The Supreme Court-appointed Expert Committee constituted to submit a review of the regulatory mechanism in light of the Adani-Hindenburg issue, has submitted its report. The committee said that prima facie it is not possible to conclude that there is a regulatory failure around the allegations of price manipulation on the part of the Securities and Exchange Board of India (SEBI), based on SEBI’s explanations supported by empirical data.
The Supreme Court constituted the Expert Committee on March 2, to:
- “To provide an overall assessment of the situation, including the relevant causal factors which have led to the volatility in the securities market in the recent past.
- To suggest measures to strengthen investor awareness.
- To investigate whether there has been regulatory failure in dealing with the alleged contravention of laws pertaining to the securities market in relation to the Adani Group or other companies.
- To suggest measures to (i) strengthen the statutory and/or regulatory framework, and (ii) secure compliance with the existing framework for the protection of investors.”
Committee on the Volatility in the Securities Market
The Expert Committee noted, “The mitigating measures from the Adani Group such as paring down the debt secured by encumbrances on their shareholding, infusion of fresh investment into Adani stocks by way of investment of nearly USD 2 billion by a private equity investor and the like, built confidence in the stocks.”
Furthermore, the committee said, “The market has re-priced and re-assessed the Adani stocks. While they may not have returned to the pre-January 24, 2023 levels, they are stable at the newly re-priced level. Empirical data shows that retail investors’ exposure to the Adani stocks has increased after January 24, 2023.”
The committee concluded that the Indian market was not unduly volatile as a whole, however, the high volatility in the stock price of Adani Group companies is attributable to the Hindenburg Research’s report. The report read, “The Committee concluded, based on empirical evidence, that the Indian market as a whole was not unduly volatile during the period under reference. The volatility in the Adani stocks was indeed high, which is attributable to the publication of the Hindenburg Report and its consequences.”
Committee on Investor Awareness
The Expert Committee noted that the SEBI had recognised the increasing number of intra-day traders who are coming into the market and the need to alert and inform them in advance of their trades.
The committee said, “SEBI has identified areas that need attention and has briefed the Committee on its plan to address these areas. The Committee agrees with steps proposed in this regard, and suggests implementation as early as possible in a time-bound manner.”
Furthermore, the committee recommended that the Government of India focuses on unclaimed properties such as securities, dividends and bank deposits belonging to deceased investors. The committee recommended that a “Central Unclaimed Property Authority” is created to handle and reunite unclaimed private assets to the successors of deceased investors.
The committee also recommended the introduction of financial literacy courses in school curriculum. The committee observed, “Financial security of a society is as vital as national security for a society to be robust. School and university curricula must be attuned to bring in a culture of financial awareness and literary.”
“Earning, saving, investing, earning returns, and giving back to society, are part of a virtuous cycle. The era of treating money with an unstated element of stigma must end,” the report read.
Minimum Public Shareholding
Furthermore, the Expert Committee delved into three areas of investigation – Minimum Public Shareholding, Related Party Transactions and Stock Price Manipulation – as per the Supreme Court’s March 2 order.
The committee noted, “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,” on the issue of minimum public shareholding.”
The committee further noted, “Both the Adani promoters and the FPI’s beneficial owners appear to have affirmed on oath that the FPI investments are not funded by the Adani Group.” The report added, “In the instant case, it appears that SEBI is not able to make out a case, and such a position of the case not being made out is presented as a prima facie position, which cannot be confirmed unless more investigation is done.”
“However, the publication of the Hindenburg Report has reinforced SEBI’s suspicion that perhaps there is something amiss and it desires to probe this further, and is seeking time,” the report added. The committee concluded, “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 the violation.”
Related Party Transactions
The committee noted that SEBI is getting feedback on related party transactions, in the instant case, and has responded by amending the regulations. The committee said that it is difficult to find a regulatory failure on the SEBI’s part, as the regulator “has been intervening to regularly raise the bar in its stipulation of desirable conduct.”
The committee noted, “SEBI has been probing the matter since October 23, 2020 after receipt of complaints in June 2020 and July 2020. The amendments to the definitions of the terms “related party” and “related party transactions” were made in November 2021 and took effect on April 1, 2022 and April 1, 2023, with material and substantive changes being made.”
Therefore, the committee pointed out the issue of retrospective application of law, as the amendments to the definitions were made after November 2021, the regulator “cannot assail past transactions effected even before November 2021 as being violative of law that has been stated by it as not being in force when the transactions were effected.”
The committee concluded, “There is a need for an effective enforcement policy that is coherent and consistent with the legislative position adopted by SEBI, so that precious regulatory resources are not expended on regulatory action that is infirm on the ground of applying the law retrospectively.”
Stock Price Manipulation
The committee noted that its task is to examine whether there is a regulatory failure and not whether the price rise in Adani Group stocks was justified. The committee found that “SEBI was actively engaged with developments and price movements in the market.”
Furthermore, the committee said, “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.”
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