CASE COMMENTARY: “SC'S VERDICT ON ADANI-HINDENBURG” AYUSHI MAHAWAR, STUDENT AT VES COLLEGE OF LAW, MUMBAI UNIVERSITY Case Analysis Mon, Feb 26, 2024, at ,12:07 AM CASE TITLE SC's verdict on Adani-Hindenburg CASE NO Writ Petition (C) No. 162 of 2023 With Writ Petition (Crl) No. 39 of 2023, Writ Petition (C) No. 201 of 2023 and with Writ Petition (Crl) No. 57 of 2023 CITATION DATE OF JUDGEMENT 03.01.2024 JURISDICTION THE SUPREME COURT OF INDIA CORAM Hon’ble Justice Dr. Dhananjaya Y Chandrachud, Hon’ble Justice J B Pardiwala and Hon’ble Justice Manoj Misra. AUTHOR OF THE JUDGEMENT Hon’ble Justice Dr. Dhananjaya Y Chandrachud PETITIONER Vishal Tiwari RESPONDENT Union of India & Ors. ACT INVOLVED Securities and Exchange Board of India Act, 1992 (As amended by the Finance Act, 2021 (13 of 2021) w.e.f. April 1, 2021) INTRODUCTIONOn January 24 last year, the investment research firm Hindenburg Research LLC released a report alleging that the Indian company called Adani is engaged in brazen stock manipulation, accounting fraud, over the course of years they have also not registered their losses and that key listed companies had substantial debt which they too have not mentioned apart from this their were certain other problems in the company which was alleged in the report. People believed the report because earlier also Hindenburg have released several reports for other companies and the allegations were proved to be true. A sharp fall in the share value of various Adani companies, reportedly to the sum amount of $100 billion was seen soon after the report was published. This led to petitions being filed before the top court i.e. the supreme court of India alleging that there were some loopholes in the Securities and Exchange Board of India Act (SEBI Act) and that the Adani group had used these loopholes and problems for manipulating their stocks in the market. Several Public Interest Litigations (PILs) were submitted to the Supreme Court, asking for an investigation into the accusations made by Hindenburg and how they might affect the Indian securities market.FACTS OF THE CASE: Hindenburg is an institute specialising in "forensic financial research". In other words, it looks for corruption or fraud in the business world, such as accounting irregularities and bad actors in management. Hindenburg, a US-based investment research firm, specialises in activist short-selling. Hindenburg Research was founded in 2017 by Nate Anderson, a chartered financial analyst and a chartered alternativ investment analyst. Four PILs (public interest litigations) were submitted to the highest court. The first one expressed worries about the significant decline in the securities market, its impact on investors, alleged lack of resolution, and the distribution of loans to the Adani Group without proper procedures. This PIL called for the formation of a committee overseen by a retired Supreme Court judge to investigate the Hindenburg report. The second PIL claimed that the Adani Group went against India's rules regarding public ownership. It alleged that the group secretly controlled more than 75% of the shares in its listed companies, manipulating share prices in the market. This plea requested a court-monitored investigation, either by a Special Investigating Team (SIT) or the Central Bureau of Investigation (CBI), to look into these allegations. The third PIL called for an examination of the Adani Group's financial dealings, including the involvement of entities like Life Insurance Corp (LIC) and the State Bank of India (SBI). It requested that this investigation be overseen by a sitting judge from the Supreme Court. Simultaneously, the fourth PIL urged the registration of a First Information Report (FIR) against Nathan Anderson, the founder of Hindenburg, for allegedly taking short positions in the group through bonds traded in the US and derivative instruments traded overseas. Additionally, it sought to recover any profits gained from these deals to compensate Indian investors. On March 2 last year, the supreme court asked SEBI to independently investigate the matter, apart from this they have constituted their own separate expert committee headed by former Supreme Court judge Justice A.M. Sapre because there were also some allegations about SEBI that the SEBI Act and SEBI has some regulatory failures which resulted in Adani company making profits and to scrutinise whether there had been any regulatory failure in SEBI such committee was established. So the supreme court directed Justice A.M. Sapre to investigate SEBI Act and SEBI fully and further directed SEBI to investigate this Adani issue i.e. 24 allegations against Adani properly. Which means if Justice say that SEBI is acting properly and fairly then there is no failure in the functioning of SEBI and if SEBI has done a proper research in the Adani issue then their remains no problem. Which means their lies no reason for the Supreme court to