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2024 (1) TMI 188
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.... ii. SEBI has prime facie conducted a comprehensive investigation ...... 25 iii. Reliance on the OCCRP report and the letter by DRI is misconceived 28 E. Allegations of conflict of interest against members of the Expert Committee .......................................................................................................... 30 F. Other recommendations by the Expert Committee ................................. 32 i. Volatility and short selling ...................................................................... 32 ii. Investor Awareness ................................................................................. 36 iii. Recommendations of the Expert Committee to strengthen regulatory framework and secure compliance to protect investors ............................ 39 G. Conclusion .................................................................................................. 43 1. A batch of writ petitions filed before this Court under Article 32 of the Constitution in February 2023, raised concerns over the precipitate decline in investor wealth and volatility in the share market due to a fall in the share ....
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....n the batch came up for hearing on 10 February 2023, this Court noted that there was a need to review the existing regulatory mechanisms in the financial sector to ensure that they are strengthened with a view to protect Indian investors from market volatility. This Court sought inputs from the Solicitor General on the proposed constitution of an Expert Committee for the purpose. This Court observed: "4 We have suggested to the Solicitor General that he may seek instructions on whether the Government of India would facilitate the constitution of an expert committee for an overall assessment of the situation, and if so, to place its suggestions on the constitution and remit of the committee on the next date. Meantime the Solicitor General shall place on the record a brief note on factual and legal aspects so as to further the deliberations during the course of the next hearing." 4. The batch of cases came up for hearing on 17 February 2023. This Court heard detailed submissions on behalf of the parties and reserved further orders. In its order dated 2 March 2023, this Court took note of the loss of investor wealth in the aftermath of the report by Hindenburg Research and....
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....mittee (constituted in paragraph 14 of this order) of the action that it has taken in furtherance of the directions of this Court as well as the steps that it has taken in furtherance of its ongoing investigation. The constitution of the expert committee does not divest SEBI of its powers or responsibilities in continuing with its investigation into the recent volatility in the securities market." 6. On 6 May 2023, in compliance with the above interim order, the Expert Committee submitted its report to this Court. In its order dated 17 May 2023, this Court directed that copies of the report shall be made available to the parties and their counsel to enable them to assist the Court in the course of further deliberations. This Court also granted SEBI an extension of time till 14 August 2023 to submit its status report about its investigation. 7. SEBI filed an interlocutory application on 14 August 2023 intimating this Court about the status of the twenty-four investigations which were undertaken by them. Further, SEBI submitted a status report dated 25 August 2023 providing details about the twenty-four investigations. Both SEBI and the counsel for the petitioners have also fil....
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....anipulation and insider trading. SEBI has tied its own hands; f. SEBI must be directed to revoke the amendment made to its LODR Regulations which have altered the definition of "related party"; g. SEBI's inability to establish a prima facie case of regulatory non-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; h. A few members of the Expert Committee may have a conflict of interest and there is a likelihood of bias, which was not brought to the notice of the Court by the concerned members; and i. SEBI has willfully delayed the submission of its status report on the investigation into the Adani group within the time granted by this Court. 10. On the other hand, the learned Solicitor General, appearing on behalf of SEBI made the following submissions: a. Twenty-two out of twenty-four investigations being conducted by SEBI are complete. In these investig....
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.... as SEBI must be delineated. 12. SEBI was established as India's principal capital markets regulator with the aim to protect the interest of investors in securities and promote the development and regulation of the securities market in India. SEBI is empowered to regulate the securities market in India by the SEBI Act 1992, the SCRA and the Depositories Act 1996. SEBI's powers to regulate the securities market are wide and include delegated legislative, administrative, and adjudicatory powers to enforce SEBI's regulations. SEBI exercises its delegated legislative power by inter alia framing regulations and appropriately amending them to keep up with the dynamic nature of the securities' market. SEBI has issued a number of regulations on various areas of security regulation which form the backbone of the framework governing the securities market in India. 13. Section 11 of the SEBI Act lays down the functions of SEBI and expressly states that it "shall be the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit". Further, Section 30 of the SEBI Act empow....
