBI only in rare and exceptional cases. Such as where high officials of State authorities are involved, or the accusation itself is against the top officials of the investigating agency thereby allowing them to influence the investigation, and further that it is so necessary to do justice and to instil confidence in the investigation or where the investigation is prima facie found to be tainted/biased. 50. The Court reiterated that an investigation may be transferred to the CBI only in rare and exceptional cases . One factor that courts may consider is that such transfer is imperative to retain public confidence in the impartial working of the State agencies. This observation must be read with the observations made by the Constitution Bench in the case of Committee for Protection of Democratic Rights, West Bengal (supra), that mere allegations against the police do not constitute a sufficient basis to transfer the investigation. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2 3 Alleged related Party Transactions (RPT)-Failure to disclose transactions with Related Parties and other relevant information 13 4 Other Issues : (A) Possible violation of SEBI (Foreign Portfolio Investors) Regulations, 2014 and 2019 (B) Possible violation of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (C) Trading-Pre-post Hindenburg Report (D) Possible violation of SEBI (Prohibition of Insider Trading) Regulations, 2015 1 1 1 5 Total 24 SEBI s status report and the details of the twenty-four investigations does not indicate inaction by SEBI. In fact, to the contrary, the course of conduct by SEBI inspires confidence that SEBI is conducting a comprehensive investigation. 37. The petitioners have also raised questions about the delay by SEBI in submitting the status report before this Court. As noted earlier, by an order dated 2 March 2023, this Court directed SEBI to conclude its investigation within two months and file a status report before this Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to the then SEBI Chairperson. The letter purportedly alerted SEBI about inter alia potential stock market manipulation by the Adani group through over-valuation of the import of power equipment from a UAE-based subsidiary. According to the petitioner, SEBI did not disclose the receipt of the letter and did not take adequate action based on it. 42. SEBI has submitted that after receiving the above letter, it sought information from the DRI on the issue and received the requisite inputs. Further, while SEBI examined the preliminary alerts by the DRI, the Additional Director General (Adjudication), DRI concluded their examination and held that the allegations were not established. The order of the Additional Director General was assailed by the Commissioner of Customs before the Customs, Excise and Service Tax Tribunal. CESTAT The CESTAT passed an order on 8 November 2022 dismissing the appeal and concluding that the allegation of overvaluation was not proved. The order of the CESTAT was upheld by this Court on 27 March 2023. Further, SEBI has also submitted that its investigation based on the DRI alerts was concluded and the related findings were also placed before the Expert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t present any additional evidence. The acceptance of a professional brief by a lawyer in 2007 cannot be construed to reflect bias or even a likelihood of bias in 2023. There is an absence of proximity both in terms of time (the alleged appearance was sixteen years ago) and subject matter. There was also no justifiable reason for the petitioners to wait until the expert committee submitted its report. 48. Similarly, the allegations against Mr OP Bhatt and Mr Kamath have not been adequately substantiated by the petitioner. With regard to Mr OP Bhatt, the petitioner has alleged that he is presently working as the Chairman of a leading renewable energy company, which is working in partnership with the Adani group on certain projects. Additionally, the petitioner has also raised vague accusations against Mr OP Bhatt and Mr Kamath in relation to unconnected misconduct by Mr Vijay Mallya and the ICICI Bank, respectively. 49. The petitioner has not established the link between these unsubstantiated allegations and the appointment of Mr Bhatt and Mr Kamath to the committee. Here too, the petitioner has only annexed newspaper reports published after the appointment of the committee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Hindenburg Report was stabilised due to market forces and mitigatory measures. While shares of the group fluctuated, it did not pose any systemic market-level risk. According to the Expert 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. Therefore, according to the Committee, while events related to Adani stocks had an impact at an individual scale, it did not result in volatility in the market. 55. After drawing the above conclusion, the Expert Committee has additionally made the following recommendation upon considering the submissions of SEBI and other market participants: 47. SEBI has submitted that only recently, it has made a regulatory intervention in terms of supervising the construction of stock indices. SEBI must consider directing index writers to construct indices to compute volatility of stocks that are constituents of indices so that volatility in these stocks can be compared with volatility in the indices. The availability of such data on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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. In its report, Hindenburg Research admits to taking a short position in the Adani group through US-traded bonds and non-Indian traded derivative instruments. SEBI has submitted that short selling is a