Monday, September 30, 2024

Supreme Court's Judgment in Adani Group investigation case is among its "Landmark Judgments"

Supreme Court's judgment in Adani Group investigation case is one of the 28 landmark cases of 2024. On January 3, 2024, Supreme Court's bench of Chief Justice (Dr.) Dhananjaya Y. Chandrachud and Justices Jamshed B. Pardiwala, Justice Manoj Misra passed a 46 page long judgement in  Vishal Tiwari vs Union of India. It adjudicated on the questions like: what is the scope of judicial review over the regulatory functions of the Securities and Exchange Board of India (SEBI) and whether the Supreme Court should transfer the investigation into the Adani Group from SEBI to a Special Investigation Team (SIT).

This case was heard in the context of the publication of a report of Hindenburg Research, a American investment research firm on Adani Group. The report entitled Adani Group: How The World’s 3rd Richest Man Is Pulling The Largest Con In Corporate History was published on January 24, 2023. The Court's "Landmark Judgment Summaries" launched on September 27, 2024 refers to it in the backdrop of the celebration of its 75th year. The case was filed on February 6, 2023.  It was registered on February 8, 2023 and verified on February 9, 2023. It was admitted on March 2, 2023. The respondents were Union of India, Ministry of Home Affairs, Reserve Bank of India and SEBI. It was listed for hearing on 10 occasions.

Hindenburg Research revealed the findings of our 2-year investigation, presenting evidence that the INR 17.8 trillion (U.S. $218 billion) Indian conglomerate Adani Group has engaged in a brazen stock manipulation and accounting fraud scheme over the course of decades. The January 2023 repprt stayed that Gautam Adani, Founder and Chairman of the Adani Group, has amassed a net worth of roughly $120 billion, adding over $100 billion in the past 3 years largely through stock price appreciation in the group’s 7 key listed companies, which have spiked an average of 819% in that period. Its research drew attention towards the financials of Adani Group at face value. Its 7 key listed companies have 85% downside purely on a fundamental basis owing to sky-high valuations. The report pointed out that the key listed Adani companies have taken substantial debt, including pledging shares of their inflated stock for loans, putting the entire group on precarious financial footing. 5 of 7 key listed companies have reported ‘current ratios’ below 1, indicating near-term liquidity pressure.

The report threw light on Adani Group’s very top ranks and how 8 of 22 key leaders in it are Adani family members. The Group's “a family business” places control of the group’s financials and key decisions in the hands of a few. 

The report compiled details about four government fraud investigations which alleged money laundering, theft of taxpayer funds and corruption, totaling an estimated U.S. $17 billion. Adani family members allegedly cooperated to create offshore shell entities in tax-haven jurisdictions like Mauritius, the UAE, and Caribbean Islands, generating forged import/export documentation in an apparent effort to generate fake or illegitimate turnover and to siphon money from the listed companies. Gautam Adani’s younger brother, Rajesh Adani, was accused by the Directorate of Revenue Intelligence (DRI) of playing a central role in a diamond trading import/export scheme around 2004-2005. The alleged scheme involved the use of offshore shell entities to generate artificial turnover. Rajesh was arrested at least twice over separate allegations of forgery and tax fraud. He was subsequently promoted to serve as Managing Director of Adani Group. Adani’s brother-in-law, Samir Vora, was accused by the DRI of being a ringleader of the same diamond trading scam and of repeatedly making false statements to regulators. He was subsequently promoted to Executive Director of the Adani Australia division. His s elder brother, Vinod Adani was referred to as “an elusive figure” who has been at the center of the government’s investigations into Adani for his alleged role in managing a network of offshore entities used to facilitate fraud.

The research report catalogued the entire Mauritius corporate registry and uncovered that Vinod Adani  manages 38 offshore shell entities on his own or through close associates. It dentified entities that are also surreptitiously controlled by Vinod Adani in Cyprus, the UAE, Singapore, and several Caribbean Islands.  

The report noted that several of the Vinod Adani-associated entities do not show signs of operations, including no reported employees, no independent addresses or phone numbers and no meaningful online presence. Despite this, they have collectively moved billions of dollars into Indian Adani publicly listed and private entities, often without required disclosure of the related party nature of the deals. The report claimed that it has uncovered efforts designed to mask the nature of some of the shell entities. For example, 13 websites were created for Vinod Adani-associated entities. Notably, several were formed on the same days, featuring only stock photos, naming no actual employees and listing the same set of nonsensical services, such as “consumption abroad” and “commercial presence”. The Vinod-Adani shells seem to serve several functions, including (1) stock parking / stock manipulation (2) and laundering money through Adani’s private companies onto the listed companies’ balance sheets in order to maintain the appearance of financial health and solvency. Publicly listed companies in India are subject to rules that require all promoter holdings (known as insider holdings in the U.S.) to be disclosed. Rules also require that listed companies have at least 25% of the float held by non-promoters in order to mitigate manipulation and insider trading. It pointed out that 4 of Adani’s listed companies are on the brink of the delisting threshold due to high promoter ownership.

