The Supreme Court on Friday implored the Union government to put in place a “robust framework” by amending laws and strengthening supervisory control in order to protect thousands of investors who have been hit after a report by US firm Hindenburg Research accused the Adani Group of fraud, leading to a massive slide in its stocks.
Dealing with two public interest litigations (PIL) that highlighted how the shares of the listed firms of the Adani Group lost a record $120 billion (close to 50% of value) within a matter of days, and led to massive losses to investors, a bench headed by Chief Justice of India (CJI) Dhananjaya Y Chandrachud proposed the constitution of an expert committee under the supervision of a retired judge to formulate the way forward.
“If the Union (government) is ready to accept the suggestion, the necessary recommendation of the committee may be made,” said the court in its order, while asking solicitor general (SG) Tushar Mehta, who appeared for the Centre and the market regulator Sebi, to submit by February 13 a detailed report on the current regime and the changes that can be planned to make it more robust in the future.
The bench, also comprising justices PS Narasimha and JB Pardiwala, maintained that it was primarily concerned about protecting investors and facilitating a stable development of the securities market so that the controversy such as the one that hit the Adani Group does not result in a massive drain on the capital market and losses for individuals in future.
“The point that really bothers us, is how do we protect the interest of the Indian investors? The petitions have alleged this to be a result of short selling (by Hindenburg founder Nathan Anderson and his associates). If this was happening in small scale, nobody bothers. But if the total loss of Indian investors goes up to several lakhs of crores, how do we ensure we have a robust mechanism in place going in future?” the bench asked the SG.
To be sure, the decline in the market value of shares by lakhs of crores does not always mean investors have actually lost that much money. The losses are a function of the price at which the investors bought the shares (and even then, till they sell the shares, the gain or loss is only notional) and also corresponds to the extent of heir holding. In the case of the Adani Group’s listed companies, their low free-float (proportion in the hands of public investors) means this was likely low.
“We have indicated to SG our concern with regard to ensuring that regulatory mechanism within the country is duly strengthened so that Indian investors are protected against sudden volatility which has been witnessed in recent two weeks… The response can contain existing regulatory framework, the relevant causal factors, the need for putting into place robust mechanism to protect investors,” the court said in its order.
Hindenburg’s report, released on January 24, claimed “brazen accounting fraud” and “stock manipulation” by the Gautam Adani-led group. Though Adani Enterprises rejected the report as “unresearched” and “maliciously mischievous”, the Hindenburg report triggered a massive rout of Adani stocks and market value, with the flagship firm losing over $120bn in days, forcing the cancellation of a $2.5 billion FPOafter it had scraped through.
During the hearing, the bench observed that it was mindful about “treading with caution” in a matter like this because “stock markets work on sentiments” and the court could only have a limited role of facilitating a dialogue so that a “better mechanism” to protect the investors could be evolved.
“Can we contemplate having an expert committee, possibly from banking, investment area, headed by a wise guiding force in form of a retired judge? We are just thinking out aloud… It’s a new world and capital inflows are seamless. It can happen again… this broad body can think of modification of statutory of regulatory provisions which ultimately government can take a call on,” the bench told the SG.
Mehta, on his part, said that Sebi has been “on top of the matter” and has been looking into it from all angles of statutory and regulatory regime. He assured the court that all possible measures are being contemplated, lamenting that the trigger, the Hindenburg report, was outside the territorial jurisdiction of the country.
The bench, in its order, clarified that its observation shall not be a reflection on the discharge of statutory function by Sebi or any other statutory authority, and observed that the exercise proposed to be undertaken by the court may also look at a “wider role” for the market regulator given the fact that the stock markets have changed significantly over the years.
“India today is not how it used to be in 1990s and stock market is also not the place only for the rich. But today, the stock market is also for the wide area of middle class… you can come back and let us know what will help the process along,” it told Mehta while fixing the next hearing on Monday.
The court was hearing the PILs filed separately by advocates Visha Tiwari and ML Sharma related to the American short-seller Hindenburg Research’s report.
Tiwari’s plea focused on the “monumental loss to investors” and claimed the Hindenberg report needs to be investigated to ascertain if a calculated attempt was made to tarnish the country’s image and impact its economy. The lawyer demanded a court-monitored probe.
Sharma, on the other hand, questioned Sebi’s failure to suspend trading of Adani Group shares soon after the report came out and demanded a criminal prosecution of the short sellers. His petition named Hindenburg founder Nathan Anderson and his associates as short sellers, whom it accused of hatching a “criminal conspiracy” by releasing a “concocted news” as research report to cause heavy losses to the shareholders of Adani stocks.
The fallout of the Hidenburg report has since triggered a massive row, with the Opposition targeting the ruling Bharatiya Janata Party over alleged links between Prime Minister Narendra Modi, and his government, and the Adani Group.
The government has distanced itself, pointing to regulatory bodies capable of taking required action. Last week Union finance minister Nirmala Sitharaman referred to SBI and LIC statements that said their exposures were “well within limits”. State Bank is a lender to the Adani Group while LIC is a significant investor in shares of its listed entities.
