The justice AM Sapre expert committee appointed by the Supreme Court (SC) appears to have given a clean chit to the Securities and Exchange Board of India (SEBI) on the issue of regulatory failure while passing some strictures about the need for SEBI executives to take a constant stand on issues, especially those decided by the apex court. Meanwhile, the Adani group is also allegedly claiming a clean chit. On the Adani issue, too, barring some ongoing investigations, the committee seems satisfied that SEBI has done all it can.
In the report, the committee says, "...it would not be possible to return a finding of regulatory failure on the count since SEBI has an active and working surveillance framework to take notice of high price and volume movement and has applied itself to the data generated by such surveillance, applying objective criteria, to consider if the integrity of natural price discovery process has been manipulated."
On the big elephant in the room, which is the Adani issue, the committee deals with three aspects: 1) minimum public shareholding (MPS); 2) disclosure of transactions with related parties in accordance with law; and 3) stock price manipulation.
The key issue of MPS revolves around 13 overseas entities, including 12 foreign portfolio investors (FPIs). Following a working group's recommendation, the very requirement to disclose the last natural person above every person owning any economic interest in the FPI was done away with in 2018. The provisions on opaque structure were deleted on the promise that declarations under the Prevention of Money Laundering Act (PMLA) constitute sufficient compliance.
"Yet, in 2020, the investigation and enforcement have moved in the opposite direction, stating that the ultimate owner of every piece of economic interest in an FPI must be capable of being ascertained. It is the dichotomy that has led to SEBI drawing a blank worldwide, despite its best efforts," the committee says.
The committee also notes, "SEBI has been investigating the ownership of the 13 overseas entities since October 2020 despite the legislative change that has been effected in 2018...SEBI has found 42 contributors to the assets under management (AUM) of the 13 overseas entities. Various avenues have been pursued, including the directorate of enforcement (ED), central board of direct taxes (CBDT) and various securities market regulators in the seven jurisdictions where the 42 contributors are situated. SEBI has drawn a blank."
"Without such information, SEBI is unable to satisfy itself that its suspicion that has been aroused can be put to rest. The securities market regulator suspects wrongdoing but also finds compliance with various stipulations in attendant regulations. Therefore, the record reveals a chicken-and-egg situation," the justice Sapre committee observed.
In a nutshell, the committee seems to be saying that SEBI regulations of 2014 that mandated deep and full disclosure of beneficial interests were significantly diluted in 2018 to require a far less level of disclosure, and the investing entities are in compliance with this. On the issue of related-party transactions as well as MPS, SEBI has sought more time from the SC to investigate.
In March, a bench headed by chief justice DY Chandrachud
appointed the expert Committee headed by Justice Sapre. Other members of the committee are OP Bhat (former chairman of State Bank of India-SBI), justice JP Devdatt, KV Kamath, Nandan Nilekani and Somasekhar Sundaresan.
According to the committee, empirically, the Indian market is not unduly volatile, as seen from a comparison of the Indian volatility index (India VIX) with the CBOE volatility index (CBOE VIX). "There is certainly high volatility in the Adani stocks after the publication of the Hindenburg report...The market has re-priced and re-assessed the Adani stocks. While they may not have returned to the pre-24 January 2023 levels, they are stable at the newly re-priced level."
Quoting empirical data, it says retail investors' exposure to Adani stocks has increased after 24 January 2023. In this case, 849 alerts were generated by the system for Adani stocks and were considered by the stock exchanges resulting in two reports to SEBI, two well before the Hindenburg report and two after 24 January 2023.
SEBI also found that some entities had taken short positions before the publication of the Hindenburg report and profited from the squaring of their positions after the price crashed after the report's publication, the committee noted.
Indian securities market works on a disclosure-based regime. However, the committee says, "There is an urgent need to introspect and take a hard close look at whether there is a surfeit of disclosures that loads the investors with so much data and noise that the real content necessary to make an informed decision may be lost."
The committee also pointed out that, at times, different officials of SEBI adjudicate the same issue differently. "Judicial discipline is a must. Unless the ratio laid down by an adjudicating official has been upset about the re-stated in appeal, it should be followed by others dealing with later cases. SEBI must adopt (as indeed any regulator) a firm timeline for the initiation of investigations, completion of investigations, initiation of proceedings, disposal of settlement and disposal of proceedings. This must be embedded into the law."
"The regulator objective of SEBI may be better served by timely and sharp action in a few large and complex cases compared to frittering energy and resources in thousands of tiny cases. Every single case has a consequence, but for a regulator to achieve its objective, it has to be strategic on how best it can prosecute cases of serious significance," the committee says.
The justice Sapre committee also recommended the separation of powers within SEBI. It says the quasi-judicial arm of the regulator has to be necessarily ring-fenced from the executive arm so that it is truly a check and balance. "If the performance of the quasi-judicial officers is appraised by the executive arm, the very foundation of separation of powers would stand nullified."
The committee also recommended a multi-agency investigation committee on the lines of the Janakiraman committee in complex enforcement matters, where the skillset and expertise of multiple regulatory and enforcement agencies would be necessary.
In January, US-based Hindenburg Research with a focus on activist short-selling, claimed: "the seven key listed companies of Adani group are 85%+ overvalued even if you ignore our investigation and take the companies' financials at face value."
The Adani group responded to the Hindenburg report at length in an over 400-page response (the actual response is 54 pages, while the rest comprises annexures), raising questions against the ulterior motives and
modus operandi of the US-based research firm. In response, Hindenburg says it believes that "fraud is a fraud, even when it is perpetrated by one of the wealthiest individuals in the world". (
Read: Adani Replies With 413-Page Report; Hindenburg Says Fraud Cannot Be Camouflaged With Patriotism)
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