PRICE MANIPULATION
1. Context
The Supreme Court order, dated March 2, 2023, launched parallel investigations into alleged contraventions by the Adani Group of Companies following accusations made by Hindenburg Research.
The allegations included stock manipulation and money laundering, which the Adani Group denied.
The Security and Exchange Board of India (SEBI) and a court-appointed Expert Committee were tasked with investigating the matter.
While the SEBI probe continues, the Expert Committee's report raises concerns about regulator failure and captures within the system.
2. Status of the SEBI Probe
- SEBI was directed to investigate potential violations of the Securities Contracts (Regulation) Rules, 1957, specifically Rule 19A, which mandates a minimum of 25 per cent public shareholding for listed companies.
- SEBI was also tasked with examining the disclosure of transactions and relevant information related to "related parties" to ensure compliance with the law.
- The investigation aimed to determine if there was any stock price manipulation contrary to existing regulations.
- SEBI requested an extension due to the complexity of the transactions under investigation and the court granted additional time.
- Meanwhile, the Expert Committee submitted its report to the court on May 6, stating that there was "no regulatory failure" on SEBIs' part.
3. Expert Panel's Findings
- The Expert Committee's report indicates a potential large-scale scam involving serious economic offences committed by the Adani Group.
- SEBI initiated investigations in October 2020 based on complaints received in June-July 2020.
- However, SEBI failed to take regulatory action, such as issuing show-cause notices, claiming the absence of a prima facie case.
- SEBI's investigation focused on 13 suspected overseas entities primarily foreign portfolio investors (FPIs), based in tax havens like Mauritius, which were believed to be front companies for the Adani Group Promoters.
- These FPIs held significant shares in five listed Adani group companies as of March 2020.
- The Expert Committee noted that SEBI could not establish the Ultimate beneficial owner of these overseas entities, despite suspicions.
4. Regulatory Loopholes and Amendments
- The report highlights successive amendments to SEBI regulations, diluting definitions of "beneficial owners and related party transactions" which created regulatory loopholes.
- These amendments enabled the Adani Group promoters to conceal the true beneficiaries of suspected FPIs, thus evading regulatory scrutiny.
- SEBI approached the Enforcement Directorate (ED) and Central Board of Direct Taxes (CBDT) for further investigation, but both agencies required SEBI to register a case under the Prevention of Money Laundering Act, 2002, and tax laws, respectively.
- This "chicken and egg" situation hindered progress.
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Image Source: The Hindu
5. Price Manipulation Concerns
- The report raises questions about potential price manipulation.
- The Adani Scrips experienced significant price increases while under SEBIs scrutiny since October 2020.
- The Expert Committee noted that 849 alerts were generated regarding Adani group companies' shares through SEBI's surveillance systems, with many related to price volume movements and suspected insider trading.
- However, SEBI did not consider these alerts unusual as long as prices were rising.
- It was only after the Hindenburg accusations and subsequent stock price declines that SEBI acknowledged "unusual price movement".
- The report suggests that SEBI's silence on the stock price surge and reluctance to take action against the Adani Group Comprise is evidence of regulatory failure and complicity.
6. Implications
- Despite presenting a substantial body of evidence regarding regulatory failure, the Expert Committee's conclusions remain ambiguous.
- The report calls for Supreme Court to draw its conclusions based on the evidence provided.
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For Prelims: SEBI, Supreme Court, Aadhani group, Expert Committee, foreign portfolio investors, Enforcement Directorate, Central Board of Direct Taxes,
For Mains:
1. Discuss the amendments made to SEBI regulations related to Foreign Portfolio Investors (FPIs) and Listing Obligations and Disclosure Requirements (LODR) and their impact on the Indian Economy. (250 Words)
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Previous Year Questions
1. With reference to the Indian judiciary, consider the following statements: (UPSC 2021)
1. Any retired judge of the Supreme Court of India can be called back to sit and act as a Supreme Court judge by the Chief Justice of India with the prior permission of the President of India.
2. A High Court in India has the power to review its own judgement as the Supreme Court does. Which of the statements given above is/are correct?
A. 1 only B. 2 only C. Both 1 and 2 D. Neither 1 nor 2
Answer: C
2. Which of the following is issued by registered foreign portfolio investors to overseas investors who want to be part of the Indian stock market without registering themselves directly? (UPSC 2019)
A. Certificate of Deposit
B. Commercial Paper
C. Promissory Note
D. Participatory Note
Answer : D
3. With reference to Foreign Direct Investment in India, which one of the following is considered its major characteristic? (UPSC 2020)
A. It is the investment through capital instruments essentially in a listed company.
B. It is a largely non-debt creating capital flow.
C. It is the investment which involves debt-servicing.
D. It is the investment made by foreign institutional investors in the Government securities.
Answer: B
4. Which one of the following is not correct in respect of Directorate of Enforcement ? (CDS 2021)
A. It is a specialized financial investigation agency under the Department of Revenue, Ministry of Finance.
B. It enforces the Foreign Exchange Management Act, 1999.
C. It enforces the Prevention of Money Laundering Act, 2002.
D. It enforces the Prohibition of Benami Property Transaction Act, 1988.
Answer: D
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Source: The Hindu