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....rted aim to enforce order in the securities market and promote its healthy growth while protecting investor wealth. Insofar as its administrative/executive power goes, it has the power to regulate the business of stock exchanges and securities market. The Board provides for the registration and regulation of stock brokers, share transfer agents, depositories, venture capital funds, collective investment schemes, etc. It also has the power to prohibit various transactions which interfere with the health of the securities market. 34. In the exercise of its adjudicatory powers under Section 15-I, SEBI has the power to appoint officers for holding an inquiry, give a reasonable opportunity to the person concerned and determine if there is any transgression of the Rules prescribed. The Board has the power to impose penalties for violations and also restitute the parties. The adjudicatory power also includes the power to settle administrative and civil proceedings under Section 15-JB of the SEBI Act. 35. The regulatory jurisdiction of the Board also includes ex-ante powers to predict a possible violation and take preventive measures. The exercise of ex-ante jurisdiction ....
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.... regulatory and adjudicatory powers, coupled with its expertise and information gathering mechanisms, imprints its decisions with a degree of credibility. The powers of the SAT and the Court would necessarily have to align with SEBI's larger existential purpose." 17. From the above exposition of law, the following principles emerge: a. 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; b. 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; c. When technical questions arise - particularly in the domain of economic or financial matters - and experts in the field have expressed their views and such views are duly....
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....by natural persons of the FPI under the provisions concerning "opaque structures" in ownership of FPIs. The declaration of the "ultimate beneficial owner" under SEBI Regulations was required to conform to the disclosure of "beneficial owner" under the Prevention of Money Laundering Act, 2002 PMLA and thereby under Rule 9 of the Prevention of Money Laundering Maintenance of Records Rules, 2004. These requirements were amended by SEBI in 2018 and 2019 by removing the requirement of disclosing ownership of the FPIs by a natural person. The petitioner submits that this amounts to a regulatory failure on the part of SEBI. 21. The petitioner further argues that the LODR Regulations, 2015 defined a "related party transaction" in Regulation 2(1)(zb) as a transaction involving a transfer of resources between a listed entity and a "related party", regardless of whether a price is charged. The term "related party", in Regulation 2(1)(zc) had the same meaning that is ascribed to "related party" under Section 2(76) of the Companies Act, 2013. Based on a report of the Committee on Corporate Governance dated 5 October 2017 the definition was amended on 1 April 2019 to provide that any person o....
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....travention of a regulation to the Adani group. 24. In essence, the petitioners have argued that the amendments to the two regulations amount to regulatory failure on the part of SEBI and have accordingly prayed that SEBI be directed to revoke the amendments to the FPI Regulations and LODR Regulations or make suitable changes. It may be pointed out that these arguments and prayers were not present in the initial petitions. They have only propped after the report of the Expert Committee dated 6 May 2023. The Report stated that in view of the amendments to the regulations, it cannot return a finding of regulatory failure by SEBI. Thereafter, the petitioners have made arguments to belie the finding of the Expert Committee Report. 25. SEBI in its affidavit dated 10 July 2023 has submitted that the entire rouse around regulatory failure caused by amendments to FPI Regulations and LODR Regulations was initiated because of SEBI's submissions before the Expert Committee in the context of challenges faced in obtaining information regarding holders of economic interest. SEBI had used the term "opaque" to describe the FPIs which it submits was mistaken by the Expert Committee to imply th....
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....ve not challenged the vires of the Regulations but have contended that there is regulatory failure based on SEBI's alleged inability to investigate which is attributed to changes in the regulations. Such a ground is unknown to this Court's jurisprudence. In effect, this Court is being asked to replace the powers given to SEBI by Parliament as a delegate of the legislature with the petitioners' better judgment. The critique of the regulations made as an afterthought and based on a value judgment of economic policy is impermissible. Additionally, we find no merit in the argument that the FPI Regulations, 2014 have been diluted to facilitate mischief. The amendments far from diluting, have tightened the regulatory framework by making the disclosure requirements mandatory and removing the requirement of it being disclosed only when sought. The disclosure requirement therefore is now at par with PMLA. 29. We do not see any valid grounds raised for this Court to interfere by directing SEBI to revoke its amendments to regulations which were made in the exercise of its legislative power. A regulation may be subject to judicial review based on it being ultra vires the parent legislation ....
