Hindenburg row: SC appointed panel finds no evidence of regulatory breach by Adani, Sebi wants to search some more

• The six-member Supreme Court appointed committee does not find Adani Group to be in breach of existing securities laws.
• Sebi in 2018 changed rules for foreign portfolio investors such that they were no longer required to disclose the last natural person above every person owning economic interest in the FPI.
• Despite this, Sebi still wants more time to investigate the ultimate beneficiaries behind the 13 FPIs to see if there is a link with the group.

The six-member committee appointed by the Supreme Court has said in its report that it has not found evidence of the Adani Group violating existing market regulations. However, the Securities and Exchange Board of India (Sebi) wants time to further investigate charges made in the Hindenburg report. The ball is now firmly in Sebi’s court as it has sought more time to investigate possible violations of norms pertaining to minimum public shareholding and related party transactions. The report says: “Sebi is seeking more time to effect more investigations. This is (a) matter between Sebi and the Hon’ble Supreme Court.” The committee has called for a coherent enforcement policy, after Sebi has shown an intent to go beyond the remit of its own regulations.

The committee was tasked with investigating whether there was any violation that the Adani Group had committed. The Justice AM Sapre led committee had submitted its report on May 8 to the apex court in a sealed envelope. The three key areas the SC appointed committee was looking into were: 1) Violation of Minimum Public Shareholding norms, 2) Disclosure of transactions with related parties in accordance with the law and 3) Stock price manipulation. The report says that prima facie there is no violation of existing laws or market regulations.

The biggest allegation against the Adani Group has been that it has violated minimum public shareholding norms because of 13 entities that have been under investigations since 2020 that own substantial stakes in listed Adani companies. A violation of MPS norms would have been proven if the ultimate beneficiary of these 13 foreign portfolio investors (FPIs) could be in any way traced back to the promoters of Adani Group.

Interestingly, Sebi changed the rules in 2018 that no longer required FPIs to disclose “the very last natural person owning any economic interest in the FPI.” This means that the regulator cannot go behind each of these FPIs to investigate who is the ultimate beneficiary beyond the declarations made by natural persons controlling their decisions as is required under the Prevention of Money Laundering (Maintenance of Records) Rules, 2004.

However, Sebi has drawn a blank in its investigations in identifying the ultimate chain of ownership above these 13 FPIs that it is investigating. It has found nothing even though it has written to several other regulators overseas. Sebi in 2018 changed rules that no longer required FPIs to disclose the last natural person above every person owning ecoming interest in the FPI. Despite the change in rules, Sebi is still “investigating the ownership of the 13 overseas entities since October 2020 despite the aforesaid legislative change that had been effected in 2018,” says the SC Committee’s report.

On the second allegation of related party transactions, the committee has said that the markets regulator itself amended the terms “related party” and “related party transactions” in November 2021 with a deferred prospective effect with some changes taking effect in April 2022 and some in April 2023. The report spoke of the glide path that the regulator was giving companies to comply with new norms. The Committee in its report says, “So long as there is nothing unreasonable or subversive in choosing one path over the other, there is no scope for adverse comment on the approach or to arrive at a finding of a ‘regulatory failure’.”

The Committee has also not found any instance of price manipulation. The report says: “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.” No coherent pattern of abuse was found by the committee to suggest that the Adani Group was manipulating prices of its own stocks through related parties or otherwise.