Adani-Hindenburg case: SC reserves its judgment
The bench, which also comprised justices JB Pardiwala and Manoj Misra, added that it cannot expect a statutory regulator like Sebi to start issuing show-cause notices on the basis of reports published by Hindenburg or by a news organisation such as Financial Times.
New Delhi It will not be proper for the highest court of the land to appoint a special investigation team (SIT) to look into alleged violations of minimum public shareholding (MPS) norms by Adani group companies without there being evidence of lapses on part of the Securities and Exchange Board of India’s (Sebi’s) which is investigating the matter, the Supreme Court observed on Friday.
Even as it reserved its judgment on a bundle of petitions demanding investigation into allegations of accounting fraud and stock manipulation against Adani group companies, raised in a research report by US short-seller Hindenburg Research, the court remained emphatic that it cannot order a probe based only on certain media reports and without hearing the entities impacted by its orders.
“Where is the material before us to start doubting Sebi? Sebi is a statutory body exclusively entrusted with investigating stock market manipulation. Is it proper for the highest court of the land to say without any proper material that ‘we don’t trust Sebi, and we will form our own SIT’? This has to be done with a great deal of calibration,” a bench led by Chief Justice of India Dhananjaya Y Chandrachud told advocate Prashant Bhushan, who was appearing for one of the petitioners in the case.
The bench, which also comprised justices JB Pardiwala and Manoj Misra, added that it cannot expect a statutory regulator like Sebi to start issuing show-cause notices on the basis of reports published by Hindenburg or by a news organisation such as Financial Times.
Both reports cited the alleged violation of MPS norms by Adani group companies using 13 overseas entities. Indian stock market laws require a listed company to have a minimum public shareholding of 25% with the objective to keep a free float available for price discovery of stocks. While the court-appointed panel had in its report in May said that these allegations were in the realm of “not proved” “at this stage”, Bhushan alleged that there was enough material contained in the two reports to infer Sebi’s lapses.
But the bench retorted: “We don’t think you can ask a statutory regulator to take a newspaper source, even if it is Financial Times, as a gospel truth. We are not saying that we doubt their sources, but we can’t say it is evidentiary for Sebi. When you are dealing with evidentiary requirements, someone who has to publish a news report cannot be treated on par with a statutory regulator. Sebi is answerable to appellate authorities. If it issues a show-cause notice based on this, it will be quashed the very next day.”
During the proceedings, the bench also enquired from Sebi about the steps it has taken to protect investors by keeping extreme market volatility in check and the tightening of pertinent regulations. At one point, the court observed that it has identified four areas, pertaining to the regulatory regime and investors’ protection, where it is inclined to issue further directions to the regulator. The court, however, did not assign a date for delivering its order.
On the Hindenburg report, the apex court said that though it can be treated as some kind of disclosure forming the starting point of a probe by Sebi, it can’t presume the report to be credible. “We cannot make an assumption that it is credible or lacking credibility. We will have to rely on our investigating agencies... And Sebi says they have completed their investigation and are acting as per the law. Should they disclose the investigation even before they issue notice? Because then we will pre-judge guilt before hearing the party,” it added.
Hindenburg’s report published in January claimed “brazen accounting fraud” and “stock manipulation” by the Gautam Adani-led group. Though the conglomerate rejected the report as “unresearched” and “maliciously mischievous”, it triggered a massive rout of Adani group stocks, which lost over $140 billion in days and forced the cancellation of a ₹20,000 crore share sale.
The Supreme Court on March 2 set up a six-member panel, led by retired Supreme Court judge AM Sapre, to look into regulatory failure by Sebi and alleged breach of laws by the Adani group. In its report submitted in May, the committee said the allegations of stock price manipulation or violation of MPS norms by Adani group companies cannot be proved “at this stage”.
On Friday, Bhushan alleged that the market regulator did not apprise the court of an investigation initiated by the directorate of revenue intelligence (DRI) against the Adani group companies in 2013 over alleged overvaluation of import of equipment and machinery by various entities of the group from a UAE-based subsidiary.
Rebutting the allegation, solicitor general Tushar Mehta, appearing for the Sebi, pointed out that the issue of overvaluation was not only not germane to the present proceedings but also that the DRI investigation got over in 2017, concluding there was no incriminating evidence to prove the allegations. The conclusion was first affirmed by the Customs, Excise And Service Tax Appellate Tribunal (CESTAT) and finally by the apex court, Mehta added.
At this point, the court told Bhushan: “You have to be also very careful. We are not giving a character certificate to anyone. Equally, you must think of fundamental principles of fairness. You are relying on a DRI communication to Sebi. DRI closed the matter. CESTAT concluded it. Your entire allegation is based on overvaluation which was decided upon. So, if there was no overvaluation, where is the question of DRI investigation?”