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....he CBI must be invoked only in rare and exceptional cases. Further, no person can insist that the offence be investigated by a specific agency since the plea can only be that the offence be investigated properly. The Court held as follows: "49. Elaborating on this principle, this Court further observed: "17. ... the Court could exercise its constitutional powers for transferring an investigation from the State investigating agency to any other independent investigating agency like CBI only in rare and exceptional cases. Such as where high officials of State authorities are involved, or the accusation itself is against the top officials of the investigating agency thereby allowing them to influence the investigation, and further that it is so necessary to do justice and to instil confidence in the investigation or where the investigation is prima facie found to be tainted/biased." 50. The Court reiterated that an investigation may be transferred to the CBI only in "rare and exceptional cases". One factor that courts may consider is that such transfer is "imperative" to retain "public confidence in the impartial working of the State agencies." This observat....
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....9A of Securities Contracts (Regulation) Rules, 1957 1 2 Alleged manipulation of stock prices in contravention of existing laws 2 3 Alleged related Party Transactions (RPT)-Failure to disclose transactions with Related Parties and other relevant information 13 4 Other Issues : (A) Possible violation of SEBI (Foreign Portfolio Investors) Regulations, 2014 and 2019 (B) Possible violation of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (C) Trading-Pre-post Hindenburg Report (D) Possible violation of SEBI (Prohibition of Insider Trading) Regulations, 2015 1 1 1 5 Total 24 SEBI's status report and the details of the twenty-four investigations does not indicate inaction by SEBI. In fact, to the contrary, the course of conduct by SEBI inspires confidence that SEBI is conducting a comprehensive investigation. 37. The petitioners have also raised questions about the delay by SEBI in submitting the status report before this Court. As noted earlier, by an order dated 2 March 2023, this Court directed SEBI to conclude its investigation within two months and file a status report before this Court. This Court by its order dated....
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....tter purportedly alerted SEBI about inter alia potential stock market manipulation by the Adani group through over-valuation of the import of power equipment from a UAE-based subsidiary. According to the petitioner, SEBI did not disclose the receipt of the letter and did not take adequate action based on it. 42. SEBI has submitted that after receiving the above letter, it sought information from the DRI on the issue and received the requisite inputs. Further, while SEBI examined the preliminary alerts by the DRI, the Additional Director General (Adjudication), DRI concluded their examination and held that the allegations were not established. The order of the Additional Director General was assailed by the Commissioner of Customs before the Customs, Excise and Service Tax Tribunal. "CESTAT" The CESTAT passed an order on 8 November 2022 dismissing the appeal and concluding that the allegation of overvaluation was not proved. The order of the CESTAT was upheld by this Court on 27 March 2023. Further, SEBI has also submitted that its investigation based on the DRI alerts was concluded and the related findings were also placed before the Expert Committee. 43. None of the above fa....
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....eptance of a professional brief by a lawyer in 2007 cannot be construed to reflect "bias" or even a "likelihood of bias" in 2023. There is an absence of proximity both in terms of time (the alleged appearance was sixteen years ago) and subject matter. There was also no justifiable reason for the petitioners to wait until the expert committee submitted its report. 48. Similarly, the allegations against Mr OP Bhatt and Mr Kamath have not been adequately substantiated by the petitioner. With regard to Mr OP Bhatt, the petitioner has alleged that he is presently working as the Chairman of a leading renewable energy company, which is working in partnership with the Adani group on certain projects. Additionally, the petitioner has also raised vague accusations against Mr OP Bhatt and Mr Kamath in relation to unconnected misconduct by Mr Vijay Mallya and the ICICI Bank, respectively. 49. The petitioner has not established the link between these unsubstantiated allegations and the appointment of Mr Bhatt and Mr Kamath to the committee. Here too, the petitioner has only annexed newspaper reports published after the appointment of the committee by this Court, without any attempts to ve....
