The Supreme Court on Thursday formed an expert committee headed by former apex court judge, Justice Abhay Manohar Sapre, to investigate the causal factors and existence, if any, of regulatory failure which led to investors losing crores due to the volatility in the securities market following Hindenburg Research’s report accusing the Adani Group of manipulation of share prices and account fraud.

The committee includes a former chairman of the State Bank of India OP Bhatt, retired Bombay High Court judge Justice JP Devadhar, former chief of the New Development Bank of BRIC countries KV Kamath, co-founder of Infosys Nandan Nilekani, and securities expert and lawyer Somasekhar Sundaresan.

The Supreme Court Collegium’s recommendation of Sundaresan as a Bombay High Court judge has been pending with the government for months now. The government had objected to his name, calling him a “highly opinionated person”, but the Collegium had backed his right to free speech and reiterated its recommendation only recently.

“In order to protect Indian investors from the volatility of the kind witnesses in the recent past, we are of the view that it is appropriate to constitute an expert committee for assessment of the extant regulatory framework and for making recommendations to strengthen it,” a three-judge Bench led by Chief Justice of India DY Chandrachud observed in its order.

Remit of committee

The remit of the committee is four and all-encompassing.

They include, providing an overall assessment of the situation, including the relevant causal factors which led to the volatility in the securities market in the recent past; suggesting measures to strengthen Indian investor awareness; investigating whether there has been a regulatory failure in dealing with the alleged contravention of laws protecting the securities market concerning the Adani Group of companies; suggest measures to strengthen the statutory and regulatory framework and secure compliance with the existing framework for the protection of investors.

The expert committee was requested to submit its report to the Supreme Court in a sealed cover expeditiously within two months.

Market regulator Securities and Exchange Board of India (SEBI), agencies connected with financial regulations, fiscal agencies, and law enforcement agencies should cooperate with the expert committee. SEBI has to provide all “material and requisite information” to the committee. The expenses of the committee would be borne by the Union government.

The court recorded in its order that the SEBI is already investigating the allegations in the Hindenburg report against the Adani Group as well enquiring into “market activity immediately preceding and post the publication of the Hindenburg report to identify violations”.

The SEBI probe, the court noted, included violations of the market regulator’s regulations, including and not limited to various laws like SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003; SEBI (Prohibition of Insider Trading) Regulations, 2015; SEBI (Foreign Portfolio Investors) Regulations, 2019, Offshore Derivative Instruments (ODI) norms, short selling norms, if any.

However, the court highlighted certain blanks in the SEBI’s probe, details of which the court said were too early to out. For example, the court said SEBI has not “expressly referred” to any investigation into the alleged violation of the Securities Contract (Regulation) Rules of 1957 against the Adani Group.

Rule 19A of the 1957 Rules provides for the maintenance of the minimum public shareholding by companies and its attainment within a specified period. Listed companies, other than public sector units, should maintain a public shareholding of at least 25 per cent.

“Similarly there may be various other allegations that SEBI must include in its investigation,” the court said.

Other probe aspects

The court directed SEBI to cover three more aspects of its probe.

These include, whether there has been a violation of Rule 19A of the 1957 Rules; whether there has been a failure to disclose transactions with related parties and other relevant information that concerns related parties in contravention of the law; whether there was any manipulation of stock prices in contravention of existing laws.

The Bench ordered SEBI to keep the apex court-appointed expert committee apprised of its investigation. The court however clarified that its “committee does not divest the SEBI of its powers and responsibilities in continuing with the investigation into the recent volatility in the securities market”.

Referring to its earlier judgment in Prakash Gupta versus SEBI, the court said SEBI, as a regulatory, adjudicatory, and prosecuting agency, has a “vital function to discharge in the context of maintaining an orderly and stable securities market so as to protect the interests of investors”.

Investigation deadline

Bringing the SEBI probe also into its ambit, the court directed the market regulator to complete its investigation within two months and submit its status report.

Referring to petitions filed by advocates Prashant Bhushan, Neha Rathi, Vishal Tiwari, and ML Sharma for an investigation into the Adani-Hindenburg row, the court said its order emphasised the necessity to review the existing regulatory mechanism in the financial sector to “ensure they are strengthened with a view to protecting Indian investors from volatilities in the market”.

The Bench flagged the seriousness of the case as it concerned the “loss of investor wealth in the securities market in the last few weeks because of the steep decline in the share price in the Adani Group of companies” precipitated by the Hindenburg report published on January 24, 2023.