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TMI Blog2024 (1) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... hensive investigation ...... 25 iii. Reliance on the OCCRP report and the letter by DRI is misconceived 28 E. Allegations of conflict of interest against members of the Expert Committee .......................................................................................................... 30 F. Other recommendations by the Expert Committee ................................. 32 i. Volatility and short selling ...................................................................... 32 ii. Investor Awareness ................................................................................. 36 iii. Recommendations of the Expert Committee to strengthen regulatory framework and secure compliance to protect investors ............................ 39 G. Conclusion .................................................................................................. 43 1. A batch of writ petitions filed before this Court under Article 32 of the Constitution in February 2023, raised concerns over the precipitate decline in investor wealth and volatility in the share market due to a fall in the share prices of the Adani Group of Companies. "Adani group" The situation was purport ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng regulatory mechanisms in the financial sector to ensure that they are strengthened with a view to protect Indian investors from market volatility. This Court sought inputs from the Solicitor General on the proposed constitution of an Expert Committee for the purpose. This Court observed: "4 We have suggested to the Solicitor General that he may seek instructions on whether the Government of India would facilitate the constitution of an expert committee for an overall assessment of the situation, and if so, to place its suggestions on the constitution and remit of the committee on the next date. Meantime the Solicitor General shall place on the record a brief note on factual and legal aspects so as to further the deliberations during the course of the next hearing." 4. The batch of cases came up for hearing on 17 February 2023. This Court heard detailed submissions on behalf of the parties and reserved further orders. In its order dated 2 March 2023, this Court took note of the loss of investor wealth in the aftermath of the report by Hindenburg Research and recognized the dire need to protect Indian investors from unanticipated volatility in the market. This Court observed t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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." 6. On 6 May 2023, in compliance with the above interim order, the Expert Committee submitted its report to this Court. In its order dated 17 May 2023, this Court directed that copies of the report shall be made available to the parties and their counsel to enable them to assist the Court in the course of further deliberations. This Court also granted SEBI an extension of time till 14 August 2023 to submit its status report about its investigation. 7. SEBI filed an interlocutory application on 14 August 2023 intimating this Court about the status of the twenty-four investigations which were undertaken by them. Further, SEBI submitted a status report dated 25 August 2023 providing details about the twenty-four investigations. Both SEBI and the counsel for the petitioners have also filed their responses to the Expert Committee's report. 8. In the above background, this matter came up for hearing before this Court on 24 November 2023. We heard Mr Prashant Bhushan, learned counsel and other counsel ap ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... egulatory non-compliance and legal violations by the Adani group promoters despite starting an investigation in November 2020, appears to be prima facie self-inflicted. The unprecedented rise in the price of the Adani scrips occurred between January 2021 and December 2022, over a period when the Adani group was already under SEBI investigation; h. A few members of the Expert Committee may have a conflict of interest and there is a likelihood of bias, which was not brought to the notice of the Court by the concerned members; and i. SEBI has willfully delayed the submission of its status report on the investigation into the Adani group within the time granted by this Court. 10. On the other hand, the learned Solicitor General, appearing on behalf of SEBI made the following submissions: a. Twenty-two out of twenty-four investigations being conducted by SEBI are complete. In these investigations, enforcement actions/ quasi-judicial proceedings would be initiated, wherever applicable; b. The delay by SEBI in filing the report is only ten days which is unintentional and not willful, given that twenty-four investigations were to be carried out; c. SEBI has been taking various s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the Depositories Act 1996. SEBI's powers to regulate the securities market are wide and include delegated legislative, administrative, and adjudicatory powers to enforce SEBI's regulations. SEBI exercises its delegated legislative power by inter alia framing regulations and appropriately amending them to keep up with the dynamic nature of the securities' market. SEBI has issued a number of regulations on various areas of security regulation which form the backbone of the framework governing the securities market in India. 13. Section 11 of the SEBI Act lays down the functions of SEBI and expressly states that it "shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit". Further, Section 30 of the SEBI Act empowers SEBI to make regulations consistent with the Act. Significantly, while framing these regulations, SEBI consults its advisory committees consisting of domain experts, including market experts, leading market players, legal experts, technology experts, retired Judges of this Court or the High Courts, academicians, representatives of industr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... apital funds, collective investment schemes, etc. It also has the power to prohibit various transactions which interfere with the health of the securities market. 