Background
The Adani Group, one of India’s largest conglomerates, faced a major crisis in January 2023 when Hindenburg Research, a US-based investment research firm, published a report accusing the group of “brazen stock manipulation and accounting fraud scheme over the course of decades”. The report claimed that the group had inflated its share prices and concealed its substantial debt by using a complex web of offshore entities and transactions. The report also alleged that the group had links to dubious entities and individuals, some of whom were facing criminal charges or sanctions.
The report triggered a massive sell-off in the stock market, wiping out more than $100 billion from the group’s market value in a matter of days. The group’s flagship company, Adani Enterprises, which was planning to raise Rs 20,000 crore through a follow-on public offer (FPO), had to postpone its plans amid the turmoil.
The Adani Group strongly denied the allegations and said that the report was a “calculated attack on India” and its institutions. The group also said that it had complied with all the laws and regulations and that its financial statements were audited by reputed firms.
Legal Battle
The controversy soon reached the Supreme Court, where a batch of petitions were filed by some investors and activists seeking a transfer of the investigation from the Securities and Exchange Board of India (SEBI) to another agency, such as the Central Bureau of Investigation (CBI) or a Special Investigation Team (SIT). The petitioners argued that SEBI was not competent or independent enough to probe such a complex case involving multiple jurisdictions and entities. They also alleged that SEBI had failed to act on the Hindenburg report and that there was a regulatory capture by the Adani Group.
The Supreme Court, however, refused to entertain these pleas and instead asked SEBI to conduct an independent and expeditious investigation into the matter. The court also constituted an expert committee headed by former Supreme Court judge Justice A.M. Sapre to examine whether there was any regulatory failure on SEBI’s part. The committee comprised of 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.
Verdict
On January 3, 2024, the Supreme Court delivered its verdict on the case, upholding SEBI’s probe and dismissing the transfer petitions. The court said that there was no ground to doubt SEBI’s competence or integrity and that the scope of judicial review in such cases was limited. The court also said that it was not appropriate to interfere with SEBI’s policy decisions or exercise of discretion.
The court relied on the report of the expert committee, which concluded that there was no regulatory failure on SEBI’s part and that it had taken prompt and appropriate action on the Hindenburg report. The committee also said that SEBI had followed due process and principles of natural justice while conducting the investigation.
The court noted that SEBI had completed the investigation in 20 out of 22 matters related to the allegations against the Adani Group and that it had issued show-cause notices to some of the group entities and individuals. The court directed SEBI to complete the investigation in the remaining two matters within three months and take necessary action as per law.
The court also observed that Hindenburg Research had not approached SEBI with any complaint or evidence against the Adani Group and that it had only published its report on its website and social media platforms. The court said that Hindenburg Research had no locus standi in the matter and that it had acted with a “mala fide intention” to harm the reputation and interests of the Adani Group.
Implications
The verdict of the Supreme Court is seen as a major relief for the Adani Group, which has been facing scrutiny and criticism from various quarters since the Hindenburg report came out. The group has maintained its innocence and said that it welcomes the verdict as it vindicates its position.
The verdict is also seen as a boost for SEBI, which has been entrusted with the responsibility of regulating and protecting the interests of investors in the securities market. The verdict reaffirms SEBI’s authority and autonomy as well as its ability to handle complex cases involving cross-border transactions and entities.
The verdict may also have an impact on the stock market performance of the Adani Group companies, which have recovered some of their losses since last year but are still trading below their pre-Hindenburg levels. The group may also resume its fund-raising plans through FPOs or other means to finance its ambitious expansion projects in various sectors.
The verdict, however, does not mean that the controversy is over. SEBI still has to complete its investigation and take action against any violations or irregularities that it may find. The Adani Group may also have to face legal challenges or proceedings in other jurisdictions where it operates or has interests. Hindenburg Research may also continue to publish more reports or allegations against the group or its promoters.
The verdict, therefore, may not close the controversy, but it may certainly change its course and dynamics.