VISHAL TIWARI versus UNION OF INDIA & ORS on 2 March 2023

1. Notice.

2. The present batch of petitions concerns the loss of investorwealth in the securities market over the last few weeks because of aEsteep decline in the share price of the Adani Group of companies. Thedecline in the share price was precipitated by a report published byHindenburg Research on 24 January 2023. This report inter alia allegesthat the Adani Group of companies has manipulated its share prices;failed to disclose transactions with related parties and other relevantinformation concerning related parties in contravention of the regulationsFframed by SEBI; and violated other provisions of securities laws. Thereport also states that Hindenburg Research has taken a short positionin the Adani Group companies through US traded bonds and non-Indiantraded derivative instruments. It is in this background that the presentbatch of petitions came to be filed.G3. A brief overview of the petitions follows:

a.WP(C) No. 162 of 2023 states that public money amountingto thousands of crores is at risk because public institutionslike the State Bank of India[1]and the Life Insurance

Corporation of India[2]are exposed to the Adani Group. Itinter alia seeks the issuance of directions to the Union ofIndia and the Union Ministry of Home Affairs to constitutea committee headed by a retired judge of the Supreme Courtto investigate the contents of the report published byHindenburg Research; b.WP(Crl) No. 39 of 2023 is for the issuance of directions tothe Union Ministry of Home Affairs to register an FIRagainst Mr. Nathan Anderson (founder of HindenburgResearch) and his associates for short selling, and fordirections to recover the profits yielded by the short sellingto compensate investors;

c.WP(C) No. 201 of 2023 inter alia states that “the AdaniGroup has been in flagrant violation of ... Rule 19A ofthe Securities Contracts (Regulation) Rules bysurreptitiously controlling more than 75% of the sharesof public listed Adani group companies, therebymanipulating the price of its shares in the market.” Itinter alia seeks a court monitored investigation by a SpecialInvestigation Team or by the Central Bureau of Investigationinto the allegations of fraud and the role played by topofficials of leading public sector banks and other lenderinstitutions; and d.WP(Crl) 57 of 2023 is for directions to any investigativeauthority to: (i) investigate the Adani Group companies underthe supervision of a sitting judge of this Court; and (ii)investigate the role of LIC and SBI in these transactions.

4. In its order dated 10 February 2023, this Court noted that therewas a need to review existing regulatory mechanisms in the financialsector to ensure that they are strengthened with a view to protect Indianinvestors from volatilities in the market. Accordingly, it was suggested tothe Solicitor General that he may seek instructions from the Union ofIndia on the constitution and remit of an expert committee.

5. We have heard Mr. Prashant Bhushan, learned senior counselappearing for the petitioners and Mr. Tushar Mehta, learned SolicitorGeneral appearing for the Union of India. Both of them have also placed2 “LIC”

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Aon record brief notes indicating their suggestions for the remit of theexpert committee to be constituted. Further, SEBI has placed on recorda brief note on the factual and legal aspects describing the existingstatutory regime, regulatory mechanisms and frameworks in place forthe protection of investors. It has also laid out the regulatory frameworkgoverning short selling. Mr Vishal Tiwari and Mr Manohar Lal SharmaBhave appeared in person.

6. SEBI has submitted in its note that:

a.It has adopted a disclosure based regulatory regime for bothissuance of and trading in securities. This is in line with theCdiscontinuation of pricing control for capital issues in favourof the principle of free discovery by the markets based ondemand and supply from informed investors; and b.It is “strongly and adequately empowered to put in placeregulatory frameworks for effecting stable operations andDdevelopment of the securities markets including protectionof investors.” It has also detailed the extant frameworkgoverning investor protection in the context of the subjectmatter at hand. It has stated that the key pillars of investorprotection are:

E“11.1 Mandatory disclosures by listed companies to facilitatefree and fair price discovery and to ensure that all investorshave equal access to material information for them to be ableto take informed investment decisions; 11.2 Market systems to ensure seamless trading and settlementFincluding volatility management; 11.3 Enforcement action in the event of misconduct in themarket including fraud or violations of SEBI regulations.”

7. In Prakash Gupta v. SEBI,[3]a two Judge Bench of this Court,of which one of us (D.Y. Chandrachud, J) was a part discussed theGspecialized regulatory role of SEBI and noted that:

“99. The provisions of the SEBI Act, as analyzed earlier in thisjudgment, would indicate the importance of the role which hasbeen ascribed to it as a regulatory, adjudicatory and prosecuting agency. SEBI has vital functions to discharge in the context ofmaintaining an orderly and stable securities’ market so as to protectthe interests of investors.”