34. In the exercise of its adjudicatory powers under Section 15-I, SEBI has the power to appoint officers for holding an inquiry, give a reasonable opportunity to the person concerned and determine if there is any transgression of the Rules prescribed. The Board has the power to impose penalties for violations and also restitute the parties. The adjudicatory power also includes the power to settle administrative and civil proceedings under Section 15-JB of the SEBI Act. 35. The regulatory jurisdiction of the Board also includes ex-ante powers to predict a possible violation and take preventive measures. The exercise of ex-ante jurisdiction necessitates the calling of information as provided in Sections 11(2)(i), 11(2)(ia) and 11(2)(ib) of the SEBI Act. Where the Board has a reasonable ground to believe that a transaction in the securities market is going to take place in a manner detrimental to the interests of the stakeholders or that any intermediary has violated the provisions of the Act, it may investigate into ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rectness, suitability, and appropriateness of a policy, nor are courts advisors to expert regulatory agencies on matters of policy which they are entitled to formulate; b. The scope of judicial review, when examining a policy framed by a specialized regulator, is to scrutinize whether it (i) violates the fundamental rights of the citizens; (ii) is contrary to the provisions of the Constitution; (iii) is opposed to a statutory provision; or (iv) is manifestly arbitrary. The legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review; c. When technical questions arise - particularly in the domain of economic or financial matters - and experts in the field have expressed their views and such views are duly considered by the statutory regulator, the resultant policies or subordinate legislative framework ought not to be interfered with; d. SEBI's wide powers, coupled with its expertise and robust informationgathering mechanism, lend a high level of credibility to its decisions as a regulatory, adjudicatory and prosecuting agency; and e. This Court must be mindful of the public interest that guides the functioning of SEBI and refrain ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing the requirement of disclosing ownership of the FPIs by a natural person. The petitioner submits that this amounts to a regulatory failure on the part of SEBI. 21. The petitioner further argues that the LODR Regulations, 2015 defined a "related party transaction" in Regulation 2(1)(zb) as a transaction involving a transfer of resources between a listed entity and a "related party", regardless of whether a price is charged. The term "related party", in Regulation 2(1)(zc) had the same meaning that is ascribed to "related party" under Section 2(76) of the Companies Act, 2013. Based on a report of the Committee on Corporate Governance dated 5 October 2017 the definition was amended on 1 April 2019 to provide that any person or entity belonging to the "promoter" or "promoter group" of a listed entity that held 20% or more of the shareholding in the listed entity shall be deemed to be a related party. 22. On 21 November 2021, substantial amendments were made to the definition of "related party" with deferred prospective effect from 1 April 2022 and 1 April 2023. In these amendments, the definition of "related party" was amended to include persons holding 20% or more in the listed c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the Expert Committee dated 6 May 2023. The Report stated that in view of the amendments to the regulations, it cannot return a finding of regulatory failure by SEBI. Thereafter, the petitioners have made arguments to belie the finding of the Expert Committee Report. 25. SEBI in its affidavit dated 10 July 2023 has submitted that the entire rouse around regulatory failure caused by amendments to FPI Regulations and LODR Regulations was initiated because of SEBI's submissions before the Expert Committee in the context of challenges faced in obtaining information regarding holders of economic interest. SEBI had used the term "opaque" to describe the FPIs which it submits was mistaken by the Expert Committee to imply the rules on "opaque structures" under the FPI Regulations, 2014. 26. SEBI claims no disability in its investigation into the Adani group on account of the amendments to the FPI Regulations. On merits, SEBI has argued that the FPI Regulations, 2014 in fact did not prohibit opaque structures. They were permitted upon meeting certain conditions including the condition that they provide details of their beneficial ownership as and when called upon to do so. The 2018 amend ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d on a value judgment of economic policy is impermissible. Additionally, we find no merit in the argument that the FPI Regulations, 2014 have been diluted to facilitate mischief. 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 PMLA. 29. We do not see any valid grounds raised for this Court to interfere by directing SEBI to revoke its amendments to regulations which were made in the exercise of its legislative power. A regulation may be subject to judicial review based on it being ultra vires the parent legislation or the Constitution. None of these grounds have been pressed before the Court. Therefore, we find that the prayer seeking directions to SEBI to revoke its amendments to the FPI Regulations and LODR Regulations must fail. 30. SEBI has completed twenty-two out of the twenty-four investigations into the Adani group. It submits that the remaining two are pending due to inputs being awaited from foreign regulators. We also record the assurance given by the Solicitor General on be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... CBI only in rare and exceptional cases. Such as where high officials of State authorities are involved, or the accusation itself is against the top officials of the investigating agency thereby allowing them to influence the investigation, and further that it is so necessary to do justice and to instil confidence in the investigation or where the investigation is prima facie found to be tainted/biased." 