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....ket forces and mitigatory measures. While shares of the group fluctuated, it did not pose any systemic market-level risk. According to the Expert Committee the trend observed in volatility in the Indian market in comparison with the global volatility index has been consistent since the COVID-19 pandemic and was maintained even during the period when volatility was observed in the Adani stocks. Therefore, according to the Committee, while events related to Adani stocks had an impact at an individual scale, it did not result in volatility in the market. 55. After drawing the above conclusion, the Expert Committee has additionally made the following recommendation upon considering the submissions of SEBI and other market participants: "47.⁠ ⁠SEBI has submitted that only recently, it has made a regulatory intervention in terms of supervising the construction of stock indices. SEBI must consider directing index writers to construct indices to compute volatility of stocks that are constituents of indices so that volatility in these stocks can be compared with volatility in the indices. The availability of such data on a real time basis would enable the market to b....
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....em at a later date with a lower price, thus, attempting to profit from an anticipated decline in the price of the securities. In its report, Hindenburg Research admits to taking a short position in the Adani group through US-traded bonds and non-Indian traded derivative instruments. SEBI has submitted that short selling is a desirable and essential feature to provide liquidity and to help price correction in over-valued stocks and hence, short selling is recognised as a legitimate investment activity by securities market regulators in most countries. Short selling is regulated by a circular notified by SEBI on 20 December 2007. SEBI submits that any restrictions on short selling, may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors. Therefore, the International Organisation of Securities Commission recommends that short selling be regulated but not prohibited with an aim to increase transparency. We record the statement made by the Solicitor General before this Court that measures to regulate short selling will be considered by the Government of India and SEBI. SEBI and the investiga....
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....es to communicate relevant information in a comprehensive manner to the investors are therefore imperative for informed decision making. 62. The Committee also explored investor awareness with respect to unclaimed securities, dividends and bank deposits of deceased next of kin which may be lost due to the legal framework. The Committee invited the Investor Education and Protection Fund Authority IEPFA to present its workings and manner of administration. Based on its findings, the Committee recommended that the Government of India establish a centralised authority to handle and process unclaimed private assets. It suggested creating the Central Authority for Unclaimed Property which must aim to reunite assets of deceased persons with their next of kin. The Committee also made some suggestions in the context of IEPFA which state: "a. The integrated portal announced in the Finance Minister Budget Speech should be expedited and process re-engineering delegation to the issuer companies based upon type and threshold of the claims must be considered; b. The same may be reviewed on incremental basis from time to time considering the benefits on reducing the timeline f....
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....imize its resources and lay down policies for effective enforcement of its law by stipulating the criteria by which it may use its powers to initiate measures. This must be consistent with the legislative policy of SEBI and an attempt must be made to apply the law prospectively; c. Judicial Discipline: Adjudicating Officers and Whole Time Members must show consistency and not take differing views in similar circumstances. Judicial discipline must be followed in applying ratios of previous decisions as well as following the decisions made at the appellate stage; d. Settlement Policy: SEBI must have a robust settlement policy and formulate objective criteria to regulate it. It must not be hesitant to enter settlements whereby financial injury commensurate with the alleged violation may be inflicted on the party; e. Timelines: SEBI must lay down and adhere to strict timelines for initiation of investigations, completion of investigations, initiation of proceedings, disposal of settlement, and disposal of proceedings; f. Surveillance and Market Administration Measures: The element of human discretion must be done away with as far as possible. It must....
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....positive intent. We direct the Government of India and SEBI to consider these suggestions and to take the benefit of the efforts put in by the Expert Committee. We may add that the approach in considering these suggestions must not be defensive but constructive. The Committee has favourably noted some of the measures that SEBI has taken in reaction to the events and learnings from the market. The same attitude of advantaging from the perspectives should be taken by the Government of India and SEBI. The Union Government and SEBI would be at liberty to interact with the Committee so as to take this forward. Since a member of the Bar who was a member of the Committee has been appointed to the Bench since the submission of the report, the Chairperson of the Committee will be at liberty to nominate a member with legal expertise and domain knowledge for the purpose of interacting with the Union Government and SEBI. G. Conclusion 67. In a nutshell, the conclusions reached in this judgement are summarized below: a. 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 wisdo....