SC refuses to order SIT probe into Adani firms

The bench, also comprising justices JB Pardiwala and Manoj Misra, noted that Sebi has completed its investigations in 22 out of the 24 allegations levelled against the Adani group

The Supreme Court on Wednesday refused to order a separate probe into the allegations of accounting fraud and stock manipulation against Adani Group companies, first aired in a report by US short-seller Hindenburg Research in January 2023, holding that there was no material to show “glaring, wilful or deliberate inaction” by the Securities and Exchange Board of India (Sebi) in carrying out its investigation nor anything to suggest regulatory failure by the market regulator.

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Noting that the Hindenburg report or any other unsubstantiated news report cannot be treated as conclusive proof of the inadequacy of Sebi’s probe, the top court shot down a plea jointly made in a bundle of petitions seeking the creation of a Special Investigation Team (SIT) to investigate Hindenburg’s allegations, and maintained that the reliance on newspaper articles or reports by third party organisations as the basis for questioning a comprehensive investigation by a specialised regulator does not make sense.

Apart from the Hindenburg report, reports by Financial Times and OCCRP (a network of journalists) in August mentioned the alleged violation of Minimum Public Shareholding (MPS) and other regulations by Adani group companies, using 13 overseas entities to effect transactions in stock. 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.

“The petitioners cannot assert that an unsubstantiated report in the newspapers should have precedence over an investigation by a statutory regulator whose investigation has not been cast into doubt on the basis of cogent material or evidence... In fact, to the contrary, the course of conduct by Sebi inspires confidence that Sebi is conducting a comprehensive investigation,” held a bench, led by Chief Justice of India Dhananjaya Y Chandrachud, adding that petitions that lack adequate research and rely on unverified and unrelated material tend to, in fact, be counterproductive to the public interest jurisprudence.

The bench, also comprising justices JB Pardiwala and Manoj Misra, noted that Sebi has completed its investigations in 22 out of the 24 allegations levelled against the Adani group. “We direct Sebi to complete the two pending investigations expeditiously, preferably within three months. This court is not inclined to interfere with the outcome of the investigations by Sebi, which should take its investigations to their logical conclusion in accordance with law.”

The court, in its judgment, recorded the statement of solicitor general Tushar Mehta, who represented Sebi, that 22 final investigation reports and one interim investigation report have been approved by the competent authority. “With respect to the interim investigation report, Sebi has submitted that it has sought information from external agencies and entities and upon receipt of such information, it will determine the future course of action,” stated the judgment.

Rejecting the allegation that the Sebi was “lackadaisical” in conducting the investigations, the court said that the threshold for the transfer of investigation from Sebi to a SIT or CBI was not met in this case.

At the same time, the bench directed that the investigative agencies of the Union government should probe whether the loss suffered by Indian investors due to the conduct of the Hindenburg Research and other entities in taking short positions involved any infraction of law, and if so, suitable action shall be taken.

After the ruling, Gautam Adani said in a post on X that the court’s judgment shows truth has prevailed and the group’s “contribution to India’s growth story will continue.”

Hindenburg’s report, published in January 2023, 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 planned ₹20,000 crore share sale.

A set of petitions, filed separately by lawyers and activists last year, demanded a court-monitored probe into the matter by setting up a SIT, under the supervision of a retired judge. Some of the petitioners also questioned the legislative amendments carried out by Sebi in 2018 and 2019 to tweak the Foreign Portfolio Investors (FPI) regulations, contending that these amendments diluted the requirement of disclosure of beneficial owners (BOs) and listing disclosures by doing away with the prohibition against an FPI having an “opaque structure”.

But the court judgment on Wednesday rejected the petitioners’ contentions, ruling that the impugned amendments had in fact tightened the norms on disclosure of BOs under FPI and LODR (Listing Obligations and Disclosure Requirements) and therefore, “no valid grounds have been raised for the court to direct Sebi to revoke its amendments”. It added that the procedure followed in arriving at the current state of the negotiations is not tainted with illegality nor has it been argued that the regulations are unreasonable, capricious, arbitrary or violative of the Constitution.

“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 the PMLA (Prevention of Money Laundering Act)... 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 over the regulatory policies of Sebi. The scope of judicial review when examining a policy frame by specialized regulator is to scrutinize whether it violates fundamental rights, any provision of the Constitution, any statutory provision, or is manifestly arbitrary,” said the bench.

On the petitioners’ plea seeking the transfer the investigation from Sebi to a court-appointed SIT, the court underlined that a court must exercise this power sparingly and in extraordinary circumstances.

“Such powers must not be exercised by the court in the absence of cogent justification indicative of a likely failure of justice,” said the bench, pointing out that the petitioners have failed to portrayed inadequacy in the investigation or show a prima facie bias on Sebi’s part.

Referring to a slew of reforms suggested by a six-member panel, led by retired Supreme Court judge AM Sapre, that was set up by the court in March 2023 to look into regulatory failure by Sebi and alleged breach of laws by the Adani group, the bench directed that the Union Government and Sebi shall constructively consider the suggestions.

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”. At the same time, the panel raised certain red flags regarding the current FPI regulations and the 2018 and 2019 amendments by Sebi, which were approved by the court on Wednesday in its judgment. Following the panel’s report, Sebi’s Board had in July approved a proposal mandating additional granular disclosures to the last investor for certain categories of FPIs.

Simultaneously, the panel had in its report suggested a slew of structural reforms in Sebi, which included initiation of prosecution only in a few large and complex cases, a firm timeline for completion of investigations, robust settlement mechanism, separation of power between its quasi-judicial arm and the enforcement arm, creation of financial redress agency to handle investor grievances across sectors, mechanism for recovery of unclaimed properties and observance of judicial discipline by its adjudicating officers.

In its judgment, the bench also nixed the allegations of conflict of interest against members of the expert committee, calling these “unsubstantial and unsubstantiated”. In September, one of the petitioners in the case, Anamika Jaiswal, urged the Supreme Court to reconstitute the panel of experts to investigate the accusations against the Adani group, alleging conflict of interest of three of the six-member panel. Jaiswal claimed that inclusion of OP Bhatt (former State Bank of India chairman), KV Kamath (veteran banker) and senior advocate (now a Bombay high court judge) Somasekhar Sundaresan in the expert panel was not appropriate, considering their possible conflict of interest in the outcome of the probe.

On the aspect of a probe initiated by the Directorate of Revenue Intelligence (DRI) in 2014 about a potential stock market manipulation by the Adani group through overvaluation of the import of power equipment from a UAE-based subsidiary, the court noted that the issue that has already been settled by concurrent findings of DRI’s additional director general, CESTAT and the Supreme Court in favour of the conglomerate.

The verdict signals there will not be increased regulatory or legal risk on the Adani group beyond the current Sebi investigation. Reflecting that view, shares of various Adani Group companies rose, with Adani Energy Solutions up 9.1%, Adani Total Gas surging 7.1%, Adani Green Energy jumping 5.5% and the flagship business Adani Enterprises rising 2.6%.

The combined market valuation of all the 10 group firms stood at ₹15,11,073.97 crore. The group firms together added ₹64,189.16 crore in market valuation from yesterday’s close.

In the equity market, the 30-share BSE Sensex ended 535.88 points or 0.75% lower at 71,356.60, and the Nifty declined 148.45 points or 0.69% to 21,517.35.