New Delhi: The Supreme Court-appointed expert committee set up to investigate whether the Adani Group companies failed to abide by India’s market regulatory laws has found that there is no evidence of any laws being broken or price manipulation of stocks having taken place.
The six-member expert panel was set up on 2 March to examine issues — including failure to disclose related-party transactions and the beneficial ownership of institutions that had invested in Adani companies, as well as stock price manipulation — brought to light by short-seller Hindenburg Research in a report in January.
The committee, headed by retired SC judge Justice A.M. Sapre, submitted its report to the Supreme Court on 6 May.
The report said that the basis of SEBI’s suspicions regarding the Adani companies, and which led them to begin investigations even before the Hindenburg report came out, was that the ownership structures of 13 overseas entities that held Adani stocks were “opaque”.
However, the committee found that these 13 overseas entities had conformed with the laws at the time and had disclosed all the relevant information about their ownership as legally required. The report also found that Securities and Exchange Board of India (SEBI) was “drawing a blank” in its investigation because it was investigating provisions of the law that had been removed earlier.
SEBI rules also mandate that Indian companies must disclose to it any transactions made with related parties — i.e. another company with a pre-existing relationship with the company doing the transaction. Hindenburg’s allegation was that Adani had failed to disclose several related-party transactions to SEBI.
The committee found that, through various legal amendments over the years, SEBI had defined what would constitute related party transactions and what the disclosures on these should be. Further, it had made amendments in 2021 to the law that would have prospective effect in phases from April 2022 and April 2023.
One issue with this, the committee said, was that SEBI was trying to apply laws that came into effect later to transactions that took place earlier. This would be “legally infeasible”, it said.
The other issue, the panel pointed out, was that SEBI chose the approach to specifically define what related party transactions are. So, it was trying to categorise some transactions by the Adani Group as related party transactions whereas they did not fall under the definitions that had been set.
Towards this, notably, the committee cited a key principle in the Constitution that says that all actions that have not been expressly prohibited remain legal.
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The issue of beneficial ownership
The SEBI (FPI) Regulations, 2014 had a requirement where foreign portfolio investors (FPIs) had to disclose their ultimate beneficial owners.
This was part of a set of rules that were aimed at addressing “opaque structures” in the ownership of FPIs. These rules were also designed to be in consonance with the Prevention of Money Laundering Act (PMLA), 2002.
The committee noted that the 13 overseas entities in question had made all the required declarations regarding their beneficial owners in conformity with the PMLA.
Importantly, it also said that subsequently, in 2018, some parts of these provisions were removed, but that SEBI had been investigating Adani under these provisions from 2020 onwards.
“The very requirement to disclose the last natural person above every person owning any economic interest in the FPI was done away with in 2018 pursuant to a recommendation of a Working Group and the provisions on ‘opaque structure’ were deleted on the premise that declarations under the PMLA constitute sufficient compliance,” the committee said.
“SEBI has been investigating the ownership of the 13 overseas entities since October 2020 despite the aforesaid legislative change that had been effected in 2018,” it added.
In other words, the committee said that the SEBI was investigating provisions of the law that no longer applied.
“It is this dichotomy that has led to SEBI drawing a blank worldwide, despite its best efforts,” the report said. “The securities market regulator suspects wrongdoing, but also finds compliance with various stipulations in attendant regulations. Therefore, the record reveals a chicken-and-egg situation.”
The committee also noted that SEBI was unable to formulate a ‘prima facie’ case against Adani or its promoters. A prima facie case is one where the facts themselves stand to prove a case.
The committee said that the onus of presenting a prima facie case, whether civil or criminal, was on the plaintiff or the prosecutor. Only once a prima facie case is established is the burden shifted to the accused.
“It is trite law that suspicion, however strong, cannot replace proof,” the committee noted.
Investigating related party transactions
The expert committee noted that the approach adopted by SEBI in 2021 regarding related party transactions was to say that transactions involving a subsidiary of a listed company would be deemed to be a transaction with the listed entity. This was to come into effect from April 1, 2022.
Similarly, in 2021, it also said that transactions with an unrelated third party would be regarded as a transaction with a related party, if the purpose and intent is to benefit a related party. This was to come into effect from April 1, 2023.
Allowing this kind of deferred implementation allowed listed companies to rearrange their business dealings in a way that they would not violate the law.
“Such a ‘glide path’ is a matter of good practice in economic legislation, where disruptive changes do not hurt the ease of appreciating what is expected of members of society, to be compliant and to ensure compliance,” the committee said.
However, the fact that these provisions were made with prospective effect meant that SEBI could not then investigate past transactions for failing to adhere to these provisions.
“It would be legally infeasible to attack past transactions on the standards that have later been made applicable with prospective effect,” it said.
Further, having defined related party transactions in such a specific manner, SEBI was trying to prove that other Adani transactions were, in fact, with related parties. This, the committee said, fell afoul of India’s Constitution, which said that an act would be illegal only if the law specifically says it is illegal.
“Another regulatory approach is to make amendments to spell out what would be covered by the legal requirements,” the report said. “With related party transactions, over the years, SEBI, in its legislative capacity, has consistently and consciously chosen this path.”
“The Constitution of India lays down a fundamental principle — all actions of human ingenuity are deemed to be permitted, unless validly made law makes an intervention and restricts it,” the report added. “The rule of law is not that unless explicitly permitted, human action is prohibited, but that unless explicitly prohibited, human action is permitted.”
(Edited by Tony Rai)
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