interfere in this and that the supreme court has taken a correct step that is to check the regulatory failure in SEBI a committee was set up and to investigate the issue the power remains with the SEBI itself. The committee which was set up also included former State Bank of India chairperson Om Prakash Bhatt; retired Bombay High Court judge Justice J.P. Devadhar, National Bank of Financing Infrastructure and Development chairperson K.V. Kamath; entrepreneur Nandan Nilekani; and advocate Somasekhar Sundaresan who was subsequently elevated to Bombay High Court judgeship. In its report submitted in a sealed cover, the expert committee concluded that there had been "no regulatory failure" on the part of SEBI and SEBI Act in the matter. However, SEBI sought an extension of its probe citing the complexity of the transactions involved. Later, some allegations were made against two members of the committee named Om Prakash Bhatt and Somasekhar Sundaresan saying that they both are having a conflict of interest in the matter. A plea was filed in the top court by Anamika Jaiswal, through advocate Prashant Bhushan, in the plea it was alleged that the court-appointed expert committee which has a conflict of interest. It had pointed out that one of the committee members, O.P. Bhatt, a former chairman of the State Bank of India, was working as the Chairman of Greenko, a leading renewable energy company and Adani group also work in renewable energy so there is some vested interest. Allegations of bias were also made against advocate Somasekhar Sundaresan, another committee member who was recently appointed an Additional Judge of the Bombay High Court, on the ground that he had appeared for the Adani Group in 2006 and had been on "several SEBI committees". Dismissing such concerns, the court observed that the allegations are "belated", which prima facie indicates that they have not been made in good faith because when these plea against the committee was filed six months from the setting up of the committee was already passed and the committee has also submitted their reports regarding SEBI. So the supreme court is of the opinion that if the pleas were filed in good faith then they would have been filed when such committee was formed and such plea appears to be filed just to drag the company in this issue which will result in harm and losses to the company. ALLEGATION AGAINST ADANI Hindenburg Research said its two-year investigation has shown that the Adani group was involved in massive and "brazen stock manipulation" and an "accounting fraud scheme". Adani group had "substantial debt" which has put the entire group on a "precarious financial footing". Engaging in fraudulent activities, including inflating revenue, misstating its cash balance, and hiding its debt levels. Hindenburg's report raises serious concerns regarding the involvement of Vinod Adani, Gautam Adani's older brother, in a network of offshore entities based in Mauritius. According to the report, Vinod Adani is accused of controlling 38 shell entities in Mauritius that have allegedly funneled billions of dollars into both public and private Adani companies in India. The allegations include engaging in stock parking, a practice of selling shares to an intermediary to evade disclosure requirements, along with accusations of share price manipulation and money laundering. The report further suggests that the Adani Group utilized funds from Mauritius to conceal the true extent of the family's ownership in Mumbai-listed Adani companies. Some offshore entities, like London-based Elara and New Leaina Investments, are alleged to have concealed ownership through nominee directors, predominantly holding Adani company shares. The report claims that these practices are aimed at circumventing rules on insider stock ownership limits. ADANI GROUP'S RESPONSE:The Adani Group vehemently denies these allegations, particularly emphasizing that Vinod Adani has no managerial role in any Adani listed entities or their subsidiaries, emphasizing his lack of involvement in day-to-day affairs. The group dismisses the accusations as a selective presentation of disclosures from financial statements, asserting that third parties, qualified to review such matters, have already approved these disclosures. Adani Group contends that the allegations are an attempt to create a biased narrative and asserts that the disclosed transactions are in line with applicable accounting standards and laws. The group also disputes claims of manipulating stock prices, stating that entities referenced in the queries are public shareholders with no control over trading patterns or behavior of other public shareholders. Additionally, the Adani Group refutes concerns about financial health, stating that the cited transactions are not related party transactions and are undertaken in compliance with Indian laws and standards, having been fully disclosed. The group addresses accusations