Supreme Court: In a batch of petitions seeking protection of investor interests against the recent loss in securities market due to steep decline in the share price of Adani Group of Companies (‘Adani Group’), the Bench of Dr. Dhananjaya Y. Chandrachud, CJ., and Pamidighantam Sri Narasimha and J.B. Pardiwala, JJ. has constituted an Expert Committee headed by retired Supreme Court Justice Abhay Manohar Sapre to assess the regulatory framework for protecting investor interests in India and directed SEBI to conclude its investigation into the present matter within 2 months.

The present petitions point towards the recent loss of investors in the securities market due to steep decline in the share price of Adani Group of Companies (‘Adani Group’). The share price fall was triggered by the Hindenburg report published on 24-01-2023 which alleges the Adani Group manipulating its share prices, non-disclosure of transactions with related parties, relevant information concerning related parties contravening SEBI regulations and violation of other securities laws. It also stated that Hindenburg Research took a short position in the Adani Group through traded bonds of US and non-Indian traded derivative instruments.

The petitioners seek directions for Union of India and Ministry of Home Affairs to constitute a committee headed by a Supreme Court’s retired judge or a Court monitored investigation of Hindenburg report as well as the key role players through a Special Investigation Team (‘SIT’) or Central Bureau of Investigation (‘CBI’). Another petition seeks registration of FIR against Hindenburg Research’s founder, Nathan Anderson, and his associates for short selling along with directions for recovery of profits yielded by short selling in order to compensate the investors.

The Bench noted that the need to review existing regulatory mechanisms in the financial sector was observed by the Court through order dated 10-02-2023 to strengthen the mechanism and protect the Indian investors from market volatility. Directions were sought from the Union of India through the Solicitor General for the purpose of constitution and remit of an expert committee.

The Court pointed at SEBI’s submissions regarding adoption of disclosure based regulatory regime in line with discontinuation of pricing control for capital issues affirming the principle of free discovery by markets based on demand and supply from informed investors. SEBI also stated the key pillars of investor protection and detailed the extant framework governing investor protection in the context of the present matter.

The Court mentioned Prakash Gupta v. SEBI, 2021 SCC OnLine SC 485, wherein, the Court discussed the specialized role of SEBI as a regulatory, adjudicatory and prosecuting agency for protecting the investor interests.

The Court also noted SEBI’s statement in the present matter regarding action for identifying the Hindenburg report and market activity and said that “it appears 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.”

The Court entrusted SEBI to conclude the investigation with a status report corresponding to the following issues raised in the present matter:

  • Any violation of Rule 19-A of the Securities Contracts (Regulation) Rules 1957;

  • Any failure in disclosing related party transactions and other relevant information to SEBI covering related parties; and

  • Any manipulation of stock prices transgressing the existing laws

The Court constituted an Expert Committee for assessing the extant regulatory framework and making recommendations to strengthen the same for protecting Indian investors against the recently witnessed market volatility. The Committee will be headed by Retired Supreme Court Justice Abhay Manohar Sapre and the members include O.P. Bhatt, Justice J.P. Devadhar, K.V. Kamath, Nandan Nilekani and Somashekhar Sundaresan.

The tasks of the Expert Committee include the following:

  • Providing an overall assessment of the situation including the relevant factors leading to the recent volatility in the securities market;

  • Suggesting measures for strengthening awareness amongst investors;

  • Investigating any regulatory failure in dealing with the alleged contravention of laws covering the securities market connected with the Adani Group or other companies; and

  • Suggesting appropriate measures for strengthening the statutory and regulatory framework, and securing compliance with the existing legal framework for protecting investor interests.

The Court directed SEBI Chairperson to inform the expert Committee regarding action taken in furtherance of the ongoing investigation and the directions issued by the Court. The Court also directed the Central Government authorities connected with financial regulation, fiscal agencies and law enforcement to cooperate with the Committee. The Court directed the Expert Committee to furnish its report to the Court in sealed covers within 2 months.

[Vishal Tiwari v. Union of India, 2023 SCC OnLine SC 215, decided on 02-03-2023]

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