The Supreme Court of India (SC) order of 2nd March is a new experiment in investigating financial irregularities that lead to a public outcry. The order was in response to a batch of petitions following the release of a detailed report by Hindenburg Research on 24th January. The report had accused Gautam Adani, then the 3rd richest man in the world, of “pulling the largest con in corporate history.” The Adani group has responded with a 413-page rejoinder, refuting the allegations. But that did not prevent Adani group shares from crashing badly from their ridiculously high prices.
The SC decided that it needed to “protect Indian investors against volatility of the kind which has been witnessed in the recent past” by constituting an expert committee to assess ‘the extant regulatory framework’ and to make ‘recommendations to strengthen it’. But the SC has not limited its action to the expert committee headed by a former judge. There will also be a separate, concurrent investigation by the Securities and Exchange Board of India (SEBI), which has also to be delivered in the same two months as the expert committee’s report.
Before discussing this experiment, it is worth noting that no country has succeeded in instituting a regulatory framework that provides blanket protection to investors from ‘market volatility’. High risk and volatility are integral to any traded product; it holds the promise of ‘high returns’ without guaranteeing it. Moreover, market volatility is usually triggered by policy actions of governments, regulators and monetary authorities, or technology failures and even rogue algorithms. A short-seller, who puts out a detailed report covering two years of research, can only trigger volatility when there has been a relentless run-up in prices that is not matched by fundamentals.
So the SC has essentially ordered two separate investigations. The first by the Court-constituted expert committee headed by justice AM Sapre, a former SC judge. The very composition and remit of this committee is an experiment. Most members have deep business links and multiple relationships across the corporate world.
Powers and Remit
Although the responsibility of the expert committee is primarily to evaluate and suggest ways to strengthen SEBI’s regulatory mechanism for protecting investors from market volatility, it has also been asked to “investigate whether there has been regulatory failure in dealing with the alleged contravention of laws pertaining to the securities market in relation to the Adani Group or other companies.” This means that the expert committee will investigate the regulator.
In addition, SEBI has been asked to ‘apprise the expert committee’ of action taken on the directions of the Court in furtherance of investigations and provide all information it needs. This makes the market regulator fully subservient to the committee. Since the expert committee comprises directors of private companies and their lawyers, it remains to be seen what precedents are set and how this will impact regulatory dynamic in future.
Pertinently, the SC has not empowered the expert committee with any power to call for information or seek testimony from SEBI and stock exchange officials or market participants. Such powers would have been automatically available to a judicial commission or parliamentary committees, but they too have proved inadequate in the past. As far as this expert committee is concerned, the SC says it is ‘at liberty to seek recourse to external experts’ and that all government agencies connected with “financial regulation, fiscal agencies and law enforcement agencies shall co-operate with the Committee.”
It is important to recall that the joint parliamentary committee (JPC) investigating the Ketan Parekh scam, with all its privileges, had lamented that it “did not have the benefit of a report on the lines of the Janakiraman Committee Report which was made available to the previous JPC on the scam in securities and banking transactions. Reliable evidence was difficult to find and took much time to cull.” (Read para2.18 here: https://loksabha.nic.in/writereaddata/InvestigativeJPC/InvestigativeJPC_635612541266248975.pdf).
This expert committee could bring in law firms and forensic auditors, as in the case of the National Stock Exchange (NSE) co-location (Colo) scam investigation where SEBI repeatedly asked the Exchange to investigate itself through external agencies instead of doing the investigation itself. This time, these agencies could potentially be in a position to question the regulator as well.
SEBI’s Role
In its submission before the SC, SEBI has claimed it is “strongly and adequately empowered to put in place regulatory frameworks for effecting stable operations and development of the securities markets including protection of investors.” It also told the Court that “it is already enquiring into both, the allegations made in the Hindenburg report as well as the market activity immediately preceding and post the publication of the report to check for violations of various regulations.” No details were provided since the “matter is in early stages of examination.”
It would appear that the apex court was not convinced that the regulator is doing enough. Hence, SEBI has been directed it to look into some specific details: 1) to investigate whether there is a violation of Rule 19A of the Securities Contracts Regulation Act which prescribes the maintenance of public shareholding (25%); 2) whether there was a failure to disclose related party transactions; and 3) if there was manipulation of stock prices in contravention of existing laws.
The SC’s scepticism is well warranted. SEBI is, indeed, ‘strongly and adequately empowered’, but it uses its powers mainly to increase reporting requirements and has been repeatedly lambasted over about poor investigation and weak orders. Most recently, the securities appellate tribunal (SAT) pointed out inconsistencies in its orders and all but threw out its order in the NSE Colo scam.
There is a yawning gap between the supervision prowess that SEBI claims in its annual reports and real action on the ground. Under the head ‘Market Surveillance’, in FY21-22, SEBI claims to have “deeply integrated technology into its surveillance functions. SEBI has been able to unearth complex modus operandi with adoption of better technology and data analytics.” In its 2020-21 annual report, SEBI had claimed that “SEBI uses various innovative techniques, such as pattern recognition and data analytics” to process over 550 crore trade messages that are generated every day. Curiously, this prowess was used to monitor and act against stock recommendations of television anchors, but failed to catch the run-up in Adani stocks.
