Investors in the Dark: Navigating SEBI’s Stand on Market-sensitive News
Once again, an anonymous source at the Indian capital market regulator has leaked information to a leading news agency about a price-sensitive investigation. Indeed, this is a case where the Supreme Court had felt the need to constitute an ‘expert’ committee to examine whether there was manipulation in stock prices and if there had been “regulatory failure in contravention of laws pertaining to the securities market in relation to the Adani group.” In effect, there is no debate that an investigation by the Securities and Exchange Board of India (SEBI) is both, price-sensitive and newsworthy. 
 
On 22nd April, news agency Reuters reported that 12 offshore funds investing in the Adani group companies had “breached disclosure regulations and exceeded investment thresholds,” that SEBI was “scrutinising the relationship between the Adani Group and one of these funds” and how they had been ‘reporting their investments in Adani group entities” at the fund level. This story was quickly picked up by every Indian publication as it pertained to the report released in January 2023 by US short-seller Hindenburg Research which had led to a significant hammering of Adani Stocks in January last year and subsequent litigation. 
 
Disturbingly, the Reuters report said that eight of the foreign portfolio investors (FPIs) had submitted written requests to ‘settle the charges’ by paying a sum without admitting to any wrongdoing. Since Hindenburg Research had claimed that these funds helped ramp up Adani share prices, wouldn’t it be shocking if the violation were quietly settled without admitting to any wrongdoing?
 
Political parties, that had been highlighting the phenomenal growth of the Adani group and the run-up in stock prices over the past few years, pounced on the report. The Congress party issued a statement claiming that SEBI seems to have “finally identified key players in the Adani mega-scam” and called for the ‘immediate publication’ of SEBI’s long-delayed investigation report while pressing, once again, for a probe by a joint parliamentary committee (JPC).
 
Notably, the ‘source’- based Reuters report does not indicate whether the violations are technical or more serious. It does say that they could potentially result in penalties of up to Rs1 crore or a ban from the stock markets; but, again, that gives no indication about the seriousness of wrongdoing. Over the past three decades, SEBI’s order have often been contradictory, inconsistent, or thrown out/ diluted in appeal. I have written several articles about the wide variance in punitive action and penalties for similar offences. A detailed study of SEBI orders by Moneylife Foundation in 2021 concluded that its orders were often capricious and weak. But what is worse, orders of the appellate tribunal are equally so. These findings did not lead to better internal discipline or external oversight by the finance ministry (examples listed at the end).
 
How should investors gauge the seriousness and implications of SEBI’s potential action on Adani stock prices? And what is the timeframe in which they can they expect clarity or an order from the regulator? There are no answers. SEBI did not respond to my messages. The Adani group spokesperson replied to say, “We are not issuing any clarification, it is between SEBI and the Foreign Portfolio Investors (FPI).” He further said, “FPIs offering to settle with SEBI by paying penalty is a common and regular thing. I guess it becomes a big one given Adani name.”
 
The market regulator is constantly working and re-working rules about disclosure of ‘price-sensitive’ information and has stringent penalties for any lapse in reporting by listed companies and regulated intermediaries, but the same does not seem to apply to internal leaks.
 
Consider another example. On 23 January 2024, CNBC TV18 reported that SEBI’s ongoing investigation into the Zee group showed that misuse and diversion of funds by the promoter group was in the region of Rs800 crore-Rs1,000 crore, rather than Rs200 crore mentioned in its interim orders. The ‘source’-based report, which said that SEBI intended to impose monetary penalties on the Goenkas, was serious enough to be picked up by the media and went viral on investment groups. 
 
Three months have passed since the price-sensitive leak, but there is no sign of SEBI completing its order. In the meanwhile, the Sony-Zee merger (which would have been impacted) has collapsed for other reasons and the bankruptcy court has admitted proceedings against group founder Subhash Chandra filed by Indiabulls (NCLT Grants Indiabull’s Plea, Admits Subhash Chandra to Personal Insolvency). This delay in finalising the order is especially important because of the Zee group’s propensity to file defamation complaints against those criticising it. 
 
SEBI’s Stand on Internal Leaks
 
When the Adani issue was making headlines, SEBI had apparently been worked up about internal leaks. In July 2023, The Economic Times reported that SEBI had issued an internal circular warning officials that they could face ‘appropriate action’ for divulging confidential information to ‘outsiders’ including former colleagues. It had called this a breach of secrecy. The reason was clear enough for anyone who has been reporting on the market. There are many former colleagues, who are now on the opposite side, appearing as lawyers, consultants and advisers to market intermediaries, brokers and companies. Legal circles say that the leakage of information from SEBI to former colleagues is rampant. SEBI cannot really stop employees from socialising with former colleagues; so it cannot stop frequent rumours about cases being diluted or deliberately sabotaged, if one has the right contact.
 
News Clarifications
Like everything else, SEBI’s actions depend on and change with the incumbent chairperson’s wishes. This is clear from the tab for ‘news clarifications’ on SEBI’s website. The last clarification issued was in 2018 over a fairly innocuous report about Chanda Kochhar and before that it had a three-page clarification to a column, in 2016. Previous to this was a rash of clarifications between 2005 and 2009. It is not as though media reports have turned more accurate in recent years, but SEBI may have realised that silence works better than selective clarifications which can be used against it.
 
The question is: Will SEBI end the controversy by publishing its report on violations by FPIs; will it issue ‘news clarification’ to the Reuters report; will it issue another internal warning against ‘leaks’ to ‘outsiders’ or will it remain silent – because that has worked best for the regulator? After all, we are used to a culture where disclosures, discipline and accountability applicable to regulated entities or ordinary citizens, does not seem to apply to regulators or those who rule us. 
 
Also Read:

2. Moneylife Foundation’s review of insider trading orders: https://www.mlfoundation.in/media/uploads/article/pdf/1667978689685.pdf

3. Insider trading orders: Is there a method to the madness: SEBI’s Insider Trading Orders: Is There Any Method in the Madness?

8. SC pulls up SEBI for filing frivolous case: Supreme Court Pulls Up SEBI for Filing Frivolous Cases: Report
 
 
Comments
adityag
2 months ago
I'm sorry but SEBI has become irrelevant to me at this juncture. It will never change unless its culture changes from within. Everything other reform is just fluff. A lady from the private sector who became its chairman cannot even reform it. Hardly surprising. So, yeah, I do not expect them to do anything. In other words: it's just another day with another round of complaints. Nothing will change.
Gupta10
Replied to adityag comment 2 months ago
Quite a weird comment about the "lady". Was this intended to be a sexist comment? You got to know her before you make this comment. She can make a 100 men piss in their wants and she likely does that everyday she goes to office. Yes, there will be limitations on how much reform one individual can do in a single term, but let's see the glass half full rather than half empty. After all it was fully empty earlier.
adityag
Replied to Gupta10 comment 2 months ago
For what it's worth, her predecessors, who were all men, also failed to reform it. In fact, SEBI may have deteriorated during their tenures. Thus, I am stating facts. If a word has triggered you, that is beyond my control and your problem, not mine.
adityag
Replied to Gupta10 comment 2 months ago
It's a fact. Take it or leave it.
Gupta10
Replied to Gupta10 comment 2 months ago
sorry "pants", not "wants"
kpushkar
2 months ago
Best jobs in India only perks, no accountabilty- sebi, rbi and sc!!
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