Respecting SEBI’s mandate, expertise, functional freedom

On January 3, the Supreme Court (SC) disposed of four writ petitions filed in the wake of two reports (by Hindenburg Research and Organized Crime and Corruption Reporting Project) that raised multiple allegations against the Adani group of companies. Following the judgment, a statement was issued on behalf of the Adani group, claiming that its position has been vindicated.

Whether this is an accurate claim is a matter for another day. However, while answering the questions raised in the writ petitions, the judgment has given rise to a few other issues that need to be discussed. PREMIUM The contentions in the petitions centred around the alleged dilatoriness and the absence of competence of the Securities and Exchange Board of India (SEBI) to deal with the issues that the research reports had raised.

(REUTERS) The contentions in the petitions centred around the alleged dilatoriness and the absence of competence of the Securities and Exchange Board of India (SEBI) to deal with the issues that the research reports had raised. The first question that needs to be discussed is whether the SC should have entertained these four petitions/PILs, considering that a number of its previous judgments had taken the position that the SC should refrain from substituting its own wisdom for that of SEBI.

Regrettably, that is what the Court has ended up doing by constituting a six member expert committee, to work alongside SEBI, to ascertain the factual position, and to prescribe corrective measures where necessary. At more than one place in the judgment, the Court has commented on the wide regulatory and adjudicatory powers, coupled with expertise and information gathering mechanisms, that imprint SEBI’s decisions, with a degree of credibility.

Having discussed the previous judgements of the Court, the present Bench has laid down five principles which should guide judicial review of decisions and actions taken by a statutory body tasked with the responsibility of regulation. The first principle is reproduced below: “Courts do not and cannot act as appellate authorities examining the correctness, suitability, and appropriateness of a policy, nor are courts advisors to expert regulatory agencies on matters of policy, which they are entitled to formulate.” This being the position of law, established even before the current writ petitions were filed, the question arises whether “there was a need to review the existing regulatory mechanisms in the financial sector to ensure that they are strengthened with a view to protect Indian investors from market volatility”.

Should these matters not have been left to SEBI to address as SEBI thought fit? The reference to “protect Indian investors” is also not clear since there are non Indian investors who invest in the Indian markets, and are entitled to the same degree of protection. The Preamble to the SEBI Act speaks in terms of the protection of investors and does not distinguish between Indian investors and others.

Paragraph 4 of the judgment refers to the order dated March 2, 2023, in which the Court “took note of the loss of investor wealth in the aftermath of the report by Hindenburg Research and recognised the dire need to protect Indian investors from unanticipated volatility in the market”. The loss of investor wealth, as referred to in the order, is also not clear.

Whenever there is a decline in share prices, investors suffer a notional loss. This translates into an actual loss only when investors sell shares at depressed prices. Information in the public domain indicates that only one Indian mutual fund had any holdings in the shares of the Adani entities, which fell precipitously, following the Hindenburg report.

The number of individual retail investors was also not very large. There is no evidence to show that they panicked and sold their holdings. There is notional loss or notional gain whenever the shares of one or more companies move significantly in either direction. This has not had a broad based impact on the market, as would appear from SEBI’s submission, endorsed by the Court, that “the Indian securities market showed resilience and the impact of the fluctuations in the Adani stocks was not deleterious to the economic ecosystem as a whole.” The judgment further observes that “the volatility in the Adani stocks in the aftermath of the Hindenburg report was stabilised due to market forces and mitigatory measures.

While the shares of the group fluctuated, it did not pose any systemic market level risk.” The Court had also expressed concern about the phenomena of short selling and its possible destabilising influence on the market. However, following SEBI’s submissions, the Court has noted that “short selling is a desirable and essential feature to provide liquidity and to help price correction in overvalued stocks and hence, short selling is recognised as a legitimate investment activity by securities market regulators in most countries.” The judgment also takes note of the position that “the International Organisation of Securities Commission recommends that short selling be regulated but not prohibited with an aim to increase transparency”.

Notwithstanding all of these valid observations, the Court has directed that the loss that has been sustained by Indian investors, as a result of the volatility caused by the short positions taken by Hindenburg Research, and other entities acting in consort with Hindenburg Research, should be probed.

Assuming that this is a course worth embarking on, it might be asked, with due respect, whether the notional loss suffered by investors in respect of their holdings in other companies should also be probed to assess causation. The apex court had clarified that the expert committee and SEBI would work in collaboration with each other.

If SEBI is to be viewed as a statutory body, with powers conferred on it to discharge its responsibilities, there does not seem to be any requirement for an expert body to work alongside SEBI. There should be no reluctance in allowing SEBI to do its job unhindered by non statutory bodies working alongside SEBI, especially when the Court is clear in its observation that the judgement of a statutory regulator should not be questioned unless there is a violation of the fundamental rights of the citizens, an inconsistency with the provisions of the Constitution, an inconsistency with a statutory provision or existence of manifest arbitrariness.

The Court has correctly observed that the legality of the policy, and not the wisdom or the soundness of the policy, is the subject of judicial review. A few words about the expert committee might be in order. The six persons who originally comprised the expert committee (with one of them having been elevated subsequently to judgeship) are persons of eminence.

However, eminence does not always translate to expertise, and in the present case, the existence of relevant expertise in all members is a rebuttable presumption. In sum, it is submitted with utmost respect that the Court should not have entertained the PILs. Having admitted the petitions, the setting up of an expert committee could have been avoided.

It is hoped that persons who are upset by a significant fall in share prices (no one seems to worry about a significant rise) should not treat the apex court as the first port of call. M Damodaran is chairperson, Excellence Enablers and former chairperson, SEBI, UTI and IDBI. The views expressed are personal Unlock a world of Benefits with HT! From insightful newsletters to real time news alerts and a personalized news feed – it's all here, just a click away! Login Now! Continue reading with HT Premium Subscription Daily E Paper I Premium Articles I Brunch E Magazine I Daily Infographics Subscribe Now @1199/year Already Subscribed? Sign In SHARE THIS ARTICLE ON Share this article Share Via Copy Link Adani Group Supreme Court.