Author: Prerna Bisht, UPES

India's Supreme Court recently intervened in matters that followed after Hindenburg Research published a report on January 24, 2023, pointing to the Adani Group. The report alleged that the company had overstated its share prices and was non-transparent when dealing with related parties. These allegations caused a decline in the Adani share prices and brought about general uncertainty within the stock market. In reaction to the outcry, the Supreme Court reviewed calls for an impartial investigation. Yet, the Court declined to relocate the investigation from SEBI, India's market regulator, saying that SEBI was already dealing with the issue and should be left to complete its task. The Court highlighted the significance of supervision and asked SEBI to complete its outstanding investigations promptly. Concurrently, the Court called on authorities to weigh whether investor protections and market controls should be enhanced so that such a case would not recur in the future. The Supreme Court petitions in the Adani-Hindenburg case involved a host of issues and prayed for a variety of interventions. Petitioners requested that there should be court-supervised inquiries and questioned whether the investigation was to be transferred from SEBI to another organization, the CBI or a Special Investigation Team.

The key questions of law in the case were:

There were complaints against the Adani Group, including the violations of Rule 19A, non-disclosure of related-party dealings, and stock price manipulation.

The extent of judicial review or overseeing of SEBI’s regulatory powers and actions.

Claims of regulatory lapse by SEBI, particularly regarding its amendments to Foreign Portfolio Investment (FPI) and Listing Obligations and Disclosure Requirements (LODR) regulations.

Whether the investigation should remain with SEBI or be transferred to another agency, given concerns about impartiality and effectiveness.

The role and credibility of third-party reports, e.g., those of OCCRP or media, in affecting regulatory and judicial proceedings.

Complaints of conflict of interest regarding members of the expert committee nominated by the Court to consider the case.

The general issue of how short selling is regulated and its effect on market stability.

The requirement of improving investor knowledge and enhancing the overall regulatory framework to better protect market participants.

Finally, the Supreme Court ruled that SEBI must carry on its investigation since no clear-cut proof of regulatory failure or will-full inaction existed. The Court further underlined the need for strong, evidence-based regulation and protection of investors, refusing to shift the probe to a different agency.

Petitioners: Vishal Tiwari, and other petitioners in WP (C) No. 201 of 2023, WP (Crl) No. 57 of 2023, and WP (Crl) No. 39 of 2023.   

Respondents: Union of India, Securities and Exchange Board of India (SEBI), Mr. Nathan Anderson (Hindenburg Research founder), Life Insurance Corporation of India (LIC), and State Bank of India (SBI).

Following Hindenburg Research coming out with its report accusing the Adani Group of manipulation of stock prices and non-disclosure and coming out in the open to say it was short the successive filing of a series of petitions expressing fears about market disruption and loss of investor wealth prompted the Supreme Court to order SEBI to proceed with its inquiry and also establish an Expert Committee to examine regulatory frameworks and safeguard investor interests.

The Supreme Court observed severe dilution of the wealth of investors and stressed the safety of Indian investors in the wake of Adani Group charges. The Court asked SEBI to go ahead with the probe, specifically on potential violative action under Rule 19A of the Securities Contracts (Regulation) Rules, 1957, failure to disclose related-party transactions, and suspected price manipulation of shares. SEBI was ordered to finish its inquiry within a specified period and then submit a status report to the Court. Alongside SEBI’s ongoing investigation, the Court established an Expert Committee chaired by Justice Abhay Manohar Sapre. This committee was instructed to study the reasons for market volatility, assess investor education programs, determine if there had been any regulatory failures with respect to the Adani Group, and propose measures to strengthen investor protection and oversight. The committee was also required to report within two months.

Significantly, the Supreme Court clarified that the formation of the Expert Committee did not diminish the powers and duties of SEBI to investigate the issue. SEBI and the committee were both required to run parallel to one another, making a proper examination of the issues and strengthening the institutional mechanism for the safeguarding of investor interest.

The Expert Committee had presented its report to the Court, with SEBI also giving a comprehensive update regarding the status of its twenty-four investigations into Adani Group. Throughout the proceedings, petitioners for the first time raised conflict of interest allegations against certain members of the Expert Committee, but the Court held these charges to be unsubstantiated and expressed its continued faith in the Committee's work.

• Alleged Violations by Adani Group

• Scope of Judicial Review over SEBI's Regulatory Domain

• Alleged Regulatory Failure by SEBI

• Transfer of Investigation from SEBI

• Reliability of External Reports

• Conflict of Interest Allegations

• Role and Regulation of Short Selling

• Investor Awareness and Regulatory Framework Strengthening

These issues are important for several reasons like, these events place India's capital market regulations and the enforcement power of SEBI under intense scrutiny, particularly when there is a serious allegation of corporate malfeasance and market manipulation, this keeps SEBI in check.

They also describe the extent of interference possible by courts in the work of professional regulatory bodies, particularly in economic policy considerations and continuous probes. This is necessary to ensure the balance between judicial review and the independence of executive bodies like SEBI. Yet another such notable aspect is the impact on public trust. Such instances raise questions about whether the regulatory system is strong enough to protect investors, especially after events that shake the markets and cause gigantic financial losses.

The case also provokes basic questions about the place of international activist short sellers. It forces regulators and policy makers to ask whether current regulation is sufficient to deal with the risk posed by international operators that can trigger volatility in home markets.

Lastly, the proceeding expands into the length of which evidence from non-official sources such as investigative reports or reports from NGOs are to be considered in court. This has far-reaching implications for public interest litigation and establishes standards relating to the kind of evidence accepted as credible in court.

