Adani, Hindenburg and Supreme Court
The Securities Exchange Board of India (SEBI) has filed an application in the Supreme Court detailing its response to various recommendations made by the Court-appointed Expert Committee in the wake of the Hindenburg report on alleged security laws violations by the Adani group of companies. [Vishal Tiwari vs Union of India]
The Expert Committee had made around nine recommendations in its report.
In response to these, the SEBI has largely maintained that it has addressed the concerns raised.
These concerns include the need for an effective enforcement policy, judicial discipline, a robust settlement policy, the need to minimise human bias in surveillance and market administration and to “ring fence” the quasi-judicial wing of the SEBI.
However, with certain recommendations, such as the need for timelines in SEBI inquiries or adjudications, the securities market regulator has responded by stating that it may not be practical to implement the same.
In response to a third category of recommendations, including the suggestion to create financial redress agency and a central unclaimed property agency, the SEBI has opined that the proposals seem unrelated to the Hindenburg-Adani case and involves multiple regulators.
As such, no particular response has been given to such suggestions.
The matter concerns the controversy surrounding the Hindenburg Research report on the Adani Group of companies and allegations against the conglomerate.
The report alleged fraud on the part of the conglomerate by inflating share prices. The report had led to a fall in the share value of various Adani companies, reportedly to the tune of $100 billion.
No clean chit yet to Adani, SEBI should conduct further probe: Petitioner
The petitioner in the case, advocate Vishal Tiwari highlighted that, contrary to public perception, the Expert Committee has not given a “clean chit” to the Adani group. He submitted that the Committee has not yet given a clear-cut finding on this aspect.
“By the findings given at this juncture it cannot be said that a clean chit has been given or nothing has been found related to any irregularity by the Adani Group,” the petitioner submitted in an application.
He also pointed out that the Committee’s findings indicated regulatory failures and prima facie suspicions about legal violations by the Adani group, particularly with respect to alleged violations of Foreign Portfolio Investment (FPI) regulations and the law governing public shareholding.
As such, he urged the Supreme Court to direct SEBI to probe the issue further, apart from calling for the implementation of the Committee’s other recommendations for legal reform.
Highlights of SEBI’s response to the Expert Committee Report
1. On Effective Enforcement Policy
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SEBI has an Enforcement Manual which lays out step-by-step instructions for guiding proceedings;
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There are Internal Guidelines on how cases are selected for enforcement actions;
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There are objective criteria to determine whether the action initiated should be soft action (against peripheral entities, so that there is minimal drain on resources) or not, so that delays can be avoided in large cases;
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There are measures to tackle any potential conflicts of interest or bias in quasi-judicial proceedings;
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Proceedings initiated by SEBI have not “sky-rocketed” in 2021-22 as compared to the 562 cases in 2020-21 and 249 in 2019-2020, contrary to what the Expert Committee observed. The Expert Committee’s finding that there were 7,195 cases in 2021-22 was due to the increase in SEBI proceedings against Illiquid Stock Options (ISO) matters that year, after a Supreme Court ruling in SEBI v. Rakhi Trading Pvt. Ltd. If the ISO cases are netted from the cases dealt with in 2021-22, the number of cases that year would only be 416. Prior to the Rakhi Trading case, the SEBI only initiated ISO proceedings in a limited number of cases, the regulator explained.
2. On Judicial Discipline
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The SEBI comprises of independent authorities;
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Ordinarily, the ratios laid down in cases by Adjudicating Officers (AO) or Whole Time Members (WTM) are followed across the board, except when there is a disagreement between the AO and WTM as in the latter cases, there would be no precedential value;
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An order of the WTM does not bind the AO or vice versa;
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Security law violations would demand more prompt action to limit negative consequences in the securities market. Immediate action is warranted, and such action cannot be delayed, unlike in tax law;
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In SEBI cases, if appropriate action is not taken in a timely manner, irreparable damage to investors can be caused, which cannot be reversed by the higher Court. Therefore, importing of any process under the income tax laws to the securities laws domain would have serious ramifications for the securities market and the confidence of investors.
3. Robust Settlement Policy
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SEBI has already put in place a robust settlement policy in the form of the SEBI (Settlement Proceedings) Regulations, 2018;
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SEBI has also contested the Expert Committee’s observation that settlement proposals have crashed in recent years. In this regard, SEBI again calls for netting off the ISO cases taken up by SEBI in the recent years. If this is done, the percentage of settlement applications received in 2021-22 was 345, comprising 54.84% of cases as compared to the 45.52% in 2020-21.
4. Necessary Timelines
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Prescribing timelines for initiation of investigation and proceedings may not be appropriate;
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The process of forming a prima facie opinion before initiating investigation depends on many factors.
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Given the nature, scope and complexity of cases, what constitutes “reasonable time” to inquiry and complete proceedings would depend on each case;
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Prescribing specific timelines to complete inquiries may compromise the quality of investigation. It may also increase litigation.
5. Surveillance and Market Administration Measures
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The SEBI has maintained there are already measures in place to minimise human intervention or human bias in SEBI proceedings;
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The existing Additional Surveillance Measures (ASM) and Graded Surveillance Measures (GSM) are a set of surveillance actions that get automatically triggered, when pre-defined parameters are breached;
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The mechanism governing inclusion of rejection of stocks in the derivatives segment or futures and options (F&O) is completely data driven and based on objective criteria;
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Over 90% of filings on in Stock Exchanges are in machine readable form.
6. Ring-fencing of quasi-judicial functions
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The SEBI has maintained that there are already separate departments handing legislative, executive and quasi-judicial functions. Functions are demarcated to avoid bias;
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Officers who investigate cases are not appointed as AOs in such cases. In other words, the investigating and quasi-judicial authorities are different;
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In urgent cases, interim orders may be passed by a WTM who earlier handled the case. But even then, the final order is passed by a different person;
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There are adequate checks and balances and no interference by the executive wing of the SEBI in quasi-judicial proceedings;
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SEBI has also maintained that it has no pecuniary interest in adjudication proceedings since any penalty imposed goes to the Consolidated Fund of India.
7. Clarification that SEBI did not say FPIs are now “opaque”
The SEBI has further responded to concerns expressed by the Expert Committee that the SEBI had earlier submitted there were no provisions to tackle “opaque” Foreign Portfolio Investors (FPI).
The SEBI has explained that the concern about “opaque” FPIs is now redundant after amendments in 2018 and 2019 strengthened the norms governing disclosure of Beneficial Owners (BOs) behind FPIs.
After 2018, all FPIs have to disclose BOs upfront, whereas in 2014 they only had to undertake to give such disclosure.
“The opaque structures clause under the 2014 Regulations was rendered redundant. Consequently, the opaque structure reference was dropped in the 2019 Regulations,” the SEBI stated.
8. Related Party Transactions
The SEBI has also briefly dealt with the Expert Committee’s observations on how the law governing Related Party Transactions (RPTs) may be applied. Among other submissions, SEBI has stated that SEBI generally applies amendments to law prospectively.
The SEBI has also disclosed its recommendation to the Expert Committee on the need to introduce provisions akin to the general anti-avoidance rules that are now in vogue in tax laws.
“The fact remains that Section 12A of the SEBI Act, 1992 is but a provision enabling anti-avoidance,” the SEBI added.