8. On the subject matter of these petitions, SEBI has stated that:

“21.1 SEBI is already enquiring into both, the allegations made inthe Hindenburg report as well as the market activity immediatelypreceding and post the publication of the report, to identifyviolations of SEBI Regulations including but not limited to SEBI(Prohibition of Fraudulent and Unfair Trade Practices I relatingto Securities Market) Regulations 2003, SEBI (Prohibition ofInsider Trading) Regulations 2015, SEBI (Foreign PortfolioInvestors) Regulations 2019, Offshore Derivative Instruments(ODI) norms, short selling norms, if any. As the matter is in earlystages of examination, it may not be appropriate to list detailsabout the ongoing proceedings at this stage.”

9. In view of the above statement, it appears that SEBI is seizedof the investigation into the allegations made against the Adani Groupcompanies. SEBI has not expressly referred to an investigation into thealleged violation of the Securities Contracts (Regulation) Rules 1957which provide for the maintenance of minimum public shareholding in apublic limited company. Similarly, there may be various other allegationsthat SEBI must include in its investigation.

10. As a part of its ongoing investigation, SEBI shall also investigatethe following aspects of the issues raised in the present batch of petitions:

a.Whether there has been a violation of Rule 19A of theSecurities Contracts (Regulation) Rules 1957; b.Whether there has been a failure to disclose transactionswith related parties and other relevant information whichconcerns related parties to SEBI, in accordance with law;and

c.Whether there was any manipulation of stock prices incontravention of existing laws.

11. The above directions shall not be construed to limit the contoursof the ongoing investigation. SEBI shall expeditiously conclude theinvestigation within two months and file a status report.

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A12. Further, SEBI shall apprise the expert committee (constitutedin paragraph 14 of this order) of the action that it has taken in furtheranceof the directions of this Court as well as the steps that it has taken infurtherance of its ongoing investigation. The constitution of the expertcommittee does not divest SEBI of its powers or responsibilities incontinuing with its investigation into the recent volatility in the securitiesBmarket.

13. In Prakash Gupta (supra), we took note of the developingnature of the regulations pertaining to the securities market. This Courtnoted that:C“101. Therefore, the SEBI Act and the rules, regulations andcirculars made or issued under the legislation, are constantlyevolving with a concerted aim to enforce order in the securitiesmarket and promote its healthy growth while protecting investorwealth.”

D14. In order to protect Indian investors against volatility of thekind which has been witnessed in the recent past, we are of the viewthat it is appropriate to constitute an Expert Committee for the assessmentof the extant regulatory framework and for making recommendations tostrengthen it. We hereby constitute a committee consisting of thefollowing members:E

a. Mr. O P Bhatt;

b. Justice J P Devadhar (retired)

c. Mr. KV Kamath;

d. Mr. Nandan Nilekani; andF

e. Mr. Somashekhar Sundaresan.

The Expert Committee shall be headed by Justice Abhay ManoharSapre, a former judge of the Supreme Court of India.

15. The remit of the Committee shall be as follows:

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a.To provide an overall assessment of the situation includingthe relevant causal factors which have led to the volatilityin the securities market in the recent past; b.To suggest measures to strengthen investor awareness; H

c.To investigate whether there has been regulatory failure inAdealing with the alleged contravention of laws pertaining tothe securities market in relation to the Adani Group or othercompanies; and d.To suggest measures to (i) strengthen the statutory and/orregulatory framework; and (ii) secure compliance with theBexisting framework for the protection of investors.

16. The Chairperson of the Securities and Exchange Board ofIndia is requested to ensure that all requisite information is provided tothe Committee. All agencies of the Union Government including agenciesconnected with financial regulation, fiscal agencies and law enforcementagencies shall co-operate with the Committee. The Committee is at libertyto seek recourse to external experts in its work.

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17. The honorarium payable to the members of the Committeeshall be fixed by the Chairperson and shall be borne by the UnionGovernment. The Secretary, Ministry of Finance shall nominate a seniorofficer who will act as a nodal officer to provide logistical assistance tothe Committee. All the expenses incurred in connection with the workof the Committee shall be defrayed by the Union Government.

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18. The Committee is requested to furnish its report in sealedcover to this Court within two months.

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Ankit Gyan

(Assisted by : Mahendra Yadav, LCRA)

Directions issued.

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