Supreme Court Orders Investigation into Adani Group Share Price Volatility: Vishal Tiwari vs. Union of India (2023)

Introduction

Date of the Judgment: March 2, 2023

Citation: 2023 INSC 191

Judges: Dr. Dhananjaya Y Chandrachud, CJI, Pamidighantam Sri Narasimha, J., J.B. Pardiwala, J.

Can a report by a short seller trigger a major investigation into a company’s financial practices? The Supreme Court of India recently addressed this question in the context of the Adani Group, following a report by Hindenburg Research that led to a significant drop in the group’s share prices. This case examines the regulatory framework surrounding securities markets and seeks to protect investor interests. The Supreme Court constituted an expert committee to assess the existing regulatory framework and suggest measures to strengthen it, while also directing the Securities and Exchange Board of India (SEBI) to investigate specific allegations against the Adani Group. The judgment was delivered by a three-judge bench comprising Chief Justice Dr. Dhananjaya Y Chandrachud, Justice Pamidighantam Sri Narasimha, and Justice J.B. Pardiwala.

Case Background

The case originated from a series of writ petitions filed in the Supreme Court of India following the publication of a report by Hindenburg Research on January 24, 2023. This report alleged that the Adani Group had manipulated its share prices, failed to disclose transactions with related parties, and violated other securities laws. The report also indicated that Hindenburg Research had taken a short position in Adani Group companies. These allegations led to a steep decline in the share prices of Adani Group companies, raising concerns about investor wealth and regulatory oversight.

The petitioners, including Vishal Tiwari, sought various reliefs, including a court-monitored investigation into the allegations and directions to protect public money invested in the Adani Group through institutions like the State Bank of India (SBI) and the Life Insurance Corporation of India (LIC). The petitions also raised concerns about potential violations of securities regulations and the role of regulatory bodies like SEBI.

Timeline:

Course of Proceedings

The Supreme Court heard submissions from Mr. Prashant Bhushan, learned senior counsel for the petitioners, and Mr. Tushar Mehta, learned Solicitor General for the Union of India. SEBI also submitted a note detailing the existing regulatory framework and its ongoing investigation. The Court noted the concerns raised about the volatility in the securities market and the need to protect investor interests. It also considered the submissions of the petitioners who appeared in person, Mr. Vishal Tiwari and Mr. Manohar Lal Sharma.

Legal Framework

The Supreme Court considered the regulatory framework under the Securities and Exchange Board of India Act, 1992 (SEBI Act), and various regulations framed thereunder. These include:

• SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003: These regulations aim to prevent fraudulent activities in the securities market.

• SEBI (Prohibition of Insider Trading) Regulations 2015: These regulations prohibit insider trading to ensure fair market practices.

• SEBI (Foreign Portfolio Investors) Regulations 2019: These regulations govern the participation of foreign portfolio investors in the Indian securities market.

• Securities Contracts (Regulation) Rules 1957: Specifically, Rule 19A of these rules, which mandates the maintenance of minimum public shareholding in a public limited company, was considered.

The Court also highlighted the importance of SEBI’s role as a regulatory, adjudicatory, and prosecuting agency, as previously discussed in Prakash Gupta v. SEBI. The regulatory framework is designed to ensure fair price discovery, seamless trading, and enforcement against market misconduct, thereby protecting investor interests.

Arguments

Arguments by the Petitioners:

• The petitioners argued that public money was at risk due to the exposure of public institutions like SBI and LIC to the Adani Group. They sought an investigation into the allegations made by Hindenburg Research.

• It was contended that the Adani Group had violated Rule 19A of the Securities Contracts (Regulation) Rules by surreptitiously controlling more than 75% of the shares of public-listed Adani group companies, thereby manipulating the price of its shares in the market.

• The petitioners sought a court-monitored investigation by a Special Investigation Team or by the Central Bureau of Investigation into the allegations of fraud and the role played by top officials of leading public sector banks and other lender institutions.