desirable and essential feature to provide liquidity and to help price correction in over-valued stocks and hence, short selling is recognised as a legitimate investment activity by securities market regulators in most countries. Short selling is regulated by a circular notified by SEBI on 20 December 2007. SEBI submits that any restrictions on short selling, may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors. Therefore, the International Organisation of Securities Commission recommends that short selling be regulated but not prohibited with an aim to increase transparency. We record the statement made by the Solicitor General before this Court that measures to regulate short selling will be considered by the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rmation in which investors find themselves drowned. Measures to communicate relevant information in a comprehensive manner to the investors are therefore imperative for informed decision making. 62. The Committee also explored investor awareness with respect to unclaimed securities, dividends and bank deposits of deceased next of kin which may be lost due to the legal framework. The Committee invited the Investor Education and Protection Fund Authority IEPFA to present its workings and manner of administration. Based on its findings, the Committee recommended that the Government of India establish a centralised authority to handle and process unclaimed private assets. It suggested creating the Central Authority for Unclaimed Property which must aim to reunite assets of deceased persons with their next of kin. The Committee also made some suggestions in the context of IEPFA which state: a. The integrated portal announced in the Finance Minister Budget Speech should be expedited and process re-engineering delegation to the issuer companies based upon type and threshold of the claims must be considered; b. The same may be reviewed on incremental basis from time to time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rcement Policy: SEBI must optimize its resources and lay down policies for effective enforcement of its law by stipulating the criteria by which it may use its powers to initiate measures. This must be consistent with the legislative policy of SEBI and an attempt must be made to apply the law prospectively; c. Judicial Discipline: Adjudicating Officers and Whole Time Members must show consistency and not take differing views in similar circumstances. Judicial discipline must be followed in applying ratios of previous decisions as well as following the decisions made at the appellate stage; d. Settlement Policy: SEBI must have a robust settlement policy and formulate objective criteria to regulate it. It must not be hesitant to enter settlements whereby financial injury commensurate with the alleged violation may be inflicted on the party; e. Timelines: SEBI must lay down and adhere to strict timelines for initiation of investigations, completion of investigations, initiation of proceedings, disposal of settlement, and disposal of proceedings; f. Surveillance and Market Administration Measures: The element of human discretion must be done away with as far as possible. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ositive intent. We direct the Government of India and SEBI to consider these suggestions and to take the benefit of the efforts put in by the Expert Committee. We may add that the approach in considering these suggestions must not be defensive but constructive. The Committee has favourably noted some of the measures that SEBI has taken in reaction to the events and learnings from the market. The same attitude of advantaging from the perspectives should be taken by the Government of India and SEBI. The Union Government and SEBI would be at liberty to interact with the Committee so as to take this forward. Since a member of the Bar who was a member of the Committee has been appointed to the Bench since the submission of the report, the Chairperson of the Committee will be at liberty to nominate a member with legal expertise and domain knowledge for the purpose of interacting with the Union Government and SEBI. G. Conclusion 67. In a nutshell, the conclusions reached in this judgement are summarized below: a. The power of this Court to enter the regulatory domain of SEBI in framing delegated legislation is limited. The court must refrain from substituting its own wisdom ov ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Part F of the judgment. These may be treated as a non-exhaustive list of recommendations and the Government of India and SEBI will peruse the report of the Expert Committee and take any further actions as are necessary to strengthen the regulatory framework, protect investors and ensure the orderly functioning of the securities market; and i. SEBI and the investigative agencies of the Union Government shall probe into whether the loss suffered by Indian investors due to the conduct of Hindenburg Research and any other entities in taking short positions involved any infraction of the law and if so, suitable action shall be taken. 68. Before concluding, we must observe that public interest jurisprudence under Article 32 of the Constitution was expanded by this Court to secure access to justice and provide ordinary citizens with the opportunity to highlight legitimate causes before this Court. It has served as a tool to secure justice and ensure accountability on many occasions, where ordinary citizens have approached the Court with well-researched petitions that highlight a clear cause of action. However, petitions that lack adequate research and rely on unverified and unrelat ..... X X X X Extracts X X X X X X X X Extracts X X X X
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