India’s Union government on Monday agreed to the Supreme Court’s suggestion of setting up an expert committee to strengthen its supervisory regime after a report by US firm Hindenburg Research against the Adani Group led to a massive slide in the conglomerate’s stock prices, even as it expressed confidence in the current framework and “full resilience” of Indian stock markets.
At the same time, the Securities and Exchange Board of India (Sebi) told the top court that an enquiry into the Hindenburg report as well as related market activities was underway.
Submitting a 25-page note before a bench headed by Chief Justice of India (CJI) Dhananjaya Y Chandrachud, Sebi said it had no objection to the constitution of a committee, as envisaged by the court on February 10, but the terms of reference of this panel must be carefully laid down.
“The remit of the committee would be very relevant because any unintentional message to international investors or domestic investors that the regulatory authorities themselves need a monitoring by a committee may have some adverse impact on the flow of money and investments internationally,” solicitor general (SG) Tushar Mehta, who was representing both the Centre and Sebi, told the bench which also comprised justices PS Narasimha and JB Pardiwala.
Responding to two public interest litigations seeking a probe into various aspects related to the American short-seller Hindenburg’s report, Mehta added the government would like to propose the remit of the expert committee and also names of a few experts who should be made a part of it. To this, the bench asked Mehta to submit his note by February 15, and fixed the matter for hearing next on February 17.
Hindenburg’s report, released on January 24, claimed “brazen accounting fraud” and “stock manipulation” by the Gautam Adani-led group. Though the conglomerate rejected the report as “unresearched” and “maliciously mischievous”, it triggered a massive rout of Adani Group stocks, with the flagship firm losing over $120 billion in days, and forcing the cancellation of a ₹20,000 crore secondary share sale after it had scraped through.
Sebi’s note, adduced before the bench on Monday, said it was looking into both “allegations made in the Hindenburg report as well as the market activity immediately preceding and post the publication of the report”, but pointed out that Indian stock markets were resilient during this period, and that the PIL is about “events” specific to a “single Group of companies”.
“The events that are the subject of the PIL are related to one set of entities in the market and have not had any significant impact at the systemic level,” it said. “While the shares of the Group have seen significant decline in prices on account of selling pressure, the wider Indian market has shown full resilience.”
Without naming the Adani Group, the regulator also said that “entity level issues that have arisen… warrant detailed examination” and that this has been “actioned”. As the matter is in early stages of examination, Sebi said, it may not be appropriate to list details about the ongoing proceedings at this stage.
“Thus, it may be noted that the subject of the PIL relates to events that are localised to a single Group of companies and that there is no significant impact at a market wide level or at a system wide level, that might warrant a system level review of the regulatory frameworks in operation,” said the note.
The regulator’s affidavit also pointed to Hindenburg’s disclosure that its “short positions in the Group are in USD bonds in overseas markets and in non-India traded derivatives”. To be sure, neither falls under Sebi’s jurisdiction.
Sebi further listed out various measures it has in place to protect investors and prevent stock volatility, including adequate disclosure by companies, and circuit breakers to prevent a stock’s price from rising or falling sharply in a session.
“Thus, it may be noted that the subject of the PIL relates to events that are localized to a single Group of companies and that there is no significant impact at a market wide level or at a system wide level, that might warrant a system level review of the regulatory frameworks in operation,” said the note.
India follows this policy of regulated short selling and has framed its regime accordingly, said the regulator, adding: “Sebi has a robust set of frameworks and market systems to ensure seamless trading and settlement including frameworks for volatility management and restrictions on short selling including by foreign institutions.”
As HT reported last week, the decline in the market value of a share by lakhs of crores does not always mean investors have 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, this is notional) and also corresponds to the extent of their 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.
On February 10, the bench suggested that the Centre 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 Hindenburg’s report accused the Adani Group of fraud, leading to a massive slump in its stocks.
Suggesting the supervision of the proposed committee by a retired judge to formulate the way forward, the bench on that day also 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 court is currently seized of the PILs filed separately by advocates Visha Tiwari and ML Sharma related to the Hindenburg report.
Tiwari’s plea focused on the “monumental loss to investors” and claimed the 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.
