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Adani-Hindenburg Case: SEBI Defends 2019 Rule Change, Opposes Expert Committee Opinion

The Supreme Court had on March 2 constituted an expert committee to investigate if there was any failure to disclose transactions with related parties and if stock prices were manipulated.

New Delhi: The Securities and Exchanges Board of India (SEBI) on Monday told the Supreme Court that its 2019 rule changes do not make it tougher to identify beneficiaries of offshore funds, and action will be taken if any violation is found or established.

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What SEBI Told Supreme Court

Rules concerning beneficial ownership and related-party transactions have continuously been tightened. Such matters came into forefront with the allegations of Adani Group manipulating its stock price.

In May, a Supreme Court-appointed expert committee had filed an interim report saying it saw “no evident pattern of manipulation” in billionaire Gautam Adani’s companies and there was no regulatory failure.

It, however, cited several amendments the Securities and Exchange Board of India (SEBI) made between 2014-2019 that constrained regulators’ ability to investigate, and its probe into alleged violation in money flows from offshore entities has “drawn a blank”.

In its latest affidavit to the top court, SEBI said it did not agree with the expert committee observation of difficulties in identifying holders of economic interest behind an offshore fund. The market regulator also did not make any mention of the status report of its own investigation into allegations against Adani Group. In the affidavit, SEBI said its 2019 rule changes in fact “tightened the disclosure requirement” related to beneficial owners.

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SEBI also differed with the panel observation that stocks will re-price if the markets feel actions taken in the past by the company were not desirable, saying even if the market may re-price the stocks of the company based on the past transactions, “there is no bar on SEBI to examine any securities laws violations because re-pricing of the stock has happened.” SEBI indicated it does not agree with the expert committee’s views and action will be taken if any violation is found/established.

In January this year, New York-based short-seller Hindenburg Research release a report accusing the Adani conglomerate of accounting fraud, stock market manipulation and improper use of offshore entities which led to a rout in the conglomerate’s stocks, dethroning Adani as the world’s third richest man.

The Supreme Court had on March 2 constituted an expert committee to investigate if there was any failure to disclose transactions with related parties and if stock prices were manipulated. The committee was to work in parallel with the probe by SEBI into offshore entities investing in the Adani Group. The regulator was first asked to complete the probe in two months and then given another three months till August 14.

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SEBI also opposed the expert committee’s recommendation that a firm timeline for the regulator to complete its investigation must be “embedded into the law”, saying prescribing such limits “may compromise the quality of investigation”, create constraints and increase litigation.

A bench headed by Chief Justice D Y Chandrachud is scheduled to hear the ongoing Adani-Hindenburg case on Tuesday.

The market regulator has, in its affidavit, given its views on the recommendations by the expert committee on issues like effective enforcement policy, judicial discipline, robust settlement policy, necessary timelines, surveillance and market administration measures, creation of financial redress agency and others.

“Prescribing timelines for initiation of investigation and proceedings may not be appropriate as the Board is mandated to form a prima-facie opinion (reasonable grounds) to appoint an investigating authority,” it said.

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“Further, the nature, scope and complexity of cases in the securities market vary significantly, and ‘reasonable time’ to complete investigation would depend on the facts of each specific case and availability of information. Therefore, prescribing specific timelines to complete the investigation may compromise the quality of the investigation,” the SEBI said.

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