The SC directed the (SEBI) and the Union government’s investigative agencies to look into whether the loss suffered by Indian investors as a result of the Hindenburg research and any other entities taking short positions violated the law.
Case Title: Vishal Tiwari v. Union of India
Case No: W.P.(C) No. 162/2023
Decided on: 3rd January 2024
CORAM: DY Chandrachud, Chief Justice of India, Justices JB Pardiwala and Justice Manoj Misra.
Facts of the Case
In WP(C) No. 162 of 2023, a petitioner expressed concerns over a significant decline in the securities market, highlighting the adverse impact on investors and raising questions about the disbursement of loans to the Adani group without proper procedures. Another petitioner in WP(C) No. 201 of 2023 alleged that the Adani group violated Rule 19A of the Securities Contracts (Regulation) Rules, 1957, by surreptitiously controlling over 75% of publicly listed Adani group companies’ shares, thereby manipulating stock prices. Additional petitions (WP(Crl.) No. 57 of 2023 and WP(Crl.) No. 39 of 2023) sought investigations into Adani group transactions, particularly involving the role of the Life Insurance Corporation of India, the State Bank of India, and accusations against Mr. Nathan Anderson, the founder of Hindenburg Research, for short-selling.
Following a hearing on February 10, 2023, the court acknowledged the need to review regulatory mechanisms in the financial sector to protect Indian investors from market volatility. On March 2, 2023, the court ordered SEBI to continue its investigation, appointed an Expert Committee chaired by Justice Abhay Manohar Sapre, and directed SEBI to conclude its investigation within two months. The Expert Committee was tasked with providing an overall assessment of the situation, suggesting measures to strengthen investor awareness, investigating regulatory failures, and proposing ways to strengthen the statutory and regulatory framework. In a subsequent hearing on November 24, 2023, the petitioner sought the constitution of an SIT to oversee the SEBI investigation and the revocation of certain amendments to SEBI regulations, while SEBI maintained that it was diligently conducting investigations and taking necessary steps in line with the Expert Committee’s recommendations.
Legal Provisions
Multiple writ petitions have been filed in the current case, jointly contesting various facets of the Adani group’s alleged securities market breaches. Rule 19A of the Securities Contracts (Regulation) Rules, 1957, which handles the minimum public ownership requirement for publicly traded businesses, is one of the key legislative issues under review. According to the petitioners, the Adani group has secretly held more than 75% of the shares of publicly traded firms, in violation of Rule 19A and influencing stock prices. Furthermore, the lawsuit includes the Securities and Exchange Board of India (SEBI) Act, which gives SEBI the authority to supervise and probe securities market activity.
The court has instructed SEBI to investigate numerous allegations cited in the petitions, such as Rule 19A breaches, failure to report transactions with linked parties, and suspected stock price manipulation. In addition, the legal processes include the formation of an Expert Committee, led by a retired judge, to examine the issue, raise investor awareness, investigate regulatory shortcomings, and recommend actions to improve the statutory and regulatory framework for investor protection. The court-monitored inquiry and coordination between the Expert Committee and SEBI illustrate the legal complexities surrounding Indian investor protection and securities market regulation.
Issues
The legal problems in the present case concentrate upon charges of financial misconduct and market manipulation in the securities market by the Adani group. The petitioners express concerns in several writ petitions concerning the sharp drop in the stock market, the alleged breach of regulatory regulations by the Adani group, loan distribution without appropriate procedure, and alleged fraud involving high executives of public sector banks. The court addressed these concerns by asking the Securities and Exchange Board of India (SEBI) to conduct investigations into the alleged violations, with a particular emphasis on matters such as rule violations, failure to report transactions, and stock price manipulation.
Another critical issue is the petitioner’s request for the formation of a Special inquiry Team (SIT) to monitor the SEBI inquiry and the annulment of various regulatory adjustments made by SEBI, notably in the context of FPIs and listing responsibilities. The legal concerns entail interpreting and implementing securities legislation, judging the legitimacy of claims against the Adani group, determining the sufficiency of SEBI’s activities, and considering if further monitoring tools, such as a SIT, are required. In the context of complicated financial transactions and market dynamics, the case emphasises the larger legal issues of maintaining the integrity of financial markets, protecting investors, and providing effective regulatory control.
Courts analysis and decision
The Bench noted that Hindenburg Research acknowledged to having a short position in the Adani group using US-traded bonds and non-Indian traded derivative instruments. Taking into account SEBI’s contention that short selling is a desirable and necessary feature, recognised as legitimate investment activity by securities market regulators in most countries, and the further assertion that the International Organisation of Securities Commission recommends regulation of short selling but not its prohibition, the Bench recorded the Solicitor General of India’s statement that measures to regulate short selling will be considered by the Union.
The court stated that “the loss sustained by Indian investors as a result of the volatility caused by Hindenburg Research’s short positions and any other entities acting in concert with Hindenburg Research should be investigated.” The Bench stated, “In an appropriate case, this court does have the power to transfer an investigation being conducted by an authorised agency to a SIT or the CBI.” Such a power is employed only in exceptional situations, such as when the responsible authority exhibits blatant, intentional, and purposeful inactivity in carrying out the inquiry. The existence of a threshold for the transfer of investigation has not been shown.”
It was determined that the facts of the case did not justify the transfer of investigations from SEBI.
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Written by- Aastha Ganesh Tiwari