2023 (3) TMI 276 - SC - SEBI

Adani Group of companies - Decline in the share price as precipitated by a report published by Hindenburg Research on 24 January 2023 - manipulatIon of share prices - volatility in the securities market - failure to disclose transactions with related parties and other relevant information concerning related parties in contravention of the regulations framed by SEBI - loss of investor wealth in the securities market over the last few weeks because of a steep decline in the share price of the Adani Group of companies - This report inter alia alleges that the Adani Group of companies has manipulated its share prices; failed to disclose transactions with related parties and other relevant information concerning related parties in contravention of the regulations framed by SEBI; and violated other provisions of securities laws - HELD THAT - SEBI is seized of the investigation into the allegations made against the Adani Group companies. SEBI has not expressly referred to an investigation into the alleged violation of the Securities Contracts (Regulation) Rules 1957 which provide for the maintenance of minimum public shareholding in a public limited company. Similarly, there may be various other allegations that SEBI must include in its investigation. As a part of its ongoing investigation, SEBI shall also investigate the following aspects of the issues raised in the present batch of petitions a. Whether there has been a violation of Rule 19A of the Securities Contracts (Regulation) Rules 1957; b. Whether there has been a failure to disclose transactions with related parties and other relevant information which concerns related parties to SEBI, in accordance with law; and c. Whether there was any manipulation of stock prices in contravention of existing laws. The above directions shall not be construed to limit the contours of the ongoing investigation. SEBI shall expeditiously conclude the investigation within two months and file a status report. SEBI shall apprise the expert committee (constituted in paragraph 14 of this order) of the action that it has taken in furtherance of the directions of this Court as well as the steps that it has taken in furtherance of its ongoing investigation. The constitution of the expert committee does not divest SEBI of its powers or responsibilities in continuing with its investigation into the recent volatility in the securities market. In order to protect Indian investors against volatility of the kind which has been witnessed in the recent past, we are of the view that it is appropriate to constitute an Expert Committee for the assessment of the extant regulatory framework and for making recommendations to strengthen it. The remit of the Committee shall be as follows a. To provide an overall assessment of the situation including the relevant causal factors which have led to the volatility in the securities market in the recent past; b. To suggest measures to strengthen investor awareness; c. To investigate whether there has been regulatory failure in dealing with the alleged contravention of laws pertaining to the securities market in relation to the Adani Group or other companies; and d. To suggest measures to (i) strengthen the statutory and/or regulatory framework; and (ii) secure compliance with the existing framework for the protection of investors. The Expert Committee shall be headed by Justice Abhay Manohar Sapre, a former judge of the Supreme Court of India. The Chairperson of the Securities and Exchange Board of India is requested to ensure that all requisite information is provided to the Committee. All agencies of the Union Government including agencies connected with financial regulation, fiscal agencies and law enforcement agencies shall co-operate with the Committee. The Committee is at liberty to seek recourse to external experts in its work.

Summary

Issues:
1. Loss of investor wealth in the securities market due to a decline in Adani Group companies' share prices.
2. Allegations of manipulation of share prices, failure to disclose transactions, and violation of securities laws by the Adani Group.
3. Petitions seeking investigation and actions against the Adani Group and related parties.
4. Review of existing regulatory mechanisms in the financial sector for investor protection.
5. SEBI's regulatory framework and ongoing investigation into the allegations.
6. Constitution of an Expert Committee to assess regulatory framework and suggest measures for investor protection.

Analysis:

1. Loss of Investor Wealth:
The judgment addresses the decline in investor wealth in the securities market following a report by Hindenburg Research alleging manipulation of share prices by the Adani Group. The petitions highlight the risk to public money, especially concerning institutions like SBI and LIC exposed to the Adani Group.

2. Allegations Against Adani Group:
The petitions raise concerns about the Adani Group's alleged violations, including controlling more than 75% of public listed company shares, manipulating stock prices, and failing to disclose relevant information. Requests for investigations and actions against the group and related parties are made through various writ petitions.

3. Review of Regulatory Mechanisms:
The Court acknowledges the need to strengthen regulatory mechanisms to protect Indian investors from market volatilities. It suggests the formation of an expert committee to assess the existing framework and make recommendations for enhancing investor protection.

4. SEBI's Regulatory Framework and Investigation:
SEBI's disclosure-based regulatory regime, market systems, and enforcement actions for investor protection are highlighted. The Court notes SEBI's ongoing investigation into the allegations against the Adani Group, including violations of regulations and manipulation of stock prices.

5. Constitution of Expert Committee:
In response to the need for regulatory enhancement, the Court constitutes an Expert Committee headed by a former Supreme Court judge. The committee's remit includes assessing causal factors for market volatility, strengthening investor awareness, investigating regulatory failures, and suggesting measures for compliance and framework enhancement.

6. Role and Responsibilities of the Expert Committee:
The Expert Committee is tasked with providing an overall assessment of market volatility, suggesting measures for investor protection, investigating regulatory failures, and recommending actions to strengthen the statutory framework. It is empowered to seek information from relevant agencies and submit a report to the Court within two months.