2024 (1) TMI 188 - SC - SEBI

SEBI's regulatory authority upheld in corporate group investigation following short-seller report allegations

The SC upheld SEBI's regulatory authority in investigating allegations against a corporate group following a short-seller report. The Court rejected ... Violation of Rule 19A of the Securities Contracts (Regulation) Rules 1957 - failure to disclose transactions with related parties and other relevant information which concerns related parties to SEBI - Precipitate decline in investor wealth and volatility in the share market due to a fall in the share prices of the Adani Group of Companies. “Adani group” - situation was purportedly caused by a report which was published on 24 January 2023 by an “activist short seller”, Hindenburg Research about the financial transactions of the Adani group. The Hindenburg Report and certain newspaper reports allege that some Foreign Portfolio Investments “FPIs” in Adani group stocks in the Indian stock market are owned by shell companies based outside India, which have close connections with the Adani group. Such investments in Adani stocks allow the Adani group to maintain financial health and artificially boost the value of stocks in the market, in violation of Indian law; Adequacy of SEBI’s investigation - scope of judicial review over SEBI’s regulatory domain - transfer of investigation from SEBI to another agency or to an SIT - Whether SEBI has prime facie conducted a comprehensive investigation? - Allegations of conflict of interest against members of the Expert Committee - petitioner’s case appears to rest solely on inferences from the report by the OCCRP, a third-party organization involved in “investigative reporting”. The petitioners have made no effort to verify the authenticity of the claims. Whether there is no apparent regulatory failure attributable to SEBI? - petitioners have submitted, based on the Hindenburg Report and other newspaper reports, that the FPIs investing in Adani group stocks in the Indian stock market are shell companies outside India owed by the brother of the Chairperson of the Adani group HELD THAT:- In a consistent line of precedent, this Court has held that when technical questions arise particularly in the financial or economic realm; experts with domain knowledge in the field have expressed their views; and such views are duly considered by the expert regulator in designing policies and implementing them in the exercise of its power to frame subordinate legislation, the court ought not to substitute its own view by supplanting the role of the expert. Courts do not act as appellate authorities over policies framed by the statutory regulator and may interfere only when it is found that the actions are arbitrary or violative of constitutional or statutory mandates. The court cannot examine the correctness, suitability, or appropriateness of the policy, particularly when it is framed by a specialized regulatory agency in collaboration with experts. The court cannot interfere merely because in its opinion a better alternative is available. The power of this Court to enter the regulatory domain of SEBI in framing delegated legislation is limited. The court must refrain from substituting its own wisdom over the regulatory policies of SEBI. The scope of judicial review when examining a policy framed by a specialized regulator is to scrutinise whether it violates fundamental rights, any provision of the Constitution, any statutory provision or is manifestly arbitrary. No valid grounds have been raised for this Court to direct SEBI to revoke its amendments to the FPI Regulations and the LODR Regulations which were made in exercise of its delegated legislative power. The procedure followed in arriving at the current shape of the regulations does not suffer from irregularity or illegality. The FPI Regulations and LODR Regulations have been tightened by the amendments in question. SEBI has completed twenty-two out of the twenty-four investigations into the allegations levelled against the Adani group. Noting the assurance given by the Solicitor General on behalf of SEBI we direct SEBI to complete the two pending investigations expeditiously preferably within three months - This Court has not interfered with the outcome of the investigations by SEBI. SEBI should take its investigations to their logical conclusion in accordance with law; The facts of this case do not warrant a transfer of investigation from SEBI. In an appropriate case, this Court does have the power to transfer an investigation being carried out by the authorized agency to an SIT or CBI. Such a power is exercised in extraordinary circumstances when the competent authority portrays a glaring, willful and deliberate inaction in carrying out the investigation. The threshold for the transfer of investigation has not been demonstrated to exist. The reliance placed by the petitioner on the OCCPR report to suggest that SEBI was lackadaisical in conducting the investigation is rejected. A report by a third-party organization without any attempt to verify the authenticity of its allegations cannot be regarded as conclusive proof. Further, the petitioner’s reliance on the letter by the DRI is misconceived as the issue has already been settled by concurrent findings of DRI’s