50. The Court reiterated that an investigation may be transferred to the CBI only in "rare and exceptional cases". One factor that courts may consider is that such transfer is "imperative" to retain "public confidence in the impartial working of the State agencies." This observation must be read with the observations made by the Constitution Bench in the case of Committee for Protection of Democratic Rights, West Bengal (supra), that mere allegations against the police do not constitute a sufficient basis to transfer the investigation. ... 52. It has been held by this Court in CBI v. Rajesh Gandhi, 1997 Cri LJ 63, that no one can insist that an offence be investigated by a particular agency. We fully agree with the view in the aforesaid decision. An aggrieved person can on ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rohibition of Insider Trading) Regulations, 2015 1 1 1 5 Total 24 SEBI's status report and the details of the twenty-four investigations does not indicate inaction by SEBI. In fact, to the contrary, the course of conduct by SEBI inspires confidence that SEBI is conducting a comprehensive investigation. 37. The petitioners have also raised questions about the delay by SEBI in submitting the status report before this Court. As noted earlier, by an order dated 2 March 2023, this Court directed SEBI to conclude its investigation within two months and file a status report before this Court. This Court by its order dated 17 May 2023, granted SEBI an extension of time till 14 August 2023 to submit its status report about its investigation. Eventually, SEBI filed an interlocutory application intimating this Court about the status of the twenty-four investigations undertaken by SEBI on 14 August 2023. SEBI submitted a status report dated 25 August 2023 providing comprehensive details about all the investigations carried out by SEBI. Therefore, there is a delay of only ten days in filing the report. Such a delay does not prima facie indicate deliberate inaction by SEBI, particularly, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed their examination and held that the allegations were not established. The order of the Additional Director General was assailed by the Commissioner of Customs before the Customs, Excise and Service Tax Tribunal. "CESTAT" The CESTAT passed an order on 8 November 2022 dismissing the appeal and concluding that the allegation of overvaluation was not proved. The order of the CESTAT was upheld by this Court on 27 March 2023. Further, SEBI has also submitted that its investigation based on the DRI alerts was concluded and the related findings were also placed before the Expert Committee. 43. None of the above facts have been disputed by the counsel for the petitioners. The petitioner is re-agitating an issue that has already been settled by concurrent findings of the DRI's Additional Director General, the CESTAT and this Court. Therefore, the petitioner's assertion that SEBI was lackadaisical in its investigation is not borne out from the reference to the letter sent by the DRI in 2014. 44. Additionally, it must be noted that in the present case, this Court has already exercised its extraordinary powers by setting up an Expert Committee to assess the situation in the market, suggest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a leading renewable energy company, which is working in partnership with the Adani group on certain projects. Additionally, the petitioner has also raised vague accusations against Mr OP Bhatt and Mr Kamath in relation to unconnected misconduct by Mr Vijay Mallya and the ICICI Bank, respectively. 49. The petitioner has not established the link between these unsubstantiated allegations and the appointment of Mr Bhatt and Mr Kamath to the committee. Here too, the petitioner has only annexed newspaper reports published after the appointment of the committee by this Court, without any attempts to verify their authenticity or supplement them with independent research. 50. Therefore, the allegations of conflict of interest against members of the Expert Committee are unsubstantiated and do not warrant this Court's serious consideration. F. Other recommendations by the Expert Committee 51. The Expert Committee met on 17 March 2023 and noted that it would require specific factual briefings from SEBI on all four aspects within the remit of the Committee. It further sought inputs from market participants with regard to (i) suggestions and measures to strengthen investor awareness; (ii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t Committee has additionally made the following recommendation upon considering the submissions of SEBI and other market participants: "47. SEBI has submitted that only recently, it has made a regulatory intervention in terms of supervising the construction of stock indices. SEBI must consider directing index writers to construct indices to compute volatility of stocks that are constituents of indices so that volatility in these stocks can be compared with volatility in the indices. The availability of such data on a real time basis would enable the market to be more informed in making its investment and divestment decisions. SEBI must ensure that there are secular norms and periodic reviews for construction and design changes in indices." In its note filed in compliance with this Court's order dated 10 February 2023, SEBI had submitted that it has implemented measures to deal with issues which may impact sudden and unusual price movements, excessive volatility, etc. by measures like Market Wide Circuit Breakers, Circuit Filters/Price bands on individual shares, additional surveillance measures ASM, and Market Wide Position