A Supreme Court (SC)-appointed expert committee could well become a preferred choice for corporate India, when faced with a major financial scandal requiring a ‘systemically important investigation’. On 6th May, an expert committee submitted a report on the Adani saga making a masterly, point-by-point legal case for exonerating the group and the market regulator, while also suggesting that, if the ‘letter of the law’ were to be followed, there is no case for repeated and never-ending investigation based on ‘suspicion’ that various actions of the group violated the ‘spirit of the law’. It also has a nice explanation for the sharp decline in key Adani group stocks. What more could any corporate group want?
The committee report was one of the consequences of a report by Hindenburg Research of the US report, titled “Adani Group: How the World’s 3rd Richest Man Is Pulling the Largest Con in Corporate History”, published in January this year. The relentless rise in the stocks of Gautam Adani group companies was punctured by the report, triggering extreme market volatility for a few days.
Several public interest litigations (PILs) were filed and the apex court responded by ordering the Securities and Exchange Board of India (SEBI) to complete its investigation in the episode in two months. Simultaneously, it set up a six-member expert committee (EC), headed by a retired judge, to provide an overall assessment of the situation including whether there had been regulatory failure in dealing with alleged contraventions of law by Adani companies and make suggestions to strengthen the regulatory framework and investor awareness.
As an aside, the committee has made several excellent suggestions that could improve SEBI’s performance; it will also make things less dangerous for investors struggling with an overload of disclosures; but the reason for setting up the committee was the Adani issue and this column will focus on it alone.
On 20th May, when the report was made available to litigants, the Adani group was quick to tell the media and social media influencers that the EC had given the Adani group a ‘Clean Chit’. Further, that the committee found: 1) No evidence of price manipulation; 2) No evidence of violation of related-party transaction norms; and 3) FPIs (foreign portfolio investors) invested in Adani have made full disclosures.
How did this happen when the relentless rise in Adani stocks, open knowledge among top-level market participants of the manipulation (and the subsequent fall) clearly fail the smell test of everything being open and above board? That is, indeed, the beauty of the EC’s legal arguments. It makes the case on why it may not be possible for SEBI to come up with findings that would indict Adani. I am not sure if that was ever the intended remit of the committee; but the upshot is, indeed, ‘a clean chit’. Let us look at the process by which it was ensured.
Remember, almost everything that Hindenburg Research said was based on public information and the Adani group never got around to suing the research house after threatening to do so. Also, the sharp crash in stocks with no significant buying in them for months after, indicate that market believes Hindenburg’s allegations. The EC, correctly, points out that overall market volatility was not unduly worrying when the Adani stocks crashed and things settled down after a substantial re-rating and corporate actions by the group such as paring debt and cancelling a big fund-raising plan.
On the related-party transactions exposed by Hindenburg, the EC thinks what the Adani group did, ‘need not be an action that is considered desirable’ but it was legally in line with the extant rules. So, the market has factored in the seriousness of the allegations and, regardless of whether the law was violated, it has re-priced Adani stocks. On the other hand, because the market has punished Adani stocks, it cannot be extrapolated to conclude that there was a violation of law.
In a similar vein, the EC had legal arguments for why the public expectation that SEBI should investigate price manipulation, beneficial ownership or even the big issue of related-party transactions will not lead to a guilty verdict, given how SEBI has been changing its own rules and the group has always been always technically compliant.
Before going into the details, let us look at the larger picture this throws up. In the normal course, an issue involving such a large corporate group, given all its political dimensions, would have led to multiple investigations by SEBI, the enforcement directorate (ED) and the tax authorities that would have dragged on for years. This one is stunningly different. The report tells us that ED and the tax department refused to get involved in an investigation because SEBI did not make out a ‘prima facie’ case of wrongdoing while making a reference of its suspicions to the respective agencies.
The ED has opened inquiries against a cross-section of women activists and intellectuals, under the Prevention of Money Laundering Act (PMLA), when the extent of violation, even if proven, will be inconsequential. But it is reluctant to get involved in a significantly larger case. And yet, it is not staying out either. The ED intends to pursue four FPIs and a couple of others who allegedly built up a short position in Adani stocks just before the Hindenburg report was released.
Now let us look at why the EC thinks that SEBI will continue to draw a blank on the three points where the Adani group had claimed a ‘clean chit’.
1. Price Manipulation: On price manipulation, the EC says that SEBI’s market surveillance software threw up 849 alerts for Adani stocks, which resulted in four reports to SEBI—two before the Hindenburg report and two after. But, apparently, nothing could be traced back to the corporate group; so it gets a ‘clean chit’.
2. Minimum Public Shareholding (MPS): The Hindenburg revelations and SEBI’s subsequent investigations show that the MPS issue is one on which the corporate group was on really on a weak ground. The issue boils down to the true ownership of 13 foreign entities, who claim and name 42 investors or beneficial owners (BOs) in seven jurisdictions, who seem to have invested heavily and almost exclusively in four Adani stocks. SEBI has its ‘suspicions’ about whether they own ultimate economic interest in these entities; it has apparently been investigating them for ‘years’—most certainly since October 2020 but had already ‘hit a wall’ even before Hindenburg, says the EC.
The EC thinks SEBI’s continued investigation and effort to approach market regulators in these jurisdictions is ‘a journey without a destination’ because the entities are in compliance with a new set of rules that came into existence in 2019 and SEBI cannot show potential wrongdoing on their part.