• One of the petitioners sought the registration of an FIR against Mr. Nathan Anderson (founder of Hindenburg Research) and his associates for short selling, and for directions to recover the profits yielded by the short selling to compensate investors.

Arguments by the Union of India:

• The Union of India acknowledged the concerns raised and agreed to the constitution of an expert committee to assess the regulatory framework.

Arguments by SEBI:

• SEBI stated that it has adopted a disclosure-based regulatory regime for both issuance of and trading in securities, emphasizing free price discovery by the markets.

• SEBI asserted that it is adequately empowered to put in place regulatory frameworks for stable operations and development of the securities markets, including protection of investors.

• SEBI highlighted its ongoing investigation into the allegations made in the Hindenburg report, as well as the market activity immediately preceding and following the publication of the report.

• SEBI stated that its investigation includes potential violations of SEBI regulations including SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003, SEBI (Prohibition of Insider Trading) Regulations 2015, SEBI (Foreign Portfolio Investors) Regulations 2019, Offshore Derivative Instruments (ODI) norms, and short selling norms.

Issues Framed by the Supreme Court

The Supreme Court identified the following issues for investigation:

1. Whether there has been a violation of Rule 19A of the Securities Contracts (Regulation) Rules 1957.
2. 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.
3. Whether there was any manipulation of stock prices in contravention of existing laws.

Treatment of the Issue by the Court

Authorities

Cases Relied Upon:

• Prakash Gupta v. SEBI, 2021 SCC OnLine SC 485 – The Supreme Court emphasized SEBI’s role as a regulatory, adjudicatory, and prosecuting agency in maintaining an orderly and stable securities market to protect investor interests. The court noted that the SEBI Act and its regulations are constantly evolving to enforce order in the securities market and promote its healthy growth while protecting investor wealth.

Legal Provisions Considered:

• Securities and Exchange Board of India Act, 1992 (SEBI Act): The court considered the powers and responsibilities of SEBI under this Act.

• Rule 19A of the Securities Contracts (Regulation) Rules 1957: The court directed SEBI to investigate whether there was a violation of this rule regarding minimum public shareholding.

• SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations 2003: The court noted that SEBI is investigating potential violations of these regulations.

• SEBI (Prohibition of Insider Trading) Regulations 2015: The court noted that SEBI is investigating potential violations of these regulations.

• SEBI (Foreign Portfolio Investors) Regulations 2019: The court noted that SEBI is investigating potential violations of these regulations.

Judgment

How each authority was viewed by the Court?

• Prakash Gupta v. SEBI [2021 SCC OnLine SC 485]: The Court relied on this case to underscore the importance of SEBI’s role in maintaining a stable securities market and protecting investor interests.

The Supreme Court directed SEBI to investigate specific aspects of the allegations against the Adani Group, including violations of Rule 19A of the Securities Contracts (Regulation) Rules 1957, failure to disclose related party transactions, and manipulation of stock prices. The Court also constituted an Expert Committee to assess the extant regulatory framework and recommend measures to strengthen it. The Court emphasized the need to protect Indian investors from market volatility and to ensure compliance with existing regulations.

What weighed in the mind of the Court?

The Supreme Court’s decision was primarily driven by the need to protect investor interests and maintain the integrity of the securities market. The court emphasized the importance of a robust regulatory framework and the need for thorough investigations into allegations of market manipulation and regulatory violations. The court also took into account the potential impact of market volatility on investor confidence and the broader economy.

Logical Reasoning:

The Court considered various aspects, including the allegations made by Hindenburg Research, the submissions of the petitioners, the Union of India, and SEBI, and the existing regulatory framework. The Court recognized the need for a comprehensive approach that includes both investigation and assessment of the regulatory mechanisms.

