Supreme Court Upholds SEBI’s Regulatory Authority in Adani Group Case (2024)

Date of the Judgment: 3 January 2024
Citation: 2024 INSC 3
Judges: Dr Dhananjaya Y Chandrachud, CJI, J B Pardiwala, J, Manoj Misra, J
Can the Supreme Court interfere with the regulatory decisions of SEBI? The Supreme Court of India recently addressed this question in a batch of writ petitions concerning the Adani Group, focusing on the extent of judicial review over SEBI’s regulatory actions and the allegations of regulatory failure. The Court examined the powers of SEBI as a market regulator and the limits of judicial intervention in its domain. The judgment was delivered by a three-judge bench comprising Chief Justice of India Dr Dhananjaya Y Chandrachud, Justice J B Pardiwala, and Justice Manoj Misra, with the majority opinion authored by Chief Justice Dr Dhananjaya Y Chandrachud.

Case Background

In February 2023, a series of writ petitions were filed in the Supreme Court of India, raising concerns about the dramatic decline in investor wealth and market volatility following a report by Hindenburg Research on January 24, 2023. The Hindenburg report alleged that the Adani Group had manipulated its share prices and failed to disclose related-party transactions, violating SEBI regulations and securities laws. The report also mentioned that Hindenburg Research had taken a short position in Adani Group’s bonds and derivatives.

The petitioners sought various reliefs, including the constitution of a committee to investigate the Hindenburg report, a court-monitored investigation by a Special Investigation Team (SIT) or the Central Bureau of Investigation (CBI), and directions to investigate the role of public sector banks and institutions in the Adani Group’s transactions. One petitioner also sought the registration of an FIR against Nathan Anderson, the founder of Hindenburg Research, for short-selling and directions to recover profits from short-selling to compensate investors.

Timeline

Course of Proceedings

On February 10, 2023, the Supreme Court acknowledged the need to strengthen existing regulatory mechanisms in the financial sector to protect Indian investors from market volatility. The court sought inputs from the Solicitor General regarding the potential constitution of an Expert Committee. On March 2, 2023, the Court directed SEBI to investigate the Adani Group, focusing on potential violations of Rule 19A of the Securities Contracts (Regulation) Rules, 1957, failure to disclose related-party transactions, and stock price manipulation. The Court also constituted an Expert Committee chaired by Justice Abhay Manohar Sapre, a former judge of the Supreme Court, to provide an overall assessment of the situation and suggest measures to strengthen investor awareness and the regulatory framework. The Expert Committee was directed to furnish its report within two months.

The Supreme Court clarified that the Expert Committee and SEBI would work in collaboration, and the constitution of the committee would not affect SEBI’s ongoing investigation. On May 6, 2023, the Expert Committee submitted its report, and the Court directed copies to be made available to the parties. SEBI was granted an extension until August 14, 2023, to submit its status report. SEBI filed its status report on August 25, 2023, detailing the twenty-four investigations undertaken.

Legal Framework

The judgment discusses the legal framework governing the securities market in India, primarily the Securities and Exchange Board of India Act, 1992 (SEBI Act), the Securities Contracts (Regulation) Act, 1956 (SCRA), and the Depositories Act, 1996. The SEBI Act empowers SEBI to regulate the securities market, protect investor interests, and promote market development. Section 11 of the SEBI Act outlines the functions of SEBI, emphasizing its duty to protect investors and regulate the market. Section 30 of the SEBI Act empowers SEBI to make regulations consistent with the Act.

The judgment also refers to Rule 19A of the Securities Contracts (Regulation) Rules, 1957, which mandates a minimum 25% public shareholding in all public-listed companies. Additionally, the SEBI (Foreign Portfolio Investments) Regulations, 2014 (FPI Regulations) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations) are discussed in relation to disclosure requirements and related-party transactions.

The Prevention of Money Laundering Act, 2002 (PMLA) and the Prevention of Money Laundering Maintenance of Records Rules, 2004, are also mentioned in the context of beneficial ownership disclosure requirements for FPIs.

