Adani-Hindenburg saga: Found no regulatory failure, says SC panel

Report spells relief for Adani group, Sebi

The Supreme Court-appointed expert panel has said it has not found any regulatory failure on the part of the Securities and Exchange Board of India (Sebi) in relation to the way it has dealt with the affairs at Adani Group.

Nor has the six-member committee, in its interim report submitted on May 6, made any adverse observations on the port-to-power conglomerate, which was attacked by US-based short-seller Hindenburg Research, which led to a Rs 12-trillion rout in its group’s market value.

The report, which came into the public domain on Friday, triggered gains of between 1 per cent and 7 per cent in the 10 Adani Group stocks, helping them add Rs 34,000 crore in market cap. However, the market value of the Gautam Adani-led companies is still down by close to Rs 10 trillion since the short-seller’s attack.

Sebi is investigating allegations of violations of minimum public shareholding (MPS) and related-party transactions (RPT) norms. It is expected to reach a conclusion by August 14, the new deadline set by the court to complete the probe.

“At this stage, taking into account the explanations provided by Sebi, supported by empirical data, prima facie, it would not be possible for the committee to conclude that there has been a regulatory failure around the allegation of price manipulation,” the six-member panel has said in its 173-page report.

Panel’s key observations

• No pattern of artificial trading or wash trades among same parties multiple times was found
• Sebi found that some entities had taken short positions prior to Hindenburg report and profited after price crash
• Suspicious trading observed on part of 13 entities
• On minimum public shareholding, there is a need for an effective enforcement policy
• Sebi has “drawn a blank” in its probe into suspected violations

The members of the committee are Justice A M Sapre, O P Bhat, Justice J P Devadhar, K V Kamath, Nandan Nilekani, and Somasekharan Sundaresan.

On the allegation of stock price manipulation at Adani Group companies, the committee has said there was no pattern of artificial trading or wash trades and no coherent pattern of abusive trading has come to light. The expert panel, however, has noted that some entities took short positions prior to the publication of the Hindenburg report and profited from squaring off their positions as the stock prices of Adani Group companies crashed after the report. These entities are currently being investigated by Sebi, the report has revealed.

The panel also observed intense volatility after the publication of the report on January 24 was largely restricted to the Adani stocks and the market as a whole was not unduly affected. It said the market had re-priced and re-assessed the Adani stocks.

“While they may not have returned to the pre-January 24 levels, they are stable at the newly re-priced level,” it said, adding that the measures taken by Adani Group, including the move to pare its debt, had helped rebuild investor confidence.

On MPS compliance, the panel has said if the outcome of Sebi’s investigation is able to establish that foreign portfolio investors (FPIs) that have invested in Adani listed firms are linked to the promoters then it would mean that the companies are not compliant with the MPS requirement.

However, the report said changes in the regulatory structure and lack of cooperation from other regulatory bodies had thwarted Sebi’s attempts in finding the contributors who had an economic interest in these FPIs.

“This is where it has hit a wall,” the report has observed.

Sebi has found 42 contributories to the assets under the management of the 13 FPI entities and has been pursuing various avenues to ascertain the same.

“It has been a long-standing suspicion of Sebi that some of the public shareholders are not truly public shareholders and could be fronts for the promoters of these companies,” it said.

While the FPIs in question declared the beneficial owner by identifying the natural persons controlling their decisions, a 2018 law had done away with the very requirement to disclose the last natural person owning any economic interest in the FPI.

In the context of RPTs, the report has noted Sebi has identified 13 specific transactions and is investigating if they were fraudulent in nature. The panel recommended these investigations must be completed in a time-bound manner.

The committee reached out to a host of foreign banks such as JP Morgan, Goldman Sachs, Citibank, Bank of Merill Lynch, and Morgan Stanley. It has pointed out that none of the international securities firms and banks was desirous of engaging with the matter. A few of them cited conflict of interest owing to their commercial relationship with Adani Group.

The expert committee has prescribed measures to Sebi to improve its regulatory functioning and for increasing investor awareness.