TMI Blog2024 (1) TMI 188X X X X Extracts X X X X X X X X Extracts X X X X ..... l health and artificially boost the value of stocks in the market, in violation of Indian law; Adequacy of SEBI s investigation - scope of judicial review over SEBI s regulatory domain - transfer of investigation from SEBI to another agency or to an SIT - Whether SEBI has prime facie conducted a comprehensive investigation? - Allegations of conflict of interest against members of the Expert Committee - petitioner s case appears to rest solely on inferences from the report by the OCCRP, a third-party organization involved in investigative reporting . The petitioners have made no effort to verify the authenticity of the claims. Whether there is no apparent regulatory failure attributable to SEBI? - petitioners have submitted, based on the Hindenburg Report and other newspaper reports, that the FPIs investing in Adani group stocks in the Indian stock market are shell companies outside India owed by the brother of the Chairperson of the Adani group HELD THAT:- In a consistent line of precedent, this Court has held that when technical questions arise particularly in the financial or economic realm; experts with domain knowledge in the field have expressed their views; and such views are ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in carrying out the investigation. The threshold for the transfer of investigation has not been demonstrated to exist. The reliance placed by the petitioner on the OCCPR report to suggest that SEBI was lackadaisical in conducting the investigation is rejected. A report by a third-party organization without any attempt to verify the authenticity of its allegations cannot be regarded as conclusive proof. Further, the petitioner s reliance on the letter by the DRI is misconceived as the issue has already been settled by concurrent findings of DRI s Additional Director General, the CESTAT and this Court; The allegations of conflict of interest against members of the Expert Committee are unsubstantiated and are rejected. The Union Government and SEBI shall constructively consider the suggestions of the Expert Committee in its report detailed in Part F of the judgment. These may be treated as a non-exhaustive list of recommendations and the Government of India and SEBI will peruse the report of the Expert Committee and take any further actions as are necessary to strengthen the regulatory framework, protect investors and ensure the orderly functioning of the securities market and SEBI ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 purportedly caused by a report which was published on 24 January 2023 by an activist short seller , Hindenburg Research about the financi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 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 that SEBI is already seized of the investigation into the Adani group and inter alia directed: a. SEBI to continue with its investigation and examine the f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 appearing on behalf of the petitioners and Mr Tushar Mehta, learned Solicitor General appearing on behalf of SEBI. 9. Mr Prashant Bhushan, appearing on behalf of the petitioner broadly pressed his case for tw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 steps on the areas identified by the Expert Committee and will also take into consideration the suggestions of the Expert Committee to improve its practices and procedures; d. The events pertaining to the present batch of petitions relate to onl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 industry associations and investor associations. During the consultative process, SEBI also invites and duly considers comments from the public on their proposed regulations. SEBI follows similar consultative processes while reviewing and amending its regulations. 14. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 the matter under Section 11(C) of the SEBI Act. In other words, being the real-time security market regulator, the Board is entitled to keep a watch, predict and even act before a violation occurs. (Emphasis supplied) 15. In a consistent line of precedent, this Court has held that whe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tal 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 from substituting its own wisdom in place of the actions of SEBI. We have made a conscious effort to keep the above principles in mind while adjudicating the petitions, which contain several prayers that require the Court to enter SEBI s domain. C. There is no apparent regulatory failure attributable to SEBI 18. The petition ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 company whether directly or indirectly or on a beneficial interest basis under Section 89 of the Companies Act, 2013 with effect from 1 April 2022. However, with effect from 1 April 2023, the deemed inclusion would bring within the scope of the term related party persons who hold 10% or more of the listed company. The Expert Committee report has opined ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ulatory 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 amendment required mandatory disclosures by all FPIs with a few exceptions. It marked a shift towards tightening the regulations with mandatory disclosure of beneficial owner details. This new mandate rendered the previous provision on disclosure upon demand otiose. Mandatory upfront disclosure meant that the undertaking to disclose beneficial ownership by FPIs was a v ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he 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 behalf of SEBI that the investigations would be concluded expeditiously. SEBI cannot keep the investigation open-ended and indeterminate in time. Hence, SEBI shall complete the pending investigations preferably within three months. D. The plea to transfer the investigation from SEBI to another agency or to an SIT i. The power to transfer an investigation is exercised in ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 only claim that the offence he alleges be investigated properly, but he has no right to claim that it be investigated by any particular agency of his choice. 