In 10 Points: What does the SC-appointed panel report say on the Adani-Hindenburg case?
The committee headed by Justice Abhay Manohar Sapre, formerly of the Supreme Court, said in its report that there was no evidence of a “regulatory failure” on the part of SEBI. However, it acknowledged that there is a need for effective enforcement policy.
PremiumThe Supreme Court (SC) on May 19 made public the report of the court-appointed six-member expert panel in the Adani-Hindenburg case, which notably said that capital markets regulator Securities and Exchange Board of India (SEBI) has "drawn a blank" in investigations into suspected violations in overseas investments in the Adani group and its ongoing pursuit of the case could be a "journey without a destination".
The committee headed by Justice Abhay Manohar Sapre, formerly of the Supreme Court, said in its report that there was no evidence of a “regulatory failure" on the part of SEBI. However, it acknowledged that there is a need for effective enforcement policy.
The port-to-energy conglomerate's listed companies lost more than $100 billion in market value earlier this year after US short-seller Hindenburg Research levelled accusations against the Gautam Adani-led group of stock manipulation and financial wrongdoings. The Adani group has since denied wrongdoing, but following that, the top court set up the expert panel on the issue and also directed SEBI to investigate whether there had been a violation of Section 19 of SEBI rules and whether there was any manipulation of stock prices.
While SEBI is yet to submit its report, the expert panel in its report revealed that SEBI has been investigating the ownership of 13 ‘opaque’ overseas entities or structures, related to Adani since October 2020. "The ultimate chain of ownership above the 13 overseas entities is not clear,'' it added.
Also Read: Adani-Hindenburg: Supreme Court gives SEBI extension till August 14 to complete probe
Despite involving various Indian and overseas agencies in the investigation across multiple countries, "SEBI has drawn a blank", the panel's report said, adding that trying to prove who had invested in foreign portfolio investors (FPI) who then pumped money into Adani and figure out the ultimate beneficial owner could be a massive task.
"It is evident that such an exercise could be a voluminous one but potentially a journey without a destination," the panel added. Here are the top 10 takeaways from the SC-appointed panel report on the Adani-Hindenburg case:
1. Stock manipulation: On the issue of whether the Adani group had manipulated its stock price, the expert panel said that despite SEBI’s active surveillance framework, no pattern of artificial trading or “wash trades" among the same parties multiple times was found. “In the case of Adani stocks, 849 alerts were generated by the system, and were considered by stock exchanges, resulting in four reports to SEBI — two well prior to the Hindenburg report and two after January 24, 2023,'' said the report.
2. Market volatility: The expert panel noted that there was a certain high volatility in the Adani stocks after publication of the Hindenburg report, but the market as a whole was not volatile. Retail investors also showed interest in Adani stocks after the report, according to SEBI. The market has re-priced and re-assessed the Adani stocks - which have returned to the pre-January 24, 2023 levels, but are stable at the newly re-priced levels.
3. Related-party transactions: The panel said that SEBI had identified 13 specific transactions where it was investigating the underlying transactions, regardless of whether the transactions were legally considered “related party transactions" from the standpoint as to whether or not these transactions were fraudulent. The report said that the panel ‘’will be unable to comment without further input, except to say the investigations must be completed in a time-bound manner in accordance with law."
4. Investor interest/awareness: The expert panel was largely in agreement with SEBI’s steps on ensuring investors are making informed decisions, the report also raised a question on whether there is too much information available for the average investor. Empirical data showed that retail investment exposure to Adani stocks increased multifold after January 24, the day when Hindenburg released its report accusing the Adani group.
5. Overseas entity ownership: On the matter of SEBI’s investigation in October 2020 in the matter of ‘overseas entities’ ownership and the ultimate beneficial ownership, the committee noted that in 2020, the investigation and enforcement moved in the opposite directions, stating that the ultimate owner of economic interest in an FPI couldn't be ascertained.
‘’…without such information Sebi is unable to satisfy itself that its suspicion that has been aroused can be put to rest. The securities market regulator suspects wrongdoing, but also finds compliance with various stipulations in attendant regulations. Therefore, the record reveals a chicken-and-egg situation," the committee said.
6. On regulatory failure: The committee said that it could not arrive “at a finding of a regulatory failure on the legislative side" and asserted that SEBI has been intervening to regularly “raise the bar" in its stipulation of desirable conduct. “Prima facie it would not be possible for the committee to conclude there has been a regulatory failure around the allegation of price manipulation," said the report.
7. Minimum public shareholding: SEBI regulations require a publicly listed company to have a minimum of 25 per cent of its shares to be held by the public. To examine whether the Adani group has flouted this rule, SEBI will have to look into the ownership of certain portfolio investors. The issue is dependent on whether the FPIs are compliant with disclosure of their beneficial owners as stipulated by law, according to the expert panel report.
8. FPI's declarations: “The FPIs in question have made declarations of the beneficial owner by identifying the natural persons controlling their decisions for purposes of the PMLA. This is the declaration that comports to compliance with the FPI Regulations," the panel report said. The very requirement to disclose the last natural person above every person owning any economic interest in the FPI was done away with in 2018, the committee said.
9. Short positions by certain firms: The Justice Sapre committee noted that SEBI has found that some entities had taken short positions before the publication of the Hindenburg report and had profited from squaring off their positions after the price crashed upon the publication of the Hindenburg report in January. SEBI said that detailed investigation is being carried out on the entities that held short positions.
10. Measures to strengthen regulatory mechanism: The expert panel said that SEBI has been conferred with robust powers ranging from licensing of intermediaries to legislative, executive and quasi-judicial powers to discharge its role, said the panel and added that it “does not perceive a need to confer even more powers on SEBI at this stage".
Earlier this week, the apex court granted SEBI additional time until August 14 to complete its investigation into the possible violation of securities law and regulatory disclosures by the Adani group. The shares of listed companies under the Adani empire were up between 1.2 per cent to 7 per cent in late trade on Friday in a largely flat wider market.
"Exciting news! Mint is now on WhatsApp Channels 🚀 Subscribe today by clicking the link and stay updated with the latest financial insights!" Click here!