Arguments

Arguments by the Petitioners:

• ✓ The petitioners argued that certain Foreign Portfolio Investments (FPIs) in Adani group stocks are owned by shell companies with close ties to the Adani group, violating Indian law and artificially inflating stock values.
• ✓ They contended that these investments violate Rule 19A of the Securities Contracts (Regulation) Rules, 1957, which requires a minimum 25% public shareholding.
• ✓ The petitioners cited reports from the Organized Crime and Corruption Reporting Project (OCCRP) and a letter from the Directorate of Revenue Intelligence (DRI), alleging price manipulation and inaction by SEBI.
• ✓ They argued that SEBI’s amendments to the FPI Regulations and LODR Regulations have weakened regulatory oversight, making it difficult to investigate price manipulation and insider trading.
• ✓ The petitioners claimed that SEBI has delayed its investigation and that some members of the Expert Committee had conflicts of interest.

Arguments by SEBI:

• ✓ SEBI stated that twenty-two out of twenty-four investigations are complete, and enforcement actions would be initiated where applicable.
• ✓ SEBI clarified that the delay in filing the report was unintentional and due to the extensive nature of the investigations.
• ✓ SEBI argued that the market has shown resilience and that the Adani Group’s issues did not have a significant systemic impact.
• ✓ SEBI dismissed the DRI letter, stating that the allegations of overvaluation were found to be incorrect by the DRI and upheld by the CESTAT and the Supreme Court.
• ✓ SEBI clarified that the amendments to the FPI Regulations have tightened disclosure requirements, not weakened them, by making upfront disclosure mandatory.
• ✓ SEBI contended that the OCCRP report lacked documentary support and concealed important facts.

The petitioners argued that the amendments to the LODR Regulations have facilitated the mischief or contravention with regard to related party transactions by the Adani group. This, as the petitioner argues, is because the series of amendments have made it difficult to establish contravention of law by first opening a loophole and then plugging the loophole with deferred effect. The petitioner has also argued that while initially the director, their relative, or a relative of a key managerial person was considered a related party, the amendments have changed this position to hold that a person/entity be deemed ‘related party’ only if the shareholding of that person/entity is at least 20%.

[TABLE] of Submissions:

Innovativeness of the Argument: The petitioners innovatively argued that SEBI’s amendments to regulations, intended to enhance transparency, were actually loopholes that facilitated related party transactions, which was a novel approach to challenge SEBI’s regulatory actions.

Issues Framed by the Supreme Court

The Supreme Court framed the following key issues for consideration:

1. What is the scope of judicial review over SEBI’s regulatory domain?
2. Has there been any regulatory failure attributable to SEBI?
3. Is there a need to transfer the investigation from SEBI to another agency or to an SIT?
4. Are the allegations of conflict of interest against members of the Expert Committee valid?
5. What are the other recommendations of the Expert Committee?

Treatment of the Issue by the Court

The following table demonstrates as to how the Court decided the issues

Authorities

Cases Relied Upon by the Court:

• ✓ IFB Agro Industries Ltd v. SICGIL India Ltd, (2023) 4 SCC 209, Supreme Court of India: This case examined the role of independent regulatory bodies like SEBI and upheld SEBI’s primacy in adjudicating violations of its regulations.
• ✓ Prakash Gupta v. SEBI, 2021 SCC OnLine SC 485, Supreme Court of India: This case emphasized that courts should be mindful of the public interest guiding SEBI and refrain from substituting their wisdom over SEBI’s actions.
• ✓ Himanshu Kumar v. State of Chhattisgarh, 2022 SCC OnLine SC 884, Supreme Court of India: This case reiterated that the power to transfer an investigation to agencies like the CBI must be invoked only in rare and exceptional cases.
• ✓ K.V. Rajendran v. Superintendent of Police CBCID South Zone, Chennai, (2013) 12 SCC 480, Supreme Court of India: This case established that courts can transfer investigations only in rare and exceptional cases.
• ✓ CBI v. Rajesh Gandhi, 1997 Cri LJ 63, Supreme Court of India: This case held that no one can insist that an offense be investigated by a particular agency.

