Constitution of India – Art. 32 - Report by an “activist short seller”, Hindenburg Research about the financial transactions of the Adani group alleging that the Adani group manipulated its share prices and failed to disclose transactions with related parties and other relevant information in violation of the regulations framed by SEBI – Petitioners sought constitution of expert Committee and transfer of investigation from SEBI to Special Investigation Team or by the CBI:

Held: Power of this Court to enter the regulatory domain of SEBI in framing delegated legislation is limited – Court must refrain from substituting its own wisdom over the regulatory policies of SEBI – No apparent regulatory failure attributable to SEBI – Procedure followed in arriving at the current shape of the Regulations does not suffer from irregularity or illegality – Further SEBI has completed twenty-two out of the twenty-four investigations into the allegations levelled against the Adani group – SEBI directed to complete the pending investigations expeditiously – SEBI should take its investigations to their logical conclusion in accordance with law – Facts of this case do not warrant a transfer of investigation from SEBI – Court does have the power to transfer an investigation being carried out by the authorized agency to an SIT or CBI in extraordinary circumstances when the competent authority portrays a glaring, willful and deliberate inaction in carrying out the investigation – Threshold for the transfer of investigation has not been demonstrated to exist – Reliance placed by the petitioner on the OCCPR report and the letter by the DRI is misconceived – Allegations of conflict of interest against members of the Expert Committee are unsubstantiated and are rejected – Union Government and SEBI to consider the suggestions of the Expert Committee in its report and take further actions to strengthen the regulatory framework, protect investors and ensure the orderly functioning of the securities market – SEBI and the investigative agencies of the Union Government to probe into the loss suffered by Indian investors due to the conduct of Hindenburg Research and other entities in taking short positions involved any infraction of the law and if so, suitable action be taken. [Para 67] 

Constitution of India – Art. 32 – Investigation conducted by SEBI into the allegations that the Adani group manipulated its share prices and failed to disclose transactions with related parties – SEBI’s regulatory domain – Scope of judicial review:

Held: 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 – Scope of judicial review, when examining a policy framed by a specialized regulator, is to scrutinize whether it violates the fundamental rights of the citizens; is contrary to the provisions of the Constitution; is opposed to a statutory provision; or is manifestly arbitrary – Legality of the policy, and not the wisdom or soundness of the policy, is the subject of judicial review – When technical questions arise particularly in the domain of economic or financial matters and experts in the field have expressed their views and such views are duly considered by the statutory regulator, the resultant policies or subordinate legislative framework ought not to be interfