It has been widely reported in the media that the Supreme Court-appointed expert committee led by retired judge Justice AM Sapre has given a clean chit to the Adani Group in relation to the investigation triggered by the Hindenburg Research report.

However, such a conclusion is incorrect on the face of it, since the report by the committee has not exactly given a “clean chit” to Adani as regards various aspects which were probed.

What stands out in the report is that the committee has given a clean chit to the Securities and Exchange Board of India (SEBI), which had also come under the scanner for its alleged failure to probe Adani's dealings. The committee in its report has said that it has prima facie found no lapse on the part of SEBI in probing Adani companies.

In fact, the committee report is largely based on SEBI’s probe itself, though the two were asked to probe the conglomerate's transactions independently.

So what exactly has the report found on Adani?

Related party transactions – clean chit

On related-party transactions probed by SEBI, the committee concluded:

- SEBI's investigation was based on the premise that it is pursuing the "spirit of law" but goes against the prospective amendments with deferred effect that SEBI made on legislative side;

- Some transactions date back to nearly a decade ago, which predate the LODR (Listing Obligations and Disclosure Requirements) Regulations, when the listing agreement was the instrument of law that was applicable.

The committee said that when legislative policy proceeds in a certain direction, the enforcement cannot move in a diametrically opposite direction. The enforcement, it said, should be consistent and in consonance with the publicly declared law.

Once SEBI has taken the legislative position (in November 2021) that transactions between related parties and subsidiaries of listed companies would come within the coverage of the related party transactions only with deferred prospective effect (from April 1, 2022), it cannot assail past transactions effected even before November 2021 citing 'spirit of law'.

Price manipulation - No clean chit yet

The report noted that Adani stocks were under the scanner of SEBI even prior to the Hindenburg report.

The price movement on Adani stocks had been considered by stock exchanges on four occasions, and they had submitted reports to the SEBI on the same. Two of those reports were prior to the Hindenburg report and two came after.

Further, SEBI also examined whether there was any unusual trading pattern proximate to the release of the Hindenburg report. While there was no adverse observation with regard to Adani scrips in the cash segment, suspicious trading was observed on the part of six entities – four foreign portfolio investors (FPIs), one body corporate and one individual.

The committee's report noted that investigation is ongoing against these six entities and, thus, it would not reveal their names or the quality of prima facie evidence.

Specifically on Adani scrips, the committee noted that 849 alerts were received between April 1, 2018 and December 31, 2022. These included online alerts, complaints and references.

603 alerts were closed, while 246 were processed from the perspective of suspected insider trading. These alerts were examined by stock exchanges, which submitted three reports to SEBI.

From these reports, as well as SEBI’s own probe, it was found that while the price of shares of Adani Energy Limited rose, there was no evident pattern of manipulative contribution to price rise that coud be attributed to a single entity or a group of connected entities.

The report said that at this stage, it would not be possible for the committee to conclude that there has been a regulatory failure around the allegation of price manipulation of Adani stocks.

Emphasising that the committee's remit was to only ascertain whether there was a regulatory failure and not to examine whether the price rise was justified, it was concluded that SEBI was, in fact, actively engaged with price movements in the market.

Nonetheless, the committee asked SEBI to prepare similar charts with data from across all Adani stocks for analysis.

"This can be work in progress as indeed is the intended probe into those who build short positions just ahead of the publication of the Hindenburg Report and profited from the price crash upon publication on January 24, 2023," the committee report said.

On violation of SCRR, minimum public shareholding - No evidence yet

Regarding violation of Rule 19A of the Securities Contract Regulation Rules of 1957 (SCRR), the committee noted that SEBI has been suspecting 13 overseas entities of having links to the promoters of the Adani Group, and thereby, suspecting that the shareholding in the listed Adani stocks in the hands of those 13 entities would not qualify as 'public shareholding'.

If such holding is not public shareholding, then the listed Adani companies would have violated Rule 19A of the SCRR.

The committee noted that the foundation of SEBI’s suspicion that led to the investigation into FPIs in the Adani-listed companies was that their ownership structure was opaque because the ultimate chain of ownership of the 13 overseas entities holding Adani stocks was not clear.

Adani, the committee said, has denied having promoted shareholding of above 75 per cent. It was SEBI’s long-standing suspicion that some of the public shareholders are not truly public shareholders, but were fronts for the promoters of these companies.

However, the committee found that each of the 13 entities have provided the details of the beneficial owners to the SEBI and to the respective reporting entities in compliance with Rule 9 of the Prevention of Money Laundering Rules (PMLA Rules).

As per SEBI, from the information supplied, there is no demonstration that the persons declared to be beneficial owners are not 'beneficial owners' for the purpose of Rule 9. Hence, as of now, SEBI has not been able to make out a case and that is the prima facie position, the committee report said.

Currently, the matter is only in the realm of suspicion, but the Hindenburg report has reinforced SEBI's suspicion that something is amiss, the committee further noted.

It is in this context that it has sought more time for further investigation.

But as of now, what comes out of the factual matrix is that the matter is in the realm of 'not proved'.

"At this stage, the regulator has not been able to prove that its suspicion can be translated into a firm case of prosecuting an allegation of violation," the report said.

Conclusion

From a reading of these findings, the committee has not yet given a clean chit to Adani in many aspects relating to the probe.

However, it has indeed maintained that there is no evidence as of now against the conglomerate.

One thing that is clear from the report is that the committee has not found any regulatory failure on the part of SEBI in its investigation into the Adani companies.

Whether the markets regulator will eventually find evidence of wrongoing on the part of the conglomerate, only time will tell.

[Read the committee's report]