The Court did not explicitly consider any alternative interpretations, but its decision reflects a balanced approach to addressing the issues while ensuring that the regulatory bodies continue to perform their functions. The Court emphasized that the constitution of the expert committee does not divest SEBI of its powers or responsibilities in continuing with its investigation into the recent volatility in the securities market.

The decision was reached by a three-judge bench, and there were no dissenting opinions. The Court’s reasoning was based on the need to protect investor interests, ensure regulatory compliance, and maintain market stability.

The Supreme Court quoted the following from the judgment:

“SEBI is already enquirin g into both, the allegations made in the Hindenburg report as well as the market activity immediately preceding and post the publication of the report, to identify violations of SEBI Regulations including but not limited to SEBI (Prohibition of Fraudulent and Unfair Trade Practices I relating to Securities Market) Regulations 2003, SEBI (Prohibition of Insider Trading) Regulations 2015, SEBI (Foreign Portfolio Investors) Regulations 2019, Offshore Derivative Instruments (ODI) norms, short selling norms, if an y.”

“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.”

“The constitution of the expert committee does not divest SEBI of its powers or responsibilities in continuing with its investigation into the recent volatility in the securities market.”

Key Takeaways

• The Supreme Court has emphasized the importance of protecting investor interests in the securities market.

• The decision highlights the need for a robust regulatory framework and thorough investigations into allegations of market manipulation.

• The constitution of an expert committee indicates a proactive approach towards strengthening the regulatory mechanisms in the financial sector.

• The directions to SEBI to investigate specific allegations against the Adani Group may lead to stricter enforcement of securities laws.

• The judgment could potentially lead to enhanced regulatory frameworks and greater transparency in the securities market.

Directions

The Supreme Court directed SEBI to expedite the investigation and conclude it within two months, submitting a status report to the Court. The Expert Committee was also directed to furnish its report in a sealed cover to the Court within two months.

Specific Amendments Analysis

(Omitted as the judgment does not discuss any specific amendments.)

Development of Law

The ratio decidendi of this case is that in the face of allegations of market manipulation and regulatory failures, the Supreme Court will intervene to ensure that regulatory bodies like SEBI conduct thorough investigations and that expert committees are constituted to assess and strengthen the regulatory framework. This judgment reinforces SEBI’s role in maintaining market stability and protecting investors. This judgment does not change any previous position of law but emphasizes the need for effective enforcement of existing laws and regulations.

Conclusion

In conclusion, the Supreme Court’s order in Vishal Tiwari vs. Union of India is a significant step towards addressing concerns about market volatility and regulatory oversight. The Court’s decision to direct SEBI to investigate specific allegations against the Adani Group and to constitute an expert committee to assess the regulatory framework underscores the importance of investor protection and market stability. This case highlights the proactive role of the judiciary in ensuring that regulatory bodies perform their functions effectively and that the securities market operates in a fair and transparent manner.

Category

Parent Category: Securities Law

Child Categories:

• Investor Protection
• Regulatory Framework
• Market Manipulation
• SEBI Act, 1992

Parent Category: Securities Contracts (Regulation) Rules, 1957

Child Category: Rule 19A, Securities Contracts (Regulation) Rules, 1957

FAQ

Q: What does the Supreme Court order mean for investors?

A: The Supreme Court order aims to protect investors by ensuring a thorough investigation into the allegations against the Adani Group and by assessing the regulatory framework to prevent future market volatility. This could lead to greater transparency and stricter enforcement of securities laws, which would ultimately benefit investors.

Q: What will the expert committee do?

A: The expert committee will assess the existing regulatory framework, identify any gaps or failures, and recommend measures to strengthen it. This includes suggesting ways to improve investor awareness and ensure compliance with existing regulations.

Q: How does this affect the Adani Group?

A: The Adani Group will be subject to a thorough investigation by SEBI into the allegations of stock manipulation and regulatory violations. The outcome of this investigation could have significant implications for the group’s operations and market standing. The group will also be under scrutiny by the expert committee, who will assess the regulatory framework in relation to the group.