Journalism of Courage
An expert committee appointed by the Supreme Court to investigate Hindenburg Research’s claims against the Adani Group said that there was no evidence of a “regulatory failure” on the part of markets regulator Securities and Exchange Board of India.
The six-member committee headed by Justice Abhay Manohar Sapre, formerly of the Supreme Court, in its May 6 report also looked into whether foreign portfolio investors (FPIs) declared their beneficial owner as required by the SEBI and in conformity with the requirements of the Prevention of Money Laundering Act (PMLA) 2002 and PMLA Rules and found that they had indeed done so.
“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 committee said.
It added that “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 pursuant to a recommendation of a Working Group and the provisions on ‘opaque structure’ were deleted on the premise that declarations under the PMLA constitute sufficient compliance”.
On the allegations of stock manipulation, the committee said that “SEBI has explained its approach to dealing with the various automated alerts that are thrown up by the trading system, how they are generated, and how they are analysed and investigated for potential market abuse and price or volume manipulation”.
“From the alerts generated by the algorithm that mines the traded data, the information is analysed based on set criteria…,” it said, adding that “if the trading pattern appears to be suspicious based on the…criteria, further examination is conducted. If the trading pattern does not arouse suspicion, then the alerts are closed”.
“In the case of the 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”, it said, adding that “SEBI has explained the analysis done, taking the example of Adani Enterprises Ltd., breaking the trading data into four ‘patches’ (periods of time) where the stock price rose significantly”.
The committee said that “the report sets out the detail of the analysis across the multiple patches. In a nutshell, no pattern of artificial trading or “wash trades” among the same parties multiple times was found. In one of the patches where the price rose, the FPIs under investigation were net sellers. One investing entity that had purchased across the patches had purchased far more of other securities. In a nutshell, there was no coherent pattern of abusive trading that has come to light”.
The Justice Sapre committee said that SEBI has also found that some entities had taken short positions prior to the publication of the Hindenburg report and had profited from squaring off their positions after the price crashed upon the publication of the report.
It added that “all of these are still under investigation and the Committee therefore does not express any opinion on merits. Suffice it to say, it would not be possible to return a finding of regulatory failure on this count since SEBI has an active and working surveillance framework to take notice of high price and volume movements and 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”.
The expert committee, which was also asked to suggest measures to strengthen the regulatory mechanism, said “SEBI is well-empowered and has been conferred with robust powers ranging from licensing of intermediaries to legislative, executive and quasi-judicial powers to discharge its role” and added that it “does not perceive a need to confer even more powers on SEBI at this stage”.
While questions were raised over 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.
On the matter of SEBI’s investigation in October 2020 in the matter of “overseas entities” ownership and ultimate beneficial ownership, the committee noted that in 2020, the investigation and enforcement moved in the opposite directions, stating that the ultimate owner of every piece of economic interest in an FPI must be capable of being ascertained.
“It is this dichotomy that has led SEBI drawing a blank worldwide, despite its best efforts… 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.
On the issue of transactions with related parties, the committee said that Sebi had also 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 further said, “SEBI is actively engaged in collecting data on these transactions. The Committee would therefore be unable to comment without further input, except to say the investigations must be completed in a time-bound manner in accordance with law.”
As directed by the Supreme Court, the committee was supposed to provide an overall assessment on the factors that led to volatility in securities market, suggest measures to strengthen investor awareness, investigate whether there has been regulatory failure in dealing with the alleged contravention of the laws pertaining to the securities market in relation to the Adani Group companies and to advise on strengthening the statutory and regulatory framework and secure compliance with the existing framework for the protection of investors.
As the report was made public, shares of Adani Group companies rose. While Adani Enterprises was up by 2.6 per cent; Adani Port was up 2.4 per cent. Adani Power rose 3.3 per cent and Adani transmission was up 1.8 per cent.
The committee’s other members are Justice J P Devadhar (retired), K V Kamath, former MD, CEO and chairman of ICICI Bank, O P Bhatt, former chairman of State Bank of India; Nandan Nilekani, chairman of Infosys; and lawyer Somasekhar Sundaresan.
