Mint Explained | Sebi’s order clearing Adani Group of Hindenburg's allegations

The market regulator’s final orders concluded that transactions routed through third-party entities could not be classified as related-party transactions under the regulations that existed at the time the deals occurred.

Sebi’s two orders, passed on 18 September, addressed Hindenburg’s allegations that listed Adani Group companies moved funds to each other via a set of private, unrelated firms to bypass regulatory requirements. Sebi found no violation of listing regulations or its rules against fraudulent trade practices.

Adani Group stocks were up Friday following Sebi's decision.

Mint explains the genesis of the investigation, the allegations, the role of the Indian Supreme Court, and Sebi’s findings.

Which Adani Group entities were under investigation?

The entities, referred to as ‘noticees’ in the Sebi orders, included key Adani Group companies, their top leadership, and three private firms allegedly used as conduits.

The noticees were Adani Ports and Special Economic Zone Ltd, Adani Power Ltd, and Adani Enterprises Ltd. These companies operate in the ports, power, and diversified business sectors, respectively.

The alleged conduit firms through which funds were supposedly routed were Adicorp Enterprises Pvt. Ltd, Milestone Tradelinks Pvt. Ltd, and Rehvar Infrastructure Pvt. Ltd. These were the private entities.

The key individuals involved in the case were Adani Group chairman Gautam Adani, managing director Rajesh Adani, and group chief financial officer Jugeshinder Singh.

What was the genesis of Sebi’s investigation?

The investigation was triggered by a report published by Hindenburg Research on 24 January, 2023. The US short seller alleged, among other things, that the Adani Group used a web of entities to move funds between its listed companies to manipulate its financials and bypass regulations.

Following the report, the Supreme Court of India, after being approached in a public interest litigation, directed Sebi to investigate the allegations, including any failure by the conglomerate in disclosing transactions with related parties.

What were Sebi’s initial allegations?

Sebi’s show cause notices alleged that the Adani Group had devised a scheme or artifice to circumvent the rules governing related-party transactions.

The core allegations were that between 2012 and 2021, Adani Ports allegedly routed loans totaling ₹1,282 crore to Adani Power through Adicorp Enterprises. Sebi alleged this structure was used to hide the fact that one related party was funding another.

Additionally, between 2018 and 2023, Adani Ports allegedly lent funds to Adani Power and Adani Enterprises through Milestone Tradelinks and Rehvar Infrastructure.

In both cases, Sebi’s initial stance was that while the intermediary firms were not legally related parties, the substance of the transactions was a transfer of resources between related entities.

Sebi alleged that this was done to avoid seeking the necessary approvals from audit committees and shareholders, and to misrepresent financial statements, thereby violating Listing Obligations and Disclosure Requirements (LODR) and the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP) regulations.

“The regulator was, therefore, bound by the explicit language of the old LODR regime, which covered only direct dealings with related parties. While the ‘substance over form’ doctrine is recognised in Indian law, Sebi could not invoke it to override unambiguous statutory definitions in force at the time," Amit Tungare, managing partner at Asahi Legal, explained.

What was Sebi’s final verdict?

Sebi whole-time member Kamlesh Varshney dismissed all allegations against the Adani companies, the individual directors, and the private firms.

Sebi’s orders stated that the allegations in its show case notices were not established. Consequently, the proceedings were disposed of without issuing any directions or imposing any monetary penalties on any of the noticees.

Sebi’s decision was based on a strict interpretation of the law as it existed before the 2021 amendments, along with the principles of legal certainty and regulatory consistency.

Legal experts noted that after this order, new regulations cannot be retroactively applied to punish conduct unless it was already illegal under the rules that existed at the time. “Transactions will generally be judged by the law of the time, unless specific misstatement, deception, or other actionable wrongs are established independent of the new definition," Nirali Mehta, partner at Mindspright Legal, said.

Sebi’s orders concluded that under the un-amended LODR, transactions between a listed company and an unrelated third party were not covered, even if the ultimate beneficiary was a related party. “It would be legally infeasible to attack past transactions on the standards that have later been made applicable with prospective effect," it said.

Tungare said this was precisely why the law was amended in April 2023—to plug the gap and bring indirect, conduit-based benefit arrangements within the related-party transaction net, mandating full disclosure and shareholder approval.

“Today, similar structures would be caught, requiring transparency and approvals. Although Sebi’s approach tracked the letter of the law, it does highlight that, pre-amendment, there was indeed a regulatory blind spot," he said.

“For deals done before April 2023, these orders set a clear precedent: unless a transaction falls under the broader amended definition, SEBI is unlikely to revisit similar past cases under the old framework," Tungare added.

Varshney ruled that the charge of fraud under the PFUTP regulation was a consequence of the related-party transaction allegation. Since the transactions were not found to be in violation of related-party transaction rules, the charge of creating a fraudulent scheme to conceal them did not stand. The full repayment of loans with interest further weakened the allegation of fraud.

Finally, as the Adani companies themselves were not found to be in violation, the charges against the directors and key managerial personnel for being vicariously liable were also dismissed.

What was the role of the Supreme Court?

Sebi’s order was influenced by the observations of the Supreme Court. An expert committee appointed by the court while hearing the petition noted that Sebi had amended its related-party transaction regulations in 2021 to explicitly cover transactions with unrelated parties if their purpose was to benefit a related party.

However, these amendments were made with ‘deferred prospective effect’, meaning they applied only from April 2022, and April 2023, giving companies a glide path to comply. The Supreme Court accepted these findings and stated that there was no regulatory failure on Sebi’s part.

Sebi’s final orders cite this to support the reasoning that the old rules could not be reinterpreted retrospectively.

“The ruling closes the door on imposing the April-2023 RPT (related-party transaction) standard on historical transactions, while signalling that similar arrangements carried out after the amendment will be subject to far closer regulatory scrutiny," said Mehta of Mindspright Legal.