Legal Provisions Considered by the Court:

• ✓ Section 11, SEBI Act, 1992: This section outlines the functions of SEBI, including the protection of investor interests and regulation of the securities market.
• ✓ Section 30, SEBI Act, 1992: This section empowers SEBI to make regulations consistent with the Act.
• ✓ Rule 19A, Securities Contracts (Regulation) Rules, 1957: This rule mandates a minimum 25% public shareholding in all public-listed companies.
• ✓ SEBI (Foreign Portfolio Investments) Regulations, 2014: These regulations govern foreign portfolio investments in India.
• ✓ SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015: These regulations govern the listing and disclosure requirements for listed entities.
• ✓ Prevention of Money Laundering Act, 2002 (PMLA): This act deals with money laundering and related issues.
• ✓ Rule 9, Prevention of Money Laundering Maintenance of Records Rules, 2004: This rule specifies the requirements for declaring beneficial owners.

[TABLE] of Authorities:

Judgment

How each submission made by the Parties was treated by the Court?

How each authority was viewed by the Court?

• ✓ IFB Agro Industries Ltd v. SICGIL India Ltd, (2023) 4 SCC 209*: The Court followed this authority to emphasize the primacy of SEBI as a regulatory body and its role in adjudicating violations of its regulations.
• ✓ Prakash Gupta v. SEBI, 2021 SCC OnLine SC 485*: The Court relied on this case to highlight that courts should be mindful of the public interest that guides SEBI and should refrain from substituting its own wisdom over the actions of SEBI.
• ✓ Himanshu Kumar v. State of Chhattisgarh, 2022 SCC OnLine SC 884*: The Court followed this authority to reiterate that the power to transfer an investigation to agencies like the CBI must be invoked only in rare and exceptional cases.
• ✓ K.V. Rajendran v. Superintendent of Police CBCID South Zone, Chennai, (2013) 12 SCC 480*: This authority was followed to establish that courts can transfer investigations only in rare and exceptional cases.
• ✓ CBI v. Rajesh Gandhi, 1997 Cri LJ 63*: The Court used this case to support the view that no one can insist that an offense be investigated by a particular agency.

The Court upheld SEBI’s regulatory authority, stating that judicial review is limited and courts should not interfere with expert regulatory bodies unless there is a violation of fundamental rights, the Constitution, or statutory provisions. The Court found no regulatory failure by SEBI, noting that the amendments to regulations were within its powers and did not dilute the regulatory framework. The Court also rejected the plea to transfer the investigation, finding that SEBI had conducted a comprehensive investigation and there was no evidence of bias or inadequacy. The allegations of conflict of interest against the Expert Committee members were also dismissed as unsubstantiated and belated. The Court directed the Government of India and SEBI to consider the Expert Committee’s recommendations constructively.

What weighed in the mind of the Court?

The Supreme Court’s decision was influenced by a combination of factors, with a strong emphasis on upholding the authority of expert regulatory bodies like SEBI. The Court was mindful of not substituting its own wisdom for that of the regulator unless there was a clear violation of established legal principles. The Court’s reasoning was also guided by the need to maintain public confidence in the regulatory framework and to ensure that interventions are based on concrete evidence rather than unsubstantiated claims.

Sentiment Analysis of Reasons Given by the Supreme Court:

Fact:Law Ratio:

The Court’s decision was heavily influenced by legal considerations, particularly the principles of limited judicial review over expert regulatory bodies and the need for concrete evidence to support allegations of regulatory failure or bias. While factual aspects were considered, the legal framework and precedents played a more significant role in the Court’s reasoning.

Logical Reasoning:

The Court considered alternative interpretations but rejected them due to a lack of concrete evidence and the established legal principles governing judicial review and regulatory authority. The final decision was reached by applying these principles to the specific facts of the case, emphasizing the need for evidence-based interventions and upholding the integrity of regulatory bodies.

The Court’s reasoning was based on the following factors:

• ✓ Limited scope of judicial review over expert regulatory bodies like SEBI.
• ✓ Absence of concrete evidence of regulatory failure or bias by SEBI.
• ✓ SEBI’s comprehensive investigation and adherence to procedures.
• ✓ Unsubstantiated and belated allegations against the Expert Committee.
• ✓ Need for a constructive approach to the Expert Committee’s recommendations.

The Court quoted the following from the judgment:

“Courts do not and cannot act as appellate authorities examining the correctness, suitability, and appropriateness of a policy, nor are courts advisors to expert regulatory agencies on matters of policy which they are entitled to formulate.”

“The scope of judicial review, when examining a policy framed by a specialized regulator, is to scrutinize whether it (i) violates the fundamental rights of the citizens; (ii) is contrary to the provisions of the Constitution; (iii) is opposed to a statutory provision; or (iv) is manifestly arbitrary. The legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review.”