53. The principle of law that emerges from the precedents of this Court is that the power to transfer an investigation must be used sparingly and only in exceptional circumstances . In assessing the plea urged by the petitioner that the investigation mu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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, as the issue involved a complex investigation in coordination with various agencies, both domestic and foreign. 38. Further, as noted in part C of this judgment, no apparent regulatory failure can be attributed to SEBI based on the material before this Court. Therefore, there is prima facie no deliberate inaction or inadequacy in the investigation by SEBI. iii. Reliance on the OCCRP report and the letter by DRI is misconceived 39. To assail the a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 regulatory measures, and investigate whether there has been a regulatory failure. To expect the Court to monitor the investigation indefinitely, even after the committee has submitted its report and SEBI has completed its investigation in twenty-two out of twenty-four enquiries is not warranted. E. Allegations of conflict of interest against members of the Expert Committee 45. The petitioners have raised allegations against some of the members of the Expert Com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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) strengthen the statutory and regulatory framework; and (iii) secure compliance with the existing framework. We have discussed the committee s analysis on the issue of whether there was a regulatory failure above. The other observations and recommendations of the Expert Committee report are discussed below. i. Volatility and short selling 52. The Court in its order dated 10 March 2023 expressed concern over the impact of volatility in the securities market on Indian investors. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 these submissions before the Expert Committee and has further, in its affidavit dated 10 July 2023 placed on record the existing ASM and graded surveillance measure GSM framework. We are inclined to direct SEBI to further consider the recommendations and take appropriate measures. 56. The chain of events which triggered the Adani group-related events and eventually the petitions filed before this Court were attributable to the report by short-seller Hindenburg Research. The Expert Committ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g 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 investors in the Indian economy in the future and options segment of the stock market. SEBI, Analysis of Profit and Los of Individual Traders dealing in Equity F O Segment, 25 January 2023, available at This requires specialized knowledge. The creation of a framework for this knowledge to percolate to investors lies in the policy domain. However, this Court sought an assessment of the existing framework to aid a determination of whether the regulatory framework suffers from infirmities which would le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... g the benefits on reducing the timeline for disposal of claims vis- -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 have specific key performance indicia that would be fixed by the governance oversight of the Authority. The Committee made further recommendation to induce financial literacy and make it a fundamental part of pedagogy right from school curricula. 63. SEBI has submitted that while it is open to considering some of the above suggestions, it is not empowered to implement others as they lie outside its prescribed sphere of competence and expertise. In particular, SEBI has submitted that the recommendations on creation of a fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e 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-agency committee to investigate complex enforcement matters. The same must have a temporary shelf life which ends upon initiation of prosecution. It may only be used in cases involving serious cross-sectoral repercussions which would need multi-disciplinary skill sets to act in coordination; and (iv) following the doctrine of separation within SEBI in its quasi-judicial, and executive arm. 65. SEBI has addressed these recommendations in its affidavit dated 10 July 2023. SEBI has inter alia submitted that its existing framework already accounts for ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 the twenty-four investigations into the allegations levelled against the Adani group. Noting the assurance given by the Solicitor General on behalf of SEBI we direct SEBI to complete the two pending investigations expeditiously preferably within three months; d. This Court has not interfered with the outcome of the investigations by SEBI. SEBI should take its investigations to their logical conclusion in accordance with law; e. The facts of this case do not warrant a transfer of investigation from SEBI. In an appropriate case, this Court does have the pow ..... X X X X Extracts X X X X X X X X Extracts X X X X
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