Adani-Hindenburg Report | Prima Facie ‘No Regulatory Failure,’ Says Supreme Court Expert Committee About SEBI Probe

In a significant development in the Adani-Hindenburg controversy, the Expert Committee constituted by the Supreme Court said it cannot, as of now, arrive at a finding of "regulatory failure" of SEBI in dealing with the alleged contravention of securities law by the Adani Group or any other companies.The Committee was constituted to provide an overall assessment of the situation as well as suggesting measures to strengthen investor awareness, the statutory architecture, and secure compliance with the existing framework. The three areas of investigation that have been spelt out by the Committee are: first, whether there has been a violation of Rule 19A of the Securities Contracts (Regulation) Rules, 1957 (relating to maintaining public shareholding of at least 25%); second, whether there has been a failure to disclose transactions with related parties and other relevant information which concerns related parties to SEBI, in accordance with law; and third, whether there was any manipulation of stock prices in contravention of existing laws. The conclusions of the expert committee with respect to each of these areas of investigation are given below. Question – Was there a violation of Rule 19A of the Securities Contracts (Regulation) Rules 1957? Expert Committee’s Answer – The issue of minimum public shareholding is dependent on whether 13 overseas entities including 12 foreign portfolio investors are compliant with disclosure of their beneficial owners, as stipulated by law.According to SEBI, there is no demonstration that the persons declared to be beneficial owners are not ‘beneficial owners’ for purposes of Rule 9 of the Prevention of Money Laundering Rules (from which the meaning of ‘ultimate beneficial owners’ in the SEBI (Foreign Portfolio Investors) Regulations, 2014 has been imported). The Committee report states: “SEBI has been suspecting 13 overseas entities of having links to the promoters of the Adani Group and thereby suspecting that the shareholding in the listed Adani stocks in the hands of these 13 overseas entities need not qualify as public shareholding; If such holding is not public shareholding, the listed Adani companies would have violated Rule 19A of the SCRR; At this stage, each of the 13 overseas entities have provided the details of the beneficial owners to the respective reporting entities and to SEBI in compliance with Rule 9 of the PMLA Rules.” The expert committee has also said that it appeared that prima facie SEBI has not been able to make out a case. This prima facie position cannot be confirmed unless more investigation is done. “In any prosecution of proceedings, whether civil or criminal, the presentation of a ‘prima facie’ case is the responsibility of the plaintiff or the prosecutor. Once a prima facie case is made out, the burden shifts to the accused: The inversion of the process of proving a charge, leaves the matter in the realm of suspicion. It is trite law that suspicion, however strong, cannot replace proof.” However, the committee has added that the publication of the Hindenburg Report reinforced SEBI’s suspicion that “perhaps there is something amiss and it desires to probe this further and is seeking time”. The report states: “Even the fundamental rules of evidence require a conclusion of whether an allegation is ‘proved’, ‘disproved’, or ‘not proved’. At this stage, the factual matrix appears to place the matter in the realm of ‘not proved’ — the regulator has not been able to prove that its suspicion can be translated into a firm case of prosecuting an allegation of violation.” Question – Was there a failure to disclose transactions with related parties and other relevant information which concerns related parties to SEBI, in accordance with law? Expert Committee’s Answer – The committee noted that SEBI substantially amended the definition of terms "related party" and "related party transactions" with a deferred prospective effect providing time to entities to re-arrange their affairs to become compliant with law. The committee said it is a good practice in economic legislation and SEBI's prerogative in this regard cannot be said regulatory failure.The report states: “Therefore, it would be difficult to arrive at a finding of a regulatory failure on the legislative side, when SEBI has been intervening to regularly raise the bar in its stipulation of desirable conduct.” “However,” the report adds, “While the legislative policy has proceeded in one direction, enforcement policy cannot move in a diametrically opposite direction.” The committee has highlighted the need for an effective enforcement policy that is coherent and consistent with the legislative position adopted by SEBI. This would ensure that “precious regulatory resources are not expended on regulatory action that is infirm on the ground of applying the law retrospectively”. The report explains: “Once SEBI has...

Adani-Hindenburg Report | Prima Facie ‘No Regulatory Failure,’ Says Supreme Court Expert Committee About SEBI Probe

Awstika Das

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