A perusal of the recent Supreme Court order on the Adani-Hindenburg matter reveals that the verdict has limited itself to the conduct of inquiries by the Securities and Exchange Board of India (SEBI) in the matter. Two of these inquiries are still ongoing. The apex court has ruled that there is no regulatory failure on SEBI’s part and hence no need for any external agency like a Special Investigating Team (SIT) to further investigate the matter. In other words, if the apex court has given any “clean chit”, it is to SEBI and not to the Adani group. Yet there are deficiencies in the Supreme Court judgment which can subvert the ongoing investigation into the Adani group and which merit reconsideration in the interest of justice.
Lack of scrutiny
The judgment records that SEBI has completed 22 out of the 24 investigations in the Adani-Hindenburg matter. It further notes that the court has not interfered with the investigations and it is for SEBI to take them “to their logical conclusion in accordance with law”.
This status report on investigations was submitted by SEBI to the apex court on August 25, 2023. The 22 completed reports included two on manipulation of stock prices, 13 on failure to disclose Related Party Transactions (RTPs), five on violation of insider trading regulations and one each on violations of regulations on Foreign Portfolio Investors (FPI) and Acquisitions & Takeovers. However, these investigation reports have remained under wraps for over four months, with their findings unknown. Unless the findings of the SEBI investigations are publicly reported and acted upon, how can one conclude whether or not there has been regulatory failure? The SC judgment has accepted SEBI’s status report at face value without examining the findings of these reports in its judgment. Neither have the petitioners been allowed access to these reports nor have they been vetted by the Expert Committee (EC) appointed by the apex court to investigate regulatory failure. There is an absence of rigorous scrutiny of SEBI’s investigations.
‘Chicken-and-Egg’ inquiry
The terms of reference for the SEBI inquiries were set by the Supreme Court itself in its order dated March 2, 2023. The very first term was to probe the alleged violation of Rule 19A of the Securities Contracts (Regulation) Rules 1957 by the Adani group companies. This implied probing into the alleged offence of maintaining promoter group shareholding above the regulatory threshold of 75% through front companies based in overseas tax havens. If proven, such an offence could lead to the de-listing of the Adani group companies.
As per the EC’s submissions, SEBI’s inquiry on this matter had been ongoing since October 2020, much before the publication of reports by Hindenburg or the Organised Crime and Corruption Reporting Project (OCCRP). Even after several extensions granted by the apex court in 2023, SEBI was unable to conclude this vital inquiry on the ground that information sought from foreign jurisdictions were still awaited. Yet, the apex court judgment gives another three months extension to SEBI for concluding this inquiry and the petitions complaining about regulatory failure have been disposed of, before ascertaining this inquiry’s outcome.
The report of the EC had brought to light that 13 overseas entities having significant shareholding in the Adani group of companies were being investigated by SEBI for long. However, the EC also noted that the inquiry had “hit a wall” and SEBI’s attempts to identify the ultimate beneficial owners of those 13 entities could become “a journey without a destination”. The EC further reported that agencies like the Central Board of Direct Taxes (CBDT) and the Enforcement Directorate (ED) required SEBI to first make a prima facie case to conduct further investigations. The SEBI could not present such a case because the dilution and eventual repeal of the prohibition of “opaque structures” in FPI regulations had tied SEBI’s hands. This conundrum has been characterised by the EC as a “chicken-and-egg situation”. These were not allegations made by Hindenburg or OCCRP, but revelations made by the EC itself.
It is therefore, inexplicable why the apex court did not intervene to resolve this “chicken-and-egg situation” and direct the CBDT, ED and other relevant agencies to extend all possible assistance to SEBI in unearthing the ultimate beneficial owners of those 13 suspected overseas entities.
Statutory violations were overlooked
The apex court judgment expresses reluctance to act as appellate authority over regulatory policies framed by SEBI by stating that the court “may interfere only when it is found that the actions are arbitrary or violative of constitutional or statutory mandates”.
The EC report provided an elaborate account of SEBI’s successive amendments to the regulations on FPIs made in 2018 and 2019 as well as the regulations on Listing Obligations and Disclosure Requirements (LODR) brought between 2018 and 2022. These amendments in effect facilitated the concealment of ultimate beneficial ownership of FPIs investing in Indian security markets and their related party transactions. Hence they are violative of Section 12A of the Securities and Exchange Board of India Act, 1992 which explicitly prohibits “contrivances and devices that are structured to bypass the law”.
By rejecting the prayer for revoking these amendments, the apex court has ignored the detailed critique of SEBI’s regulatory actions contained in the EC report. It has rather relied upon certain assertions made by SEBI in an affidavit submitted on July 10, 2023, which appear prima facie counter factual and deceptive. For instance, SEBI claimed that its use of the term “opaque” to describe the suspected FPIs was mistakenly interpreted by the EC to imply that the rules on “opaque structures” under the FPI Regulations, 2014 were diluted. This argument is an affront to the collective wisdom of the EC.
