Editor's Pick: Supreme Court-appointed panel ‘clears’ SEBI in Adani case

A six-member expert committee — constituted by the Supreme Court in the Hindenburg-Adani allegations case and headed by former Supreme Court judge, Justice A.M. Sapre — said that the Securities and Exchange Board of India (SEBI) has “drawn a blank” and is in a “chicken-and-egg situation” in its investigation into the “ownership” of 13 overseas entities, including 12 Foreign Portfolio Investors (FPIs). The panel was set up after U.S.-based investment research firm Hindenburg Research alleged in January that the Adani Group was engaged in brazen stock manipulation and accounting fraud, charges denied by the company. In its 178-page report, the panel said, “SEBI has found 42 contributories to the assets under management of the 13 overseas entities. Various avenues have been pursued — including ED, CBDT and various market regulators in the seven jurisdictions where the contributories are situated. SEBI has drawn a blank”. The market regulator has asked the court for more time to complete its investigation. The foundation of SEBI’s suspicion that led to investigations into the overseas entities’ ownership is that they have “opaque structures”, because the chain of ownership of the 13 entities was not clear. The committee said that SEBI was investigating the ownership of the 13 entities since October 2020, with regard to allegations in the Hindenburg report about minimum public shareholding. “The key issue is whether as the law stands, one could draw a conclusion that the FPIs are fronts for the promoters of the Adani Group... If such an outcome in the investigation would come about, it would mean that the promoters would not be compliant with the minimum public shareholding requirement,” it noted. While it emphasised the need for a “coherent enforcement policy”, the panel concluded it would not be possible to return a finding of “regulatory failure” in compliance with stipulations governing minimum public shareholding. The Justice Sapre Committee said that the conundrum faced by the market regulator was due to a change in the legislative policy of SEBI under the FPI Regulations 2014 on the basis of a recommendation by a Working Group in 2018. As the law stands, FPIs need to only declare their “beneficial owner”, and not the “last natural person above every person owning economic interest in the FPI”, in conformation with the anti-money laundering law. In 2018, the very provision dealing with ‘opaque structure’ and requiring an FPI to be able to disclose every ultimate natural person at the end of the chain of every owner of economic interest in the FPI was done away with,” the report observed. It said that for the SEBI to put to rest its suspicions, its investigation would require information about the “ultimate economic ownership” — and not just the “beneficial owners” — of the 13 overseas entities under its lens. The Supreme Court has given SEBI time till August 14 to complete the inquiry against the Adani Group. On the issue of price manipulations, the report said that in the case of Adani stocks, 849 alerts were generated by the trading system. These alerts were considered by the stock exchanges in four reports to SEBI. Two of these reports were well before the Hindenburg report and two were after January 24, 2023. However, no pattern of “artificial trading or wash trades” were found. The report agreed that there was “certainly high volatility in the Adani stocks after publication of the Hindenburg report”. “The market’s expectations from, and confidence in the Adani Group was shaken by the allegations in the Hindenburg report, which was inferential,” the report said. The Opposition Congress said efforts to spin findings of the expert panel as a clean chit for the Adani Group are “bogus.” An editorial in The Hindu when the panel was announced had pointed out that “it is doubtful if the committee can avoid going into the charges on its own before it can confirm or rule out regulatory failure.” The Court’s focus, it said, “should be on SEBI’s conduct and independent functioning, preserving which alone can protect investors from market manipulators.” Was this newsletter forwarded to you? Head over to our newsletter subscription page to sign up for Editor’s Pick and more. Click here. The Hindu’s Editorials A change for the better: On the shifting of Kiren Rijiju from the Law Ministry Among the elite: On India at the G-7 summit The Hindu’s Daily News Quiz How many members can the new Parliament building seat in its Lok Sabha chambers? 300 543 250 888 To know the answer and to play the full quiz, click here. [logo] Editor's Pick 20 May 2023 [The Hindu logo] In the Editor's Pick newsletter, The Hindu explains why a story was important enough to be carried on the front page of today's edition of our newspaper. [Arrow]( [Open in browser]( [Mail icon]( [More newsletters]( Adani case: Supreme Court-appointed panel ‘clears’ SEBI A [six-member expert committee]( — constituted by the Supreme Court in the Hindenburg-Adani allegations case and headed by former Supreme Court judge, Justice A.M. Sapre — said that the Securities and Exchange Board of India (SEBI) has “drawn a blank” and is in a “chicken-and-egg situation” in its investigation into the “ownership” of 13 overseas entities, including 12 Foreign Portfolio Investors (FPIs). The panel was set up after U.S.-based investment research firm Hindenburg Research alleged in January that the Adani Group was engaged in [brazen stock manipulation and accounting fraud]( charges denied by the company. In its 178-page report, the panel said, “SEBI has found 42 contributories to the assets under management of the 13 overseas entities. Various avenues have been pursued — including ED, CBDT and various market regulators in the seven jurisdictions where the contributories are situated. SEBI has drawn a blank”. The market regulator has asked the court for more time to complete its investigation. The foundation of SEBI’s suspicion that led to investigations into the overseas entities’ ownership is that they have “opaque structures”, because the chain of ownership of the 13 entities was not clear. The committee said that SEBI was investigating the ownership of the 13 entities since October 2020, with regard to allegations in the Hindenburg report about minimum public shareholding. “The key issue is whether as the law stands, one could draw a conclusion that the FPIs are fronts for the promoters of the Adani Group... If such an outcome in the investigation would come about, it would mean that the promoters would not be compliant with the minimum public shareholding requirement,” it noted. While it emphasised the need for a “coherent enforcement policy”, the panel concluded it would not be possible to return a finding of “regulatory failure” in compliance with stipulations governing minimum public shareholding. The Justice Sapre Committee said that the conundrum faced by the market regulator was due to a change in the legislative policy of SEBI under the FPI Regulations 2014 on the basis of a recommendation by a Working Group in 2018. As the law stands, FPIs need to only declare their “beneficial owner”, and not the “last natural person above every person owning economic interest in the FPI”, in conformation with the anti-money laundering law. In 2018, the very provision dealing with ‘opaque structure’ and requiring an FPI to be able to disclose every ultimate natural person at the end of the chain of every owner of economic interest in the FPI was done away with,” the report observed. It said that for the SEBI to put to rest its suspicions, its investigation would require information about the “ultimate economic ownership” — and not just the “beneficial owners” — of the 13 overseas entities under its lens.   The Supreme Court has given SEBI time [till August 14]( to complete the inquiry against the Adani Group. On the issue of price manipulations, the report said that in the case of Adani stocks, 849 alerts were generated by the trading system. These alerts were considered by the stock exchanges in four reports to SEBI. Two of these reports were well before the Hindenburg report and two were after January 24, 2023. However, no pattern of “artificial trading or wash trades” were found. The report agreed that there was “certainly high volatility in the Adani stocks after publication of the Hindenburg report”. “The market’s expectations from, and confidence in the Adani Group was shaken by the allegations in the Hindenburg report, which was inferential,” the report said. The [Opposition Congress said]( to spin findings of the expert panel as a clean chit for the Adani Group are “bogus.” An [editorial]( in The Hindu when the panel was announced had pointed out that “it is doubtful if the committee can avoid going into the charges on its own before it can confirm or rule out regulatory failure.” The Court’s focus, it said, “should be on SEBI’s conduct and independent functioning, preserving which alone can protect investors from market manipulators.” Was this newsletter forwarded to you? Head over to our newsletter subscription page to sign up for Editor’s Pick and more. [Click here](. 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