 "Mixed impact on Adani group stocks after Sebi alleges non-compliance")
The shares of Adani group companies had a mixed bag on Friday after they disclosed that the Securities and Exchange Board of India (Sebi) had served show-cause notices (SCN) for alleged non-compliance, mainly for related party transactions (RPT).
While declaring their financial results for financial year 2023-24 (FY24), all the seven listed firms with ‘Adani’ moniker stated the market regulator has sought an explanation why they haven’t compiled with disclosure requirements. All firms said the allegations are not materially consequential and don’t warrant any adjustments to the financial statements.
Flagship Adani Enterprises said it received two SCNs during the March 2024 quarter from Sebi alleging non-compliance of provisions of the listing agreement pertaining to RPTs with respect to certain transactions and validity of peer review
certificates of statutory auditors with respect to earlier years.
Other group firms (Adani Green Energy, Adani Power, Adani Ports & SEZ, Adani Wilmar, Adani Total Gas, and Adani Energy Solutions) in separate exchange filings also disclosed the receipt of similar notices “with regard to the transactions entered in the earlier years with certain parties, essentially, from a substance-over-form perspective.”
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None of the companies provided details of the allegations or names of the related-parties involved.
Sebi has been probing the Adani group after a report by US-based Hindenburg Research alleged violation of RPT norms, circumvention of minimum public shareholding norms, improved use of tax havens, and stock manipulation.
Legal experts said the allegations don’t seem to be very serious in nature and, hence, the markets have taken it in their stride. They added that violations of Listing Obligations and Disclosure Requirements (LODR) Regulations can often be settled under the consent route or attract minimal penalties.
“A show cause notice from Sebi isn't a conviction; it's a legal notice. If the regulator is satisfied with the response, the matter usually concludes there. However, if unsatisfied, Sebi may proceed with conviction. Generally, for first-time violations, Sebi tends to be lenient, imposing fines ranging from Rs 25,000 to Rs 5 lakh. Subsequent violations may incur harsher penalties,” said Jidesh Kumar, managing partner at King Stubb & Kasiva, Advocates and Attorneys.
Experts said in the case of serious violations, Sebi can even bar the company or the management from accessing the capital markets. They said the regulator can serve more notices if pending investigations reveal further violations.
“The allegations are that the company has not obtained the requisite approvals, and have not made the required disclosure in the financial statements/ annual report (ii) Not recalling security deposits against terminated contracts leading to not using the funds for company's core business purposes and thus not complying with the company's code of conduct. The amounts dues in respect of these transactions along with interest thereon have been received in full before March 31, 2023, and there are no transactions with these parties in the current financial year and there are no losses suffered by the company,” said Adani Ports.
It further said that it has already replied to Sebi and “the company has denied the charges in its entirety, inter alia, on the basis that these transactions are in full compliance with the prevailing laws and regulations”.
Adani Wilmar said the SCN received from Sebi was related to “validity of peer review certificate (PRC) of the predecessor auditor in earlier financial year, which the company has responded to”.
Following the US-based Hindenburg Research’s allegations against the group in January 2023, the Gautam Adani-group initiated an independent review by a law firm of the transactions mentioned in the short seller’s report (SSR).
It said the assessment confirmed that “none of the alleged related parties mentioned in the SSR were related parties to the parent company or its subsidiaries, under applicable frameworks; and the parent company is in compliance with the requirements of applicable laws and regulations”.
Following Hindenburg’s report, the value of the group firms had fallen by 65 per cent, or Rs 12.4 trillion, from Rs 19.2 to below Rs 7 trillion. However, from the lows on February 27, 2023, the market value of the group has bounced by more than 2 times.
The rebound has been underpinned by the Gautam Adani-owned group’s deleveraging efforts, which included a nearly $2 billion worth sale of promoter shares to the GQG Group in March 2023, which provided a big sentiment to the beleaguered group.
In January, the Supreme Court disposed of all matters in various petitions, including those relating to separate independent investigations relating to the allegations in the SSR. The apex court had also directed Sebi to complete the pending two investigations within three months. Sebi has already completed its investigation in 22 of 24 investigations.
The regulator has also served SCNs to some foreign portfolio investors (FPIs), such as Albula Investment Fund, Cresta Fund, APMS Investment Fund, Elara India Opportunities Fund, Vespera Fund, and LTS Investment Fund that had large exposure to the Adani group firms. According to recent reports, some of the FPIs are looking to settle the allegations through the consent route.