‘Not proved at this stage’: SC panel on Adani issue

The panel, which also found no regulatory failure on the part of Sebi made a distinction between “proved”, “disproved” and “not proved”.

The allegations of stock price manipulations or violation of Minimum Public Shareholding (MPS) norms by Adani group companies cannot be proved at this stage, the Supreme Court-appointed expert committee to look into regulatory failure by the Securities and Exchange Board of India (Sebi) and alleged breach of laws by the Adani Group, has informed the Supreme Court in its report.

Sebi is investigating Adani companies following the US short-seller Hindenburg Reseach’s report released on 24 January. (REUTERS)

The panel, which also found no regulatory failure on the part of Sebi made a distinction between “proved”, “disproved” and “not proved”. “Even the fundamental rules of evidence would require a conclusion of whether an allegation is ‘proved’, ‘disproved’ or ‘not proved’. At this stage, the factual matrix appears to place the matter in the realm of ‘not proved’ — the regulator has not been able to prove that its suspicion can be translated into a firm case of prosecuting an allegation of violation,” stated its report, reviewed by HT.

The panel’s finding is at odds with social media hashtags suggesting that it has given a “clean chit” to Adani.

To be sure, the 173-page report carefully added a caveat that its conclusions are based on the “prima facie position” of Sebi, which is investigating Adani companies following the US short-seller Hindenburg Reseach’s report released on 24 January.

On May 17, the apex court gave Sebi time till August 14 to complete its probe into the allegations thrown up by the Hindenburg report, alleging “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 in the group’s flagship.

The six-member panel, led by retired Supreme Court judge AM Sapre, was set up by the court on March 2. The panel submitted its report to the CJI-led bench last week. While granting more time to Sebi for the probe, the court on Wednesday directed that the report be shared with Sebi and the PIL petitioners “to enable them assist it in further deliberation” on July 11 when the matter will be heard next.

The panel submitted its conclusions regarding the Adani-Hindenburg row under three major heads — alleged violation of MPS norms, disclosure of transactions with related parties in accordance with law and alleged stock price manipulation.

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 Sebi investigation initiated in October 2020 to look into possible violation of the MPS norms by Adani companies using 13 overseas entities that the regulator suspected “could be fronts for the promoters” of some Adani companies has “drawn a blank so far” and has not reported any offence under the Sebi Act or for alleged violation of the Foreign Exchange Management Act (FEMA), the panel’s report said. But Sebi’s attempts to seek information from some foreign regulators about the suspicious FPIs have been unfavourably treated since they sought adequate justification for entertaining such a request, that the panel called a “chicken and egg” situation.

“In the instant case, it appears that Sebi is not able to make out a case, and such a position of the case not being made out is presented as a prima facie position, which cannot be confirmed unless more investigation is done. In any prosecution of proceedings, whether civil or criminal, the presentation of a prima facie case is the responsibility of the plaintiff or the prosecutor. Once a prima facie case is made out, the burden shifts to the accused,” held the panel, adding the FPIs in question and the Adani group, on their part, have made proper disclosures under the relevant laws.

On May 17, the top court directed Sebi to also submit a status report on its investigation into the alleged violation of MPS norms of some Adani companies after Sebi filed affidavits to say that it first approached overseas regulators on October 6, 2020, in the “context of investigation into MPS norms” of some Adani companies. The affidavits, however, did not apprise the top court of the status or the outcome of this investigation.

On the aspect of 13 instances highlighted by the Hindenburg report as suspicious “related party transactions” (RPT), the panel noted that the regulator has already sought more time from the court to look into it. “Sebi is actively engaged in collecting data on these transactions. The committee would therefore be unable to comment without further input, except to say the investigations must be completed in a time-bound manner in accordance with law,” it said.

The panel highlighted that the foundation of Sebi’s suspicion that led to investigations into the overseas entities’ ownership is that they have “opaque” structures because the ultimate chain of ownership is not known. However, it added that Sebi, in its legislative capacity, itself did away with the prohibition against any FPI having an “opaque structure” in 2018.

At the same time, both on MPS and RPT probes, the panel questioned Sebi’s approach, lamenting that the enforcement policy seems to be moving opposite to the legislative policy.

While laws were amended in 2018 and 2019 to align the MPS norms with the declaration to be made by FPIs under the Prevention of Money Laundering Act (PMLA), the panel pointed out, Sebi has still decided to broaden the scope of its probe to know the ultimate beneficial owner of every single owner of the FPI in Adani companies though FPIs and Adani have complied with the regulations in vogue.

Similarly, about the RPT norms, the panel underlined that Sebi itself amended the definition of the terms “related party” and “related party transaction” in November 2021 and with a deferred prospective effect, with some changes taking effect on April 1, 2022, and others on April 1, 2023. The panel said that in view of the legislative amendments, it would not be legally tenable for Sebi to assail transactions, alleged to be suspected, since they were evidently carried out when the new law on expanding the scope of RTP did not exist.

On the aspect of alleged price manipulations of Adani stocks, Sebi informed the panel that it has kept a watch on Adani stocks for a few years now; 849 alerts were generated by the system, resulting in four reports -- two prior to the Hindenburg report and two after it, but no violations were found.

“No pattern of artificial trading or ‘wash trades’ among the same parties multiple times was found. In one of the patches where the price rose, the FPIs under investigation were net sellers. One investing entity that had purchased across the patches had purchased far more of other securities. In a nutshell, there was no coherent pattern of abusive trading that has come to light,” it said.

But ED and Sebi found that suspicious trading by six entities, including 4 FPIs (not among the 12 being looked into by Sebi for MPS norms compliance), one body corporate and an individual, proximate to the release of the Hindenburg report

“Sebi has also found that some entities have taken short positions prior to the publication of the Hindenburg Report and have profited from squaring off their positions after the price crashed upon publication of the report. All of these are still under investigation and the committee therefore does not express any opinion on merits,” said the panel, adding it would not be possible to return a finding of regulatory failure on this count since SEBI has an active and working surveillance framework.

On the issue of volatility of the Indian stock market, the panel took note of Sebi’s statement that the markets remained largely stable and resilient though shares of the Adani group saw significant decline in prices on account of selling pressure following the Hindenburg report.

“The intense adverse impact on Adani stock prices stood mitigated with measures such as the Adani group promoters paring down the debt raised, secured by encumbrances on their shareholding, and infusion of fresh investment into Adani stocks by way of purchase of shares worth nearly USD 2 billion by a private equity investor from the promoters of the Adani Group. The market has repriced and reassessed the Adani stocks and while they may not have returned to the pre-January 24, 2023 levels, they are stable at the newly repriced level,” noted the panel.

It also recommended 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.

“There is an urgent need to introspect and take a hard close look at whether there is a surfeit of disclosures that loads the investors with so much data and noise that the real content necessary to make an informed decision may be lost...The committee believes that financial literary must be introduced as a matter of pedagogy right from school curriculum. Financial security of a society is as vital as national security for a society to be robust,” recommended the panel.

In a five-point reply, Congress leader Jairam Ramesh said, “Given the reputation of the members of the Committee, we do not want to say anything more on its report except that its conclusion was already anticipated. Also, to give a clean chit to the Adani group, to distort the report of this committee bound by all kinds of limitations is complete nonsense.” The Congress has maintained that the Supreme Court-appointed committee is limited in ts scope and will be “unable (and perhaps unwilling) to uncover all aspects of the Modani scam”, he said.