Holding: The Supreme Court rejected the petitioning party's submission that SEBI’s amendments to the Foreign Portfolio Investors (FPI) Regulations and the Listing Obligations and Disclosure Requirements (LODR) Regulations showed a lapse in regulatory oversight. After reviewing SEBI’s submissions, the Court asserted that the changes did not weaken supervision. On the contrary, the changes made disclosure requirements more stringent and ensured that necessary information was provided at the outset. The Court also held that the procedure adopted by SEBI for making such amendments was correct and according to the established norms.

The Supreme Court refused to hand over the Adani investigation from SEBI to agencies like the CBI or a special team, stating that SEBI had already carried out a thorough probe, wrapping up 22 out of 24 cases, and there was no sign of intentional neglect or bias. The Court also brushed aside the petitioners’ use of OCCRP reports and media coverage, saying these were not solid evidence and couldn’t be treated as proof.

Concerns about an old Directorate of Revenue Intelligence (DRI) letter from 2014 were also dismissed, as the matter had already been settled by both the authorities and the Supreme Court itself. As for allegations about conflicts of interest among the Expert Committee members, the Court found these claims baseless, especially since they surfaced only after the committee had completed its work and submitted its findings.

While SEBI’s lead role was reaffirmed, the Court told both SEBI and the government to take the Expert Committee’s suggestions seriously—particularly those aimed at boosting investor awareness and tightening the regulatory system. The Court also called for a closer look at whether the losses suffered by Indian investors, possibly linked to Hindenburg Research and others who took short positions, involved any breach of the law.

Rationale: The supreme court specified the limit of judicial review. It stated that courts cannot act as appellate authorities for expert agencies and can only interfere with violation of fundamental right, unconstitutional act or arbitrary act.

It stated that for technical or economic matters, there should be deference to expert bodies like SEBI. The transfer of investigation should be done only in extremely rare cases like in case of bias or deliberate inaction. The petitioner also failed to provide concrete evidence.

Legal Reasoning 

The Court's reasoning was unanimous, applying established legal principles. The Court reiterated judicial restraint in policy matters, citing IFB Agro Industries Ltd v. SICGIL India Ltd and Prakash Gupta v. SEBI to emphasize that courts should not substitute their wisdom for SEBI's expertise. Intervention is only for arbitrary or unconstitutional actions.

SC found no merit in claims against the FPI and LODR amendments, SEBI clarified that these amendments tightened disclosure, aligned with PMLA and prevented circumvention of related party transactions. 

SC found that SEBI conducted sufficient investigation regarding this and cited Himanshu Kumar v. State of Chhattisgarh stating that to transfer an investigation there must be a "glaring, willful and deliberate inaction" or bias which was not proved against SEBI.

The Supreme Court reaffirmed that it will not function as an appellate body for the policy choices of expert regulators. Judicial intervention is reserved for cases where a policy clearly breaches fundamental rights, is unconstitutional, or is blatantly arbitrary. The judgment recognized the value of specialized knowledge in areas like financial regulation, making it clear that technical decisions by bodies such as SEBI should not be easily second-guessed by the courts. The court stated SEBIs' authority and expertise, which gave it power to make market decisions. It clarified that shifting investigation required specific evidence. The ruling stressed that allegations have to be backed by strong evidence. The ruling strengthens the authority and autonomy of SEBI, there is continued focus on investor protection and discouragement of speculative PILs and also provides for further scrutiny by the government on Hindenburg Research' causing losses to Indian investors.

The judgment shows restraint, which respects the domain expertise of SEBI and upholds the independence of regulatory bodies. Setting forth the evidential requirement for availing the courts for litigation, hence, has raised the bar for future litigations. The establishment of the Expert Committee is also indicative of the willingness of the Court to underpin enhancements to the entire regulatory ecosystem. 

Looking at it from the other side, the Court may be seen by some as having missed an opportunity on how it dealt with SEBI's investigative process. The Court has not questioned the speed or thoroughness of the investigation; instead, it accepted SEBI's assessment largely at face value. Because of this, some questions as to the essence of the allegations may go unanswered in the cursory manner in which the Court has examined them.

The SC, in this case, has upheld the autonomy of SEBI, rejecting petitions to move the investigation or adjudicate on regulatory issues. The Court held that it will not intervene with the decisions of expert agencies where there is lack of evidence of wrongdoing and the court must be satisfied with solid evidence before intervening.

The Court asked both SEBI and the government to consider the Expert Committee's recommendations on enhancing investor safeguards and to delve into the activities of short sellers similar to those of Hindenburg Research. This greatly improves the credibility of India's financial regulatory system, thereby promoting stability and certainty in the markets. In contrast, this also increases the pressure on SEBI to come forth with efficient and transparent results amid public scrutiny on the case.

• Himanshu Kumar v. State of Chhattisgarh, (2022) SCC OnLine SC 884 (India).

• IFB Agro Indus. Ltd. v. SICGIL India Ltd., (2023) 4 S.C.C. 209 (India).

• Prakash Gupta v. Sec. & Exch. Bd. of India, (2021) SCC OnLine SC 719 (India).

• Nealie Deol, Indian Supreme Court Closes the Curtain on Securities Board’s Adani Investigation — Brown Undergraduate Law Review, BROWN UNDERGRADUATE L. REV. (Mar. 21, 2024), https://www.brownulr.org/blogposts/indian-supreme-court-closes-the-curtain-on-securities-boards-adani-investigation.

• SCO Team, Adani-Hindenburg Controversy | Judgement Pronouncement, SUP. CT. OBSERVER (Jan. 4, 2024), https://www.scobserver.in/journal/adani-hindenburg-controversy-judgement-pronouncement/.