“This Court must be mindful of the public interest that guides the functioning of SEBI and refrain from substituting its own wisdom in place of the actions of SEBI.”

There were no dissenting opinions in this case. The judgment was delivered by a three-judge bench, with Chief Justice Dr Dhananjaya Y Chandrachud authoring the majority opinion.

Key Takeaways

• ✓ The Supreme Court has reaffirmed the limited scope of judicial review over regulatory bodies like SEBI, emphasizing that courts should not substitute their wisdom for that of expert regulators.
• ✓ The judgment highlights the importance of evidence-based interventions and the need for concrete proof to challenge regulatory actions.
• ✓ SEBI’s regulatory framework and its amendments were upheld, indicating that the regulator has the authority to make necessary changes to ensure market stability and investor protection.
• ✓ The Court’s decision reinforces the principle that investigations should be conducted by the authorized agency unless there is clear evidence of bias or inadequacy.
• ✓ The judgment underscores the need for constructive engagement with expert recommendations and a proactive approach to strengthen regulatory frameworks.
• ✓ The Supreme Court has directed SEBI and the investigative agencies of the Union Government to 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.

The judgment is likely to have a significant impacton future cases involving regulatory authorities and market manipulation. It sets a precedent for limited judicial intervention in regulatory matters and emphasizes the need for robust evidence to challenge regulatory actions. The decision also underscores the importance of maintaining public confidence in regulatory bodies and ensuring that interventions are based on sound legal principles and factual accuracy. The judgment also indicates that the Courts are not to be used as a forum for settling business rivalries. The judgment also highlights the responsibility of the media to report responsibly and not to create panic among investors. The judgment also highlights the importance of investor awareness and education. The judgment also emphasizes the need for a strong regulatory framework to protect investors from market volatility. The judgment also underscores the need for a proactive approach to strengthen regulatory frameworks.

Potential Future Impacts

Impact on Securities Law and Regulatory Practices:

• ✓ Strengthened Regulatory Authority: The judgment is likely to strengthen the authority of SEBI and other regulatory bodies, making it more difficult to challenge their decisions in court.
• ✓ Emphasis on Evidence-Based Challenges: Future challenges to regulatory actions will need to be backed by concrete evidence of regulatory failure or bias, rather than mere allegations.
• ✓ Limited Judicial Intervention: Courts are likely to be more cautious in interfering with the decisions of expert regulatory bodies, focusing on legal violations rather than policy decisions.
• ✓ Enhanced Investor Protection: The judgment underscores the need for proactive measures to protect investors, including strengthening regulatory frameworks and enhancing investor awareness.
• ✓ Increased Scrutiny of FPIs: The judgment may lead to increased scrutiny of Foreign Portfolio Investments to ensure compliance with regulatory requirements and prevent market manipulation.
• ✓ Greater Accountability of Media: The judgment may lead to greater accountability of media in reporting on market sensitive information.

Potential for Future Litigation:

• ✓ FPI Compliance: There may be future litigation related to the compliance of Foreign Portfolio Investments with disclosure requirements and related-party transaction rules.
• ✓ Regulatory Amendments: Future amendments to regulations by SEBI may be challenged if they are perceived as weakening investor protection or facilitating market manipulation.
• ✓ Market Manipulation Cases: The judgment may not stop future cases of market manipulation from being litigated, but it will set a higher bar for proving regulatory failure and bias.
• ✓ Investor Grievances: Investors may continue to seek legal recourse for losses suffered due to market volatility or alleged regulatory failures, but the judgment will guide the courts in their approach.

Impact on Business and Finance:

• ✓ Increased Regulatory Compliance: Businesses and financial institutions may need to increase their focus on regulatory compliance to avoid potential legal challenges.
• ✓ Greater Transparency: The judgment may lead to greater transparency in financial transactions and disclosures, particularly for related-party transactions and foreign investments.
• ✓ Investor Confidence: The judgment may help restore investor confidence in the Indian securities market by reinforcing the regulatory framework and its ability to protect investors.
• ✓ Market Stability: The judgment may contribute to greater market stability by emphasizing the need for a strong regulatory framework and responsible market behavior.