Hindenburg - Adani case: Supreme Court panel says SEBI did its job but no evidence yet of violation of rules, price manipulation of stocks

The Supreme Court-appointed expert committee led by retired judge Justice AM Sapre has prima facie found no lapse on part of markets regulator Securities and Exchange Board of India (SEBI) in the matter concerning probe into the Adani Group on allegations of stock price manipulation and violation of securities rules .The committee was appointed by the top court after the release of the Hindenburg Research Report on Adani.The interim report submitted by the committee before the top court also said that the SEBI has not been able to convert its suspicions into a firm case where any alleged violations can be prosecuted for."At this stage, taking into account the explanations provided by SEBI, supported by empirical data, prima facie, it would not be possible for the Committee to conclude that there has been a regulatory failure around the allegation of price manipulation," the report said..In a nutshellThe report by the committee said the following:.- 13 overseas entities having suspected links to Adani group promoters have given details of beneficial owners;- No evident pattern of manipulative contribution to price rise of Adani Energy;- SEBI should prepare similar charts with data from across all Adani stocks for analysis;- No case made out as of now on related party transactions or violation of Securities Regulations;- SEBI has been probing allegations for quite some time now. No regulatory failure on part of SEBI;- Though no evidence as of now, Hindenburg report has reinforced SEBI's suspicion..The Hindenburg report had led to a fall in the share value of various Adani companies, reportedly to the tune of $100 billion.In the wake of the same, the Supreme Court had in March appointed the expert committee comprising six members to probe the fiasco.The Hindenburg report published on January 24 this year alleged that the Adani Group of companies manipulated its share prices, failed to disclose transactions with related parties and other relevant information concerning related parties, in contravention of the regulations framed by SEBI.The regulator is conducting its own investigation in the matter as well, while coordinating with the committee..Hindenburg report on Adani: Meet the members of the expert committee appointed by the Supreme Court.The Committee noted that the manner in which the Hindenburg report extrapolated publicly-available information led to the 'serious nose-dive' in the stock prices, which has since undergone a market correction.However, the same cannot be inferred to mean that a violation of law was made out."The market has factored in the seriousness of the allegation on the commercial facets of the transactions in question. Regardless of whether the law is violated, the market has decided to re-price the Adani stocks. There has been an infliction of a price erosion and a subsequent mitigation. Every action that is legally compliant need not be an action that is considered desirable. If the market feels the actions taken in the past were not entirely desirable, it would re-price the stocks, but that by no means can be extrapolated to inexorably conclude that a violation of law has been made out in the facts of the case," the report said..Related party transactions.On related-party transactions under the SEBI's scanner in the matter, the committee ex-facie concluded:- SEBI's pursuit of investigations is based on the premise that it is pursuing the "spirit of law" but it flies in teeth of the prospective amendments with deferred effect that SEBI made on legislative side;- Some transactions relate to the period of nearly a decade ago, which predate the LODR (Listing Obligations and Disclosure Requirements) Regulations, when the listing agreement was the instrument of law that was applicable.The committee said that when the legislative policy proceeds in a certain direction, the enforcement cannot move in a diametrically opposite direction.The enforcement should be consistent and in consonance with the publicly declared law.Once SEBI has taken the legislative position (in November 2021) that transactions between related parties and subsidiaries of listed companies would come within the coverage of the related party transactions only with deferred prospective effect (from April 1, 2022), it cannot assail past transactions effected even before November 2021 citing 'spirit of law'. .On violation of SCRR.Regarding violation of Rule 19A of the Securities Contract Regulation Rules of 1957 (SCRR), the committee noted that SEBI has been suspecting 13 overseas entities of having links to the promoters of the Adani Group an thereby suspecting that the shareholding in the listed Adani stocks in the hands of those 13 entities would not qualify as 'public shareholding'. If such holding is not public shareholding, then the listed Adani companies would have violated Rule 19A of the SCRR. However, the committee noted that each of the 13 entities have provided the details of the beneficial owners to the SEBI and to the respective reporting entities in compliance with Rule 9 of the Prevention of Money Laundering Rules (PMLA Rules). As per SEBI, from the information supplied, there is no demonstration that the persons declared to be beneficial owners are not 'beneficial owners' for the purpose of Rule 9. Hence, as of now SEBI has not been able to make out a case and that is the prima facie position, the committee report said. Therefore, currently the matter is only in the realm of suspicion but the Hindenburg report has reinforced SEBI's suspicion that something is amiss, the committee further noted.It is in this context that it has sought more time for further probe. But as of now, what comes out of the factual matrix is that the matter is in the realm of 'not proved'."At this stage, the regulator has not been able to prove that its suspicion can be translated into a firm case of prosecuting an allegation of violation," the report said..Price Manipulation .The report said that at this stage, it would not be possible for the committee to conclude that there has been a regulatory failure around the allegation of price manipulation of Adani stocks.Emphasising that the committee's remit was to only ascertain whether there was a regulatory failure and not to examine whether the price rise was justified, it was concluded that SEBI was in fact actively engaged with price movements in the market.Further, it said that while the price of shares of Adani Energy Limited rose, there was no evident pattern of manipulative contribution to price rise which can be attributed to a single entity or a group of connected entities. Nonetheless, the committee asked the SEBI to prepare similar charts with data from across all Adani stocks for analysis. "This can be work in progress as indeed is the intended probe into those who build short positions just ahead of the publication of the Hindenburg Report and profited from the price crash upon publication on January 24, 2023."With this, it was noted that all investigations must be completed in a time bound manner.