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Case title: Vishal Tiwari vs Union of India & Ors.

Case no.: Writ Petition (C) no. 162 of 2023

Decided on: 03.01.2024

Quorum: Hon’ble Chief Justice of India Dr. D.Y Chandrachud, Hon’ble Justice J.B Pardiwala, Hon’ble Justice Manoj Misra.

FACTS OF THE CASE:

In February 2023, a batch of writ petitions filed before this Court under Article 32 of the Constitution raised concerns about the decline in investor wealth and market volatility caused by a drop in the Adani Group of Companies’ share prices.

Hindenburg Research, a “activist short seller,” allegedly caused the situation by publishing a report on the Adani group’s financial transactions on January 24, 2023. The report alleged, that the Adani group manipulated share prices and failed to disclose transactions with related parties and other relevant information in violation of SEBI regulations and securities legislation.

In WP (C) No.162 of 2023 the petitioner seeks the constitution of a committee monitored by a retired judge of this Court to investigate the Hindenburg Report.

In WP (C) No.201 of 2023, the petitioner claims that the Adani group has “surreptitiously controlled more than 75% of the shares of publicly listed Adani group companies, thereby manipulating the price of its shares in the market,” in violation of Rule 19A of the Securities Contracts (Regulation) Rules, 1957. The petitioner requests that the CBI or a Special Investigation Team conduct a court-monitored investigation into the fraud allegations and the alleged involvement of high-ranking officials of public sector banks and lending organisations.

In WP(Crl.) No. 57 of 2023, the petitioner requests that competent investigative agencies to (i) look into Adani Group transactions under the supervision of a sitting judge of this Court, and (ii) look into the involvement of the State Bank of India and the Life Insurance Corporation of India in these transactions.

In order to safeguard Indian investors from market volatility, the court stated that it was necessary to review and strengthen the financial sector’s current regulatory framework. This Court requested comments from the Solicitor General regarding the suggested formation of an Expert Committee for that reason.

The Court noted that SEBI had already taken over the investigation into the Adani group and ordered SEBI to proceed with the investigation, wrap it up in two months, and submit a status report to the Court.

Additionally, the court mandated the creation of an expert committee. This Court made it clear that SEBI and the Expert Committee would cooperate with one another. To put it another way, the SEBI investigation would continue unabated despite the Committee’s appointment. It is required of the Expert Committee to provide this Court with its report in a period of two months.

After that this Court received the Expert Committee’s report. The Court issued an order on May 17, 2023, granting SEBI an extension until August 14, 2023, for the submission of its investigation status report. Informing this Court of the progress of their twenty-four investigations, SEBI filed an interlocutory application on August 14, 2023. In addition, SEBI filed a status report describing the twenty-four investigations on August 25, 2023. SEBI has responded to the Expert Committee’s report, as has the petitioners’ legal representative.

LEGAL PROVISIONS:

The case is based on the Rule 19A of the Securities Contracts (Regulation) Rules 1957 which mandates a minimum of 25% public shareholding. The petitioners contended that By secretly controlling more than 75% of the shares of publicly listed Adani group companies, thereby manipulating the price of its shares in the market,” the Adani group is in violation of Rule 19A of the Securities Contracts (Regulation) Rules, 1957.

ISSUES RAISED:

Whether it is possible to seek judicial review of SEBI’s regulatory framework?

Whether the court has the power to transfer the investigation from SEBI to another agency or a SIT?

PETITIONERS CONTENTION:

Mr. Prashant Bhushan, appearing on behalf of the petitioner, broadly pressed his case for the following two requests: first, to establish a SIT to oversee the SEBI investigation into the Adani group and to have all such investigations court-monitored; and second, to direct SEBI to revoke certain amendments to the SEBI (Foreign Portfolio Investments) Regulations, 2014 and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015.

The investments by FPIs violate Rule 19A of the Securities Contracts (Regulations) Rules, 1957 which requires a minimum 25% public shareholding in all public-listed companies.

SEBI’sinabilitytoestablishaprimafaciecaseofregulatorynon-compliance and legal violations by the Adani group promoters despite starting an investigation in November 2020, appears to be prima facie self-inflicted. The unprecedented rise in the price of the Adani scrips occurred between January 2021 and December 2022, over a period when the Adani group was already under SEBI investigation.

They alleged that SEBI has wilfully delayed submitting its status report on the Adani group investigation within the time frame specified by this Court.

RESPONDENTS CONTENTION:

The respondents contended that SEBI has completed 22 of the 24 investigations it is currently conducting. In these investigations, enforcement actions/quasi-judicial proceedings would be initiated, where applicable. The delay by SEBI in filing the report is only ten days, which is unintentional and not wilful, given that twenty-four investigations were to be conducted.

They submitted that initially, the FPI Regulations permitted “opaque structures” under certain conditions, including the obligation to disclose beneficial owner information if requested. The subsequent amendment mandated the upfront disclosure of beneficial owners by FPIs. This rendered the disclosure clause redundant, resulting in its omission in 2019. The amendments tightened the regulatory framework by mandating disclosure requirements and eliminating the requirement to disclose only when requested.

COURT ANALYSIS AND JUDGMENNT

The court on judicial review held that the courts do not and cannot act as appellate authorities determining the correctness, suitability, and appropriateness of a policy, nor are courts advisors to expert regulatory agencies on policy matters that they have the authority to formulate. When examining a policy formulated by a specialised regulator, the scope of judicial review is to determine whether it (i) violates citizens’ fundamental rights; (ii) is contrary to Constitutional provisions; (iii) contradicts a statutory provision; or (iv) is manifestly arbitrary. Judicial review focuses on the policy’s legality, rather than its wisdom or soundness.

It held that the statutory regulator should not intervene in the policies that result from technical questions, especially in the fields of economics and finance, when experts in the field have voiced their opinions and the regulator has taken due consideration. As a regulatory, adjudicatory, and prosecutorial body, SEBI’s wide-ranging powers, expertise, and strong information-gathering system give its decisions a great degree of credibility. As such, this Court must be aware of the public interest guiding SEBI’s operations and refrain from imposing its own judgement on SEBI’s decisions.

The court on transfer of investigation has held that the authority to create a SIT or transfer an investigation from a recognised agency to the CBI. These kinds of authority ought to be applied rarely and only in dire situations. Generally speaking, the court will not substitute the authority vested with the investigative power unless it is demonstrated that the authority vested with the investigative power acted blatantly, intentionally, and wilfully ignorant of the facts. In the absence of the authority to transfer, the court may not use such powers unless there is a strong case showing that justice will likely be compromised.

The court also said that the petitioner must provide compelling evidence that the investigating agency was biased or that the investigation was inadequate. Only very rare and extraordinary situations may warrant the transfer of an investigation to an agency like the CBI. Furthermore, since the only thing that can be pleaded for is that the offence be thoroughly investigated, no one can demand that the offence be looked into by a particular agency.

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Written by – Surya Venkata Sujith

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