The research indicated that offshore shells and funds tied to the Adani Group comprise many of the largest “public” (i.e., non-promoter) holders of Adani stock, an issue that would subject the Adani companies to delisting, were Indian securities regulator SEBI’s rules enforced. Many of the supposed “public” funds exhibit flagrant irregularities such as being (1) Mauritius or offshore-based entities, often shells (2) with beneficial ownership concealed via nominee directors (3) and with little to no diversification, holding portfolios almost exclusively consisting of shares in Adani listed companies. Hindenberg claimed that the Adani Group has been able to operate a large, flagrant fraud in broad daylight largely because investors, journalists, citizens and even politicians have been afraid to speak. It posed 88 questions in the conclusion of its report.

Its report accused the Adani Group of companies of violating SEBI regulations, manipulating stock prices, and failing to disclose critical financial information. This report led to a significant decline in the share price of Adani Group of companies and consequently an erosion of investor wealth. Several petitions were filed before the Supreme Court concerning the need to protect investors from market shocks and investigate the Adani Group. The Court in its order dated 2 March 2023, directed SEBI to investigate the allegations of potential regulatory violations by the Adani Group. An expert committee was also established to assess the situation and recommend measures to enhance investor protection. The petitioners sought to cancel certain amendments made to SEBI (Foreign Portfolio Investments) Regulations, 2014 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (SEBI Regulations) and requested the formation of a SIT to oversee the investigation. On May 6, 2023 the expert committee submitted its report and SEBI filed a status report on August 25, 2023. As on date of the judgment, SEBI had completed twenty two out of the twenty four investigations.

In its judgement, the Supreme Court has held that the power of the Courts to interfere with the regulatory functions of SEBI is limited. The Court did not find any valid grounds to cancel the amendments made to SEBI Regulations. The Court held that there was no apparent failure in regulation by SEBI and hence there was no need to transfer the investigation to an SIT. The Court directed the Union Government and SEBI to consider the suggestions made by the expert committee to strengthen the regulatory framework. The judgment of the court was authored by Chief Justice Dr. Chandrachud.

The Supreme Court observed that the Court cannot act as an appellate authority to assess the correctness of policies formulated by statutory regulators like SEBI. Judicial review is limited to assessing whether a policy violates fundamental rights, constitutional provisions, statutory laws, or is manifestly arbitrary. The Court further held that in technical areas, particularly economic and financial matters, courts should defer to the expertise of regulators who have considered expert opinions in formulating their policies. It upheld SEBI’s regulations, stating that the agency had properly explained the evolution and rationale behind its regulatory framework and that the procedures followed were not illegal or arbitrary.  It found no evidence of regulatory failure by SEBI in its investigation into the Adani Group. The Court observed that its authority under Article 32 and Article 142 of the Constitution to transfer investigations should be used sparingly and only in extraordinary circumstances. The Court cannot intervene unless the investigating authority shows clear, willful, and deliberate inaction in conducting the investigation.
 
The attempt to access Supreme Court's website for one of its Landmark Judgements showed "Warning:Potential Security Risk Ahead". The Court's verdict on SEBI's probe into Adani Group relied on Justice Sapre led Expert Committee which included Nandan Nilekani and K.V. Kamath

The petitioner had challenged SEBI's investigation into the Adani Group and sought constitution of Special Investigation Team (SIT) to probe it conduct.  

In its first order dated February 10, 2023, the Court observed: "We have indicated to the Solicitor General, the concerns of the Court over the loss of investor wealth in the securities’ market over the past several
weeks and the portents for the future. There is a need to review existing regulatory mechanisms in the financial sector to ensure that they are duly strengthened. These regulatory mechanisms must be robust enough to protect Indian investors against volatility of the kind which has been witnessed in the recent past. An assessment has to be made of the regulatory framework, relevant causal factors and the mechanisms necessary for the stable operation and development of the securities market. We have suggested to the Solicitor General that he may seek instructions on whether the Government of India would facilitate the constitution of an expert committee for an overall assessment of the situation, and if so, to place its suggestions on the constitution and remit of the committee on the next date. Meantime the Solicitor General shall place on the record a brief note on factual and legal aspects so as to further the deliberations during the course of the next hearing. The Solicitor General has submitted that the Securities and Exchange Board of India has been closely monitoring the situation and continues to do so."

In its second order dated February 13, 2023, the Court's order noted: "Mr Tushar Mehta, Solicitor General, states that in pursuance of the previous order of this Court, the Union Government would file its submission note and circulate a soft copy to the Court Master by 15 February 2023. A copy of the Note has been handed over to the petitioners who appear in person."

In its third order, the Court's order indicated that arguments have been heard and the order was reserved. 