Until 2014, such entities were required to disclose the ultimate natural person owning economic interest in each FPI. From around 2017, there has apparently been enough of a noise about these rules being so onerous that a committee was set up under HR Khan (former deputy governor of the Reserve Bank of India) to examine the rules. It put out a 65-page report for discussion for public feedback. Specific inputs were sought from the central bank and various investigation and tax authorities and their comments were also put up for discussion.
Finally, when the rules were changed in the name of simplification, only those dealing with FPI investment in India understood the phenomenal implication of dropping a specific clause (on ‘Opaque Structures’) and the gaping loophole it had opened.
This raises so many questions that are not part of the EC’s discussion. Who initiated the process of changing the FPI rules in 2018, when the process began with a discussion paper? Were there any instructions from the government to listen to FPIs whining? Why the greater sympathy for mega FPIs when the government has absolutely no sympathy for the never-ending harassment of bank customers, who have their accounts frozen under the same draconian PMLA rules, that too for mere re-verification of know-your-customer (KYC) rules? While the EC repeatedly describes SEBI’s ‘chicken and egg’ dilemma in going after FPIs, retiree senior citizens, home-makers, innumerable NRIs (non-resident Indians) and small businesses have gone through hell, even during the COVID lock-down when banks froze their accounts because three miserable KYC documents could not be submitted.
An application under the Right to Information (RTI) Act seeking ‘file notings’ on how the dilution process was initiated, and why FPIs need greater consideration that ordinary Indians would be enlightening. But the RTI Act has been systematically destroyed since 2014 to prevent precisely such questions. Members of parliament (MPs), who do not have inquiries opened against them, may ask questions; but we have seen in the war of words that erupted over the Adani investigation that it may not give us answer either.
While the EC makes the case that SEBI is just wasting time on going after the 42 investors in Adani stocks, how many others are hiding behind these diluted disclosure rules? Don’t we need to know?
3. Related-party Transactions: When it comes to non-disclosure of related-party transactions, the EC has similar arguments that I will not elaborate on. As pointed out earlier, the EC thinks that Adani companies may have been in violation of the spirit of the law (as evident from how their stocks were punished by the market), but they seem in compliance with SEBI’s rules as they existed then. It repeatedly points out that SEBI chose a certain path of regulation and has to follow it through. It is too bad that the chosen path does not allow it to make a case against the Adani group!
That such careful thinking and legal acumen has gone parallel to the extraordinary run-up in Adani stock price (which has resumed since 20th May) would be a matter of worry, if regulators were serious and enough of people understood its implications.
Exonerating SEBI: Since the EC’s findings are entirely based on a detailed briefing by SEBI, the regulator has been credited with being on the job, investigating market alerts, following up its suspicions, etc, to conclude that there is no regulatory failure. For instance, with regard to the suspicion of price manipulation, it is satisfied that since the regulator applied itself to studying the data generated by “an active and working surveillance framework”, there was no regulatory failure. On the issue of related-party transactions and minimum public shareholding, too, the regulator is ‘applying itself’ with zeal, doesn't matter that a change in its own rules has made it either difficult to demand answers, or arrive at a clear finding. The EC does not leave it there. It goes on to make a detailed legal case for why the regulator had absolutely no case against the corporate house.
The SC has given SEBI until 14th August to complete its investigation providing the perfect opportunity for the market regulator to wind up the probe, quoting para & verse from the EC’s report on why it has ‘drawn a blank’ and should not be spending time and resources. The question now is: Will Gautam Adani go back to being the third richest, or even the richest man in the world, based on his stock prices?
Finally, when it comes to ‘systemically important investigations’, instead of ‘a multi-agency investigation committee’ with a temporary shelf-life, I am sure corporate India would prefer a similar committee to investigate issues, so that a legal exposition on rules will make both investigation and the role of a regulator superfluous and everything can be wrapped up neatly in two months to be closed with the approval of a court.
Sucheta, there are repeated reference in the article to EC comments about SEBI having investigated Adani group and not finding anything amiss. This is line with the comments of the govt in the matter. But it runs contrary to SEBI affidavit in SC that they have not investigated Adani at all in last 6 years. Is EC referring to something else or SEBI lying to protect its skin?
Yeah...the whole thing is just a white wash. In EU 26 of 27 countries maintain Ultimate Beneficiary Registers...except the Mafia Italy...here in India, the PMLA and SEBI has loosened the rules like Mafia Italy...but everything and anything goes in India...a joke...now even El Chapo, ISI could be an Ultimate Beneficial Owner thru Bennami shell companies in Tax Havens...they only need a puppet front. The Desi politicians themselves might be coming in to India in the guise of FPIs...roundtripping their illegal stash...
I think this is what is the main objective behind legislating PMLA kind of act where the ultimate beneficial owner is known and brought to books to prevent some national security mishap.
What an expertly done job of whitewashing! Small mercies that the "eminent" persons on the EC graciously declined any payment for their work - they believed it to be a matter of "public duty" and hence they would waive any remuneration. A glimmering of conscience one may wonder. Or an unkind person may dare to suggest that the entire report was prepared externally for the EC and hence the eminent members never really had to do much work in the first place!
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In a similar vein, the EC had legal arguments for why the public expectation that SEBI should investigate price manipulation, beneficial ownership or even the big issue of related-party transactions will not lead to a guilty verdict, given how SEBI has been changing its own rules and the group has always been always technically compliant. 
A video on Related party and it's transactions falling in Fraudulent zone
To make layman to understand
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