of lax financial controls, asserting that several CFOs mentioned by Hindenburg are still part of the organization in various capacities, and auditors engaged by them are duly certified and qualified in compliance with applicable laws.JUDGEMENT OF THE COURT The court refused to transfer the ongoing investigation being carried out by SEBI to any other agency such as the Central Bureau of Investigation (CBI) or a separate Special Investigating Team (SIT) saying that when the court looks at a rule made by a special regulator like SEBI, they can only scrutinize whether it violates any fundamental right or is manifestly arbitary. Opining on the power of courts to transfer investigation, the court underscored that such powers must be exercised sparingly and in extraordinary circumstances. Court also added that unless the authority statutorily entrusted with the power to investigate "portrays a glaring, willful, and deliberate inaction" in carrying out the investigation, no such transfer of investigation to someone else is warranted. After taking into account that the expert committee said that the SEBI is working properly and it has already completed 22 out of the 24 investigations into the allegations, the court directed the regulator to complete the two pending investigations expeditiously; preferably, within three months and has decided not to transfer this issue to someone else. Now, the highest court in the country told SEBI to finish the last two investigations in three months. Once they are done, Sebi can take legal action against those who broke the rules. The court also wants SEBI to check if Indian investors suffered because of Hindenburg's actions, and if any laws were broken, they should take action in three months. SUPREME COURT ON HINDENBURG In a notable directive, the court directed SEBI to check why Hindenburg made such allegations against Adani and was their any personal profit of Hindenburg in making such allegations. Hindenburg said they were having short positions. In its report, Hindenburg Research admitted to taking a short position in the Adani group through US-traded bonds and non-Indian traded derivative instruments. Supreme court on short positions said might be due to the short position in the shares of Adani group their was a large amount of profit which incurred to the Hindenburg when the share value of Adani fell down. In another words it can be said that might be Hindenburg have done short selling which made them incur a large amount of profits and if they have done such act on purpose just to earn profits by making false allegations against such conglomerate which made the company face many serious problems and from this problems they have earned money which is then considered as a defamation. So supreme court has directed to check that whether the same thing was done by Hindenburg or not and whether it made such allegations for their own interest and if it so happened then SEBI should take suitable actions against Hindenburg as well. CONCLUSIONThe Supreme Court refused to transfer the SEBI investigation on Adani from ongoing proceedings. An expert committee found no regulatory failure by SEBI. Allegations of conflict of interest against committee members were dismissed. Hindenburg's allegations prompted the court to direct SEBI to examine if Hindenburg had personal gains. The court emphasized the need for SEBI to conclude pending investigations within three months and take legal action if rules were violated. The case underscores the delicate balance between investor protection, regulatory scrutiny, and potential market manipulation. Whereas short selling is a tactic used in investing or trading, where individuals predict that the value of a stock or another type of investment will go down. In short selling, the investor borrows shares of a stock or asset they believe will decrease in value. These borrowed shares are then sold to buyers at the current market price. The investor is essentially betting that, before they have to return the borrowed shares, the price will keep dropping. Their goal is to buy back the shares at a lower price, making a profit. However, it's crucial to note that short selling comes with a risk. If the price of the asset rises instead of falling, the potential losses for the investor are theoretically unlimited because there is no upper limit to how high an asset's price can climb.BIBLIOGRAPHY https://economictimes.indiatimes.com/news/et-explains/et-explains-allegations-against-adani-group-sebi-probe-and-sc-order/articleshow/106554195.cms https://www.india.com/business/what-is-the-adani-hindenburg-case-explained-supreme-court-delivers-final-verdict-6629102/ https://www.theweek.in/news/biz-tech/2024/01/03/key-takeaways-from-supreme-court-verdict-in-adani-hindenburg-case.html https://www.reuters.com/markets/adani-vs-hindenburg-what-you-need-know-2023-01-31/ https://www.ft.com/content/aa626668-5b7f-4697-9ef0-ba9b2bff5155