The affidavit also suppressed the fact that its Master Circular on Anti-Money Laundering and Combating Financing of Terrorism Standards issued in February 2010 had a categorical definition of “beneficial ownership” as “the natural person or persons who ultimately own, control or influence a client and/or persons on whose behalf a transaction is being conducted”.
However, the amendments made by SEBI in 2018 and 2019 to the FPI Regulations, 2014 diluted the definition in three significant ways — a) the term “ultimate beneficial owner” as per the definition of the 2010 circular, was replaced with “beneficial owner”; b) this “beneficial owner” was defined as per the Prevention of Money Laundering Act, 2002 (PMLA) and Rules framed thereunder, which mandated 25% shareholding thresholds for identifying beneficial ownership; c) and the term “opaque structure” was deleted altogether. SEBI’s July 10 affidavit grossly misinterpreted the continuous dilution of FPI provisions as tightening of disclosure requirements by FPIs. Even after admitting in its July 10 affidavit that “the existence of thresholds for determination of beneficial owners” offered a challenge in identifying beneficial ownership of FPIs, SEBI suppressed the important fact that the 25% shareholding threshold emanating from the PML (Maintenance of Records) Rules, 2005 were amended only in March 7, 2023 by the Ministry of Finance and lowered to 10%. This amendment was made after the Supreme Court order on March 2, 2023 had already set the terms of reference for the SEBI inquiry into the Adani group and also constituted the EC.
The apex court could have taken cognisance of these legislative and regulatory changes, which were made when the matter was already sub judice. Whether the lowering of the shareholding threshold to identify ultimate beneficial ownership under PML Rules resolved the problems encountered by SEBI in its ongoing investigation, was also not considered by the apex court.
Allegations or evidence?
The concluding observation of the Supreme Court judgment with reference to petitions that “lack adequate research and rely on unverified and unrelated material” being “counterproductive” appears out of place, given that whatever regulatory actions were undertaken in the past ten months have only been a fallout of the apex court’s interventions. SEBI on its own could not register any progress in its investigations on the Adani group and 13 suspected overseas entities since October 2020.
How can the Hindenburg report of January 2023 or the OCCRP report of August 2023 be considered “unrelated” material, when they could independently identify some of those overseas entities which were already under SEBI’s suspicion? These reports unveiled Vinod Adani as the ultimate beneficial owner of a massive web of shell companies hidden behind characters like Chang Chung Ling and Nasser Ali and established their link with the Adani promoter group. This was the prima facie evidence which SEBI could not unearth for over two years.
The SEBI should have acted upon this evidence by now. The apex court could also have prodded SEBI to do so. Rather, SEBI has chosen to shoot the messenger by opening a probe against Hindenburg’s short-selling, which by its own submission is recognised as “legitimate investment activity by securities market regulators in most countries”. The judgment has also nullified the OCCRP report as one from a “third-party organisation” labelling its investigative findings as “allegations” which “cannot be regarded as conclusive proof”. They may not be conclusive proof, but could have been considered as evidence additional to those provided in the Hindenburg report.
In sum, where does the Supreme Court judgement land the Adani investigation? SEBI would continue with its “chicken and egg” inquiry into the violation of minimum shareholding norms by the Adani group companies, now free from any judicial oversight. The findings of the completed SEBI inquiries on share price manipulation, insider trading, non-disclosure of related party transactions et cetera would remain under the lid. Hindenburg will be investigated for causing market volatility and losses sustained by “Indian investors”. The OCCRP report which revealed crucial links between suspected overseas entities, Vinod Adani and the Adani promoter group stands junked.
This is particularly disturbing because neither Hindenburg nor OCCRP were the first entities to make allegations of share price manipulation and round tripping against the Adani group. Fifteen years ago, SEBI itself had filed a criminal complaint against the Adani group for regulatory violations. As per Adani’s own disclosure in a prospectus, members of the Adani promoter group were indicted by SEBI for price manipulation of Adani Enterprises (AEL) shares in league with debarred trader Ketan Parekh and were themselves initially debarred from the stock market for two years. The case was finally settled “upon payment of certain amounts” in April 2008.
The Adani group is once again being investigated by SEBI for over three years now, for similar offences but involving more complex cross border transactions as well as a much larger amount of money. However, no criminal complaint has been registered so far against the promoters. Whether truth and justice has prevailed, as claimed by Mr. Adani on X after the verdict, is for everyone to see.
Prasenjit Bose is an economist and activist based in Kolkata.
