Adani-Hindenburg Case: Regulatory Failure Cannot Be Ascertained Yet, Says Supreme Court Panel

The expert committee in the Adani-Hindenburg case has said that it currently cannot conclude that there was a regulatory failure by the Securities and Exchange Board of India.

The committee said the foreign portfolio investors in Adani Group stocks are compliant with SEBI's regulations.

According to the regulations, the ultimate beneficial owner needs to be declared by the FPIs to conform to the provisions of the Prevention of Money Laundering Act.

The panel's report says that SEBI has been investigating the ownership of the 13 overseas entities since October 2020. 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 above the 13 overseas entities is not clear.

However, the provision pertaining to opaque structures was done away with in 2018, which has led the market regulator to draw a blank in the investigations. “The securities markets regulator suspects wrongdoing but also finds compliance with various stipulations in the FPI Regulations,” said the report.

Therefore, the committee said it would not be possible to return a finding of a regulatory failure, in relation to compliance with regulatory stipulations governing minimum public shareholding, due to the market regulator seeking more time to effect further investigations.

On the allegations of disclosure of related-party transactions, the committee said that SEBI has sought more time. And so, the panel said, it would not be possible to return to a finding of regulatory failure on this issue as well.

To ascertain price manipulation in the stock market, various automated alerts are thrown up by the trading system if any suspicious trading activities are observed by the algorithm. If the trading patterns appear to be suspicious based on the alerts, further examination is conducted. If the trading pattern does not arouse suspicion, then the alerts are closed.

The committee has said a total of 849 alerts were generated by the system in the case of Adani stocks, which were analysed by SEBI. According to the committee report, there was no pattern of artificial trading or “wash trades” in the Adani Group stocks.

“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.”

However, the investigations with respect to this are still going on and therefore, the committee declined to express any opinion on merits.

The committee declined to return a finding of regulatory failure on the count of price manipulation as SEBI has an active and working surveillance framework to take notice of high price and volume movements. It has applied itself to the data generated by such surveillance—applying objective criteria, to consider if the integrity of the natural price discovery process has been manipulated, it said.

The Supreme Court on March 2 had constituted an expert committee and it was directed to submit its report in a sealed cover to the top court within two months time.

Among other things, the court had directed the committee to investigate whether there had 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.