In its fourth order dated March 2, 2023, the Court issued certain directions. It reads: "In terms of the reportable order, the following directions are issued: “14. In order to protect Indian investors against volatility of the kind which has been witnessed in the recent past, we are of the view that it is appropriate to constitute an Expert Committee for the assessment of the extant regulatory framework and for making recommendations to strengthen it. We hereby constitute a committee consisting of the following members: a. Mr. O P Bhatt; b. Justice J P Devadhar (retired) c. Mr. KV Kamath; d. Mr. Nandan Nilekani; and e. Mr. Somashekhar Sundaresan. The Expert Committee shall be headed by Justice Abhay Manohar Sapre, a former judge of the Supreme Court of India. 15. The remit of the Committee shall be as follows:
a. 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;
b. To suggest measures to strengthen investor awareness;
c. 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; and
d. 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.
16. The Chairperson of the Securities and Exchange Board of India is requested to ensure that all requisite information is provided to the Committee. All agencies of the Union Government including agencies connected with financial regulation, fiscal agencies and law enforcement agencies shall co-operate with the Committee. The Committee is at liberty to seek recourse to external experts in its work.
17. The honorarium payable to the members of the Committee shall be fixed by the Chairperson and shall be borne by the Union Government. The Secretary, Ministry of Finance shall nominate a senior officer who will act as a nodal officer to provide logistical assistance to the Committee. All the expenses incurred in connection with the work of the Committee shall be defrayed by the Union Government.
18. The Committee is requested to furnish its report in sealed cover to this Court within two months.”

The order of the Court dated May 17, 2023 Justice Sapre headed Expert Committee submitted its report. The order reads: "The Expert Committee is requested to continue to assist the Court. The Committee may hold further deliberations in the meantime. The Committee would be requested to take up any further aspects or suggestions as may be formulated by the Court, following the course of deliberations when the
proceedings are next listed for hearing."

The July 11, 2023 order reads:"The Solicitor General informs the Court that SEBI has filed a response on issues pertaining to its functioning, together with an IA, to the report which was submitted by the Expert Committee. The response by SEBI be circulated to the Court and all counsel. Mr Prashant Bhushan, counsel, states that in Writ Petition (Civil) No 201 of 2023, response has been submitted to the report of the Expert Committee."

The November 24, 2023 order stated that arguments have been concluded and judgment was reserved.

The January 3, 2024 judgement reads:In terms of the signed reportable judgment, the petitions are disposed of with the following conclusion:
“67. In a nutshell, the conclusions reached in this judgement are summarized below:
i. The power of this Court to enter the regulatory domain of SEBI in framing delegated legislation is limited. The court must refrain from substituting its own wisdom over the regulatory policies of SEBI. The scope of judicial review when examining a policy framed by a specialized regulator is to scrutinise whether it violates fundamental rights, any provision of the Constitution, any statutory provision or is
manifestly arbitrary;
ii. No valid grounds have been raised for this Court to direct SEBI to revoke its amendments to the FPI Regulations and the LODR Regulations which were made in exercise of its delegated legislative power. The procedure followed in arriving at the current shape of the regulations does not suffer from irregularity or illegality. The FPI Regulations and LODR Regulations have been tightened by the amendments in question;
iii. SEBI has completed twenty-two out of the twenty-four investigations into the allegations levelled against the Adani group. Noting the assurance given by the Solicitor General on behalf of SEBI we direct SEBI to complete the two pending investigations expeditiously preferably within three months;
iv. This Court has not interfered with the outcome of the investigations by SEBI. SEBI should take its investigations to their logical conclusion in accordance with law;
v. The facts of this case do not warrant a transfer of investigation from SEBI. In an appropriate case, this Court does have the power to transfer an investigation being carried out by the authorized agency to an SIT or CBI. Such a power is exercised in extraordinary circumstances when the competent authority portrays a glaring, willful and deliberate inaction in carrying out the investigation. The threshold for the transfer of investigation has not been demonstrated to exist;
vi. The reliance placed by the petitioner on the OCCPR report to suggest that SEBI was lackadaisical in conducting the investigation is rejected. A report by a third-party organization without any attempt to verify the authenticity of its allegations cannot be regarded as conclusive proof. Further, the petitioner’s reliance on the letter by the DRI is misconceived as the issue has already been settled by concurrent findings of DRI’s Additional Director General, the CESTAT and this Court;
vii. The allegations of conflict of interest against members of the Expert Committee are unsubstantiated and are rejected;
viii. The Union Government and SEBI shall constructively consider the suggestions of the Expert Committee in its report detailed in Part F of the judgment. These may be treated as a non-exhaustive list of recommendations and the Government of India and SEBI will peruse the report of the Expert Committee and take any further actions as are necessary to strengthen the regulatory framework, protect investors and ensure the orderly functioning of the securities market; and
ix. SEBI and the investigative agencies of the Union Government shall probe into whether the loss suffered by Indian investors due to the conduct of Hindenburg Research and any other entities in taking short positions involved any infraction of the law and if so, suitable action shall be taken." 

FPI Regulations refers to SEBI (Foreign Portfolio Investments) Regulations, 2014 and LODR Regulations refers to SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. OCCRP refers to Organized Crime and Corruption Reporting Project (OCCRP). DRI refers to Directorate of Revenue Intelligence. CESTAT refers to Commissioner of Customs before the Customs, Excise and Service Tax Tribunal.

The Court disposed of the pending applications, including applications for intervention/impleadment.

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