Additional Director General, the CESTAT and this Court; The allegations of conflict of interest against members of the Expert Committee are unsubstantiated and are rejected. The Union Government and SEBI shall constructively consider the suggestions of the Expert Committee in its report detailed in Part F of the judgment. These may be treated as a non-exhaustive list of recommendations and the Government of India and SEBI will peruse the report of the Expert Committee and take any further actions as are necessary to strengthen the regulatory framework, protect investors and ensure the orderly functioning of the securities market and SEBI and the investigative agencies of the Union Government shall 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. Before concluding, we must observe that public interest jurisprudence under Article 32 of the Constitution was expanded by this Court to secure access to justice and provide ordinary citizens with the opportunity to highlight legitimate causes before this Court. It has served as a tool to secure justice and ensure accountability on many occasions, where ordinary citizens have approached the Court with well-researched petitions that highlight a clear cause of action. However, petitions that lack adequate research and rely on unverified and unrelated material tend to, in fact, be counterproductive. This word of caution must be kept in mind by lawyers and members of civil society alike. We are grateful to all the members and the Chairperson of the Expert Committee for their time, efforts, and dedication in preparing their erudite, comprehensive, and detailed report in a time-bound manner. Subject to the consent and availability of the members and Chairperson of the Expert Committee, SEBI and the Government of India may draw upon their expertise and knowledge while taking necessary measures pursuant to the recommendations of the Committee. Issues Involved:1. The scope of judicial review over SEBI's regulatory domain.2. Alleged regulatory failure attributable to SEBI.3. Plea to transfer the investigation from SEBI to another agency or to an SIT.4. Allegations of conflict of interest against members of the Expert Committee.5. Other recommendations by the Expert Committee.Summary:A. Factual Background and SubmissionsA batch of writ petitions filed under Article 32 of the Constitution raised concerns about the decline in investor wealth and market volatility due to a fall in the share prices of the Adani Group, purportedly caused by a report from Hindenburg Research. The petitions sought various forms of investigation and regulatory review.B. The Scope of Judicial Review Over SEBI's Regulatory DomainThe Court emphasized that its power to review SEBI's regulatory policies is limited. Courts should not substitute their own views for those of specialized regulators like SEBI unless the policies violate fundamental rights, constitutional provisions, statutory provisions, or are manifestly arbitrary. The Court upheld SEBI's primacy in adjudicating violations of its regulations and acknowledged SEBI's wide regulatory, administrative, and adjudicatory powers.C. There is No Apparent Regulatory Failure Attributable to SEBIThe petitioners alleged that SEBI's amendments to the FPI Regulations and LODR Regulations amounted to regulatory failure. However, the Court found that SEBI's amendments were aimed at tightening the regulatory framework and that the procedure followed was not tainted with illegality. The Court rejected the petitioners' arguments and upheld SEBI's regulatory actions.D. The Plea to Transfer the Investigation from SEBI to Another Agency or to an SITThe Court stated that the power to transfer an investigation is exercised only in extraordinary situations where there is glaring, willful, and deliberate inaction by the investigating authority. The Court found that SEBI had conducted a comprehensive investigation and that there was no prima facie evidence of deliberate inaction or inadequacy. The reliance on the OCCRP report and the DRI letter was found to be misconceived.E. Allegations of Conflict of Interest Against Members of the Expert CommitteeThe Court found the allegations of conflict of interest against certain members of the Expert Committee to be unsubstantiated and raised belatedly. The Court rejected these allegations, noting that the petitioners did not provide adequate evidence to support their claims.F. Other Recommendations by the Expert CommitteeThe Expert Committee made several recommendations to strengthen the regulatory framework, enhance investor awareness, and ensure compliance. The Court directed SEBI and the Government of India to constructively consider these recommendations and take necessary actions to protect investors and ensure the orderly functioning of the securities market.G. ConclusionThe Court summarized its conclusions, emphasizing the limited scope of judicial review over SEBI's regulatory policies, the adequacy of SEBI's investigation, and the need for SEBI and the Government of India to consider the Expert Committee's recommendations. The petitions were disposed of accordingly, and SEBI was directed to complete the pending investigations expeditiously. The Court also highlighted the importance of well-researched petitions in public interest jurisprudence.