Limits. SEBI has inter alia reiterated t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ember 2007. SEBI submits that any restrictions on short selling, may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors. Therefore, the International Organisation of Securities Commission recommends that short selling be regulated but not prohibited with an aim to increase transparency. We record the statement made by the Solicitor General before this Court that measures to regulate short selling will be considered by the Government of India and SEBI. SEBI and the investigative agencies of the Union Government shall also enquire into whether there was any infraction of law by the entities, which engaged in short-selling on this occasion. The loss which has been sustained by Indian investors as a result of the volatility caused by the short positions taken by Hindenburg Research and any other entities acting in concert with Hindenburg Research should be probed. ii. Investor Awareness 59. Informed decisions made by an aware investor population are a pre-requisite to an efficient market. The data from 2019 to 2022 provided by SEBI shows that there is an increase in the number of invest ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... creating the Central Authority for Unclaimed Property which must aim to reunite assets of deceased persons with their next of kin. The Committee also made some suggestions in the context of IEPFA which state: "a. The integrated portal announced in the Finance Minister Budget Speech should be expedited and process re-engineering delegation to the issuer companies based upon type and threshold of the claims must be considered; b. The same may be reviewed on incremental basis from time to time considering the benefits on reducing the timeline for disposal of claims vis-à-vis the risks of fraud. c. Pilot projects such as taking up names from the death registry in a given area to map it with the database of the IEPFA and proactively attempting to reach out to the next of kin should be considered; d. Registered market intermediaries who are answerable to the regulatory regime of financial sector regulators could be identified and recognized as agents for service delivery to enable release of unclaimed dividend and securities; e. An officer strength of a dozen personnel is evidently disproportionate. The IEPFA would need a full time Chief Executive Officer who would ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... It must not be hesitant to enter settlements whereby financial injury commensurate with the alleged violation may be inflicted on the party; e. Timelines: SEBI must lay down and adhere to strict timelines for initiation of investigations, completion of investigations, initiation of proceedings, disposal of settlement, and disposal of proceedings; f. Surveillance and Market Administration Measures: The element of human discretion must be done away with as far as possible. It must be saved for extraordinary circumstances that would not have been factored in already. With regard to disclosures, all provision of data should be in machine-readable format and inter-operable across electronic platforms; g. The suggestions made on structural reforms by committees in the past should be followed. These include (i) the creation of a Financial Redress Agency that handles investor grievances across sectors; (ii) easing and centralizing the process for recovering unclaimed private property, which is currently spread across agencies, either through the aegis of the Financial Stability and Development Council or even by appropriate legislation; (iii) creation of a framework for a multi-agenc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n of the report, the Chairperson of the Committee will be at liberty to nominate a member with legal expertise and domain knowledge for the purpose of interacting with the Union Government and SEBI. G. Conclusion 67. In a nutshell, the conclusions reached in this judgement are summarized below: a. 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 framed by a specialized regulator is to scrutinise whether it violates fundamental rights, any provision of the Constitution, any statutory provision or is manifestly arbitrary; b. No valid grounds have been raised for this Court to direct SEBI to revoke its amendments to the FPI Regulations and the LODR Regulations which were made in exercise of its delegated legislative power. The procedure followed in arriving at the current shape of the regulations does not suffer from irregularity or illegality. The FPI Regulations and LODR Regulations have been tightened by the amendments in question; c. SEBI has completed twenty-two out of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Constitution was expanded by this Court to secure access to justice and provide ordinary citizens with the opportunity to highlight legitimate causes before this Court. It has served as a tool to secure justice and ensure accountability on many occasions, where ordinary citizens have approached the Court with well-researched petitions that highlight a clear cause of action. However, petitions that lack adequate research and rely on unverified and unrelated material tend to, in fact, be counterproductive. This word of caution must be kept in mind by lawyers and members of civil society alike.
69. We are grateful to all the members and the Chairperson of the Expert Committee for their time, efforts, and dedication in preparing their erudite, comprehensive, and detailed report in a time-bound manner. Subject to the consent and availability of the members and Chairperson of the Expert Committee, SEBI and the Government of India may draw upon their expertise and knowledge while taking necessary measures pursuant to the recommendations of the Committee.
70. The Petitions shall accordingly stand disposed of in the above terms.
71. Pending applications, if any, stand disposed of. X X X X Extracts X X X X X X X X Extracts X X X X
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