Hindenburg Report: Sebi draws a blank in Adani probe, says SC expert committee

The committee, in its 173-page report, said that the market regulator “suspects wrongdoing” on the ownership of foreign portfolio investors (FPIs) but it was unable to pinpoint the violations.

The committee was headed by Justice Abhay Manohar Sapre (retd.) and included Justice J P Devadhar (retd.); KV, Kamath former MD, CEO and Chairman of ICICI Bank; OP Bhatt, former chairman of State Bank of India; Nandan Nilekani, chairman Infosys; and lawyer Somasekhar Sundaresan.

The panel said there was an evidence of a build-up in short positions on Adani Group stocks ahead of the report of US-based short seller Hindenburg Research and profiting from squaring off positions after prices crashed post-publication of the damning allegations.

On January 24 this year, US-based shortseller Hindenburg Research had released a 106-page report, accusing the Adani group of “brazen stock manipulation and accounting fraud.” The Adani group had denied the allegations.

While questions were raised over regulatory failure, the committee has 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 mandate relating to regulatory failure, the committee said it looked into minimum public shareholding, disclosure of transactions with related parties and stock price manipulation.

On the matter of minimum public shareholding — “overseas entities” ownership and ultimate beneficial ownership — the committee said that while Sebi found 42 contributors to the assets under management of the 13 overseas entities holding Adani Group stocks (that included 12 FPIs), the market regulators in the seven jurisdictions where the 42 contributors are located have not provided any details to Sebi.

“It has been a long-standing suspicion of Sebi that some of the public shareholders are not truly public shareholders and could be fronts for the promoters of these companies,” it said.

Despite pursuing various routes through the Enforcement Directorate and the income-tax department, Sebi has not determined the ultimate ownership of these 13 entities.

While the FPIs in question made declarations of the beneficial owner by identifying the natural persons controlling their decisions, a 2018 law had done away with the very requirement to disclose the last natural person owning any economic interest in the FPI.

Sebi has been investigating the ownership of the 13 overseas entities since October 2020.

“The investigation and enforcement have moved in the opposite direction, 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 to Sebi drawing a balance worldwide, despite its best efforts,” it said.

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,” it said.

The panel said that 849 alerts were generated by the system regarding Adani stocks, and were considered by stock exchanges resulting in four reports to SEBI — of which two were well prior to the Hindenburg Report and two after January 24, 2023.

It said that the report did not find a pattern of artificial trading or “wash trades” among the same parties multiple times. “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”.

“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,” the panel said.

As directed by the Supreme Court, the expert committee had a mandate 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 advice 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 said that the market has re-priced and re-assessed the Adani stocks. “While they may not have returned to the pre-January 24 levels, they are stable at the newly re-priced level,” it said.

The committee noted that as per empirical data, retail investors’ exposure to Adani stocks increased after January 24, 2023. And on the basis of this, it concluded that the Indian stock market as a whole was not unduly volatile during the period under reference.

The Supreme Court had earlier this week granted Sebi time till August 14 to complete its probe into the allegations against Adani Group. (with PTI).