A box titled ‘Data Detectives’ in the 2021-2022 annual report has some serious boasts about technology for surveillance, including use of artificial intelligence and machine learning for ‘robust, agile and scalable capabilities’. It says: “While it might be a bit of an overstatement, it might not be entirely inappropriate to say that there are very few problems that technology cannot solve.”
‘Data Lake’, says the report, “has characteristics such as visualization, time series/machine learning analytical capabilities, ability to seek and search both structured/ unstructured/ semi structured data, self-serviced business intelligence capabilities, in memory processing of data, etc.”
Even on the issue of promoter risk due to high pledge of shares, SEBI claims to be on top of things. The 2020-21 annual report mentions how it has asked exchanges to look at ‘encumbrance’ (which includes lien, negative lien on shares) instead of ‘pledge’ to track promoter risk.
These claims make it all the more important for SEBI to tell us how and why it missed the big elephant in the room, namely, the extraordinary run-up in Adani group shares leading to sky high valuations. And why were these not a part of the 72 investigations into price and volume manipulation completed in 2021-22 and 82 in 2020-2021? Surely, its machines caught the fact that Adani group shares have risen relentlessly over three years? Why did we need a US-based short-seller and an SC directive to push the regulator into completing investigations that ought to have been its top priority? It remains to be seen if the expert committee gives us answers to these questions.
You have mentioned in your article that the committee has members who are directors in a company. One also read in newspapers that one of the members was recommended for a judgeship of Bombay HC but the government did not approve for reasons stated in their reply to the SC collegium. Was it necessary for the SC to appoint the person on the panel? In spite of all the above remarks, can the panel do a good job. Over the last 3 decades we have had investigative committees appointed, who may have made recommendations. Scams still happen irrespective of any government at the helm. Greed of investors like me helps.
Though the move is very well-intentioned, chances are that it will only be an eye-wash, considering that even mentioning this name in Parliament is forbidden and expunged. If not sealed cover, they may find another way of suppressing inconvenient information.
Investors in Stock Markets are supposed to be well informed before they invest. SEBI only mandates plethora of disclosures. Whether these disclosures are sufficient for investors? No. Because does SEBI investigate when share prices climb abnormally up or when dive down? If yes, whether SEBI publishes any report that investors have access to? NO. Is this not a failure of SEBI? If Adani shares were driven up its surrogates trading, is it not SEBI's job to investigate? Was SEBI not sleeping at the wheel? Should not SEBI Officials be fined for losses by investors? Is SEBI not rendering services to investors? If yes, why should it not be accountable for not doing its job?
Why is George Soros so so so interested in Adani and connecting Adani with Modi and India?
When a man like Soros criticize a company you know its a good company based of Soros's track record of deeds he has done in his life.
There is hardly anything to investigate..people trading in shares are not poor retail investors..they are people out to make disproportionate profits..INVESTMENT IN SHARES ARE SUBJECT TO MARKET RISK..why are they buying shares valued at 200-300-400 times their earnings..the only point to be investigated is whether the adani group was involved in increasing its share value by any unlawful means..share price is determined by the principle of demand and supply..no court in the world is educated or competent to tell whether the price of a share is correct or not..
It is like ‘’ Smoking is injurious to health’’ and government extracts huge tax from tobacco companies and liquor companies. Yes, the citizen must be careful enough to fall prey to such temptations The government would derive revenue from taxation and has no accountability. Soon we may dispense with all measures of remedial action
India's judiciary, lacking in erudition, competence, integrity and intellect usually rely on power. Letting loose even a a barrel full of monkeys or a bench full of judges will solve nothing.
Most of the observations are correct, but, let's wait till the report by the SC appointed Committee and the separate investigation report by SEBI is placed with SC/public domain.
the probe is very limited and the committee doesn't have any one from opposition who are creating charges - this will most probably a eye wash. Supreme court also should monitor future Retail scam - Lakhs of retail investor money are looted with banks and administration - also the loss to the bank another burden on middle class - govt is ensuring middle class become poor class.
Well said. I was happy when MPB was appointed as SEBI chair instead of yet another IAS officer. But she needs to act fast. Her credibility is diving day by day as SEBI remains quit. SEBI itself has no credibility to speak of any way.
to pacify the retail investor the court constituted a committee comprising friends and acquaintances of the same company that has Fu6ked & looted us in the first place
if one looks closely majority of the IPOs have fallen 80 % from their issue prices
SEBI was constituted for the protection of the retail investor but now it's doing Fu6king of investors!
Absolutely a big NO (those were good old days of "Controller of Capital Issues - CCI- this system was abolished more than 2 decades back) . SEBI's job is to ensure that all required disclosures and risk factors are properly mentioned and indicated in the RHP - which alas no body reads.
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It is important to recall that the joint parliamentary committee (JPC) investigating the Ketan Parekh scam, with all its privileges, had lamented that it “did not have the benefit of a report on the lines of the Janakiraman Committee Report which was made available to the previous JPC on the scam in securities and banking transactions. Reliable evidence was difficult to find and took much time to cull.” (Read para2.18 here: https://loksabha.nic.in/writereaddata/InvestigativeJPC/InvestigativeJPC_635612541266248975.pdf).
When a man like Soros criticize a company you know its a good company based of Soros's track record of deeds he has done in his life.
if one looks closely majority of the IPOs have fallen 80 % from their issue prices
SEBI was constituted for the protection of the retail investor but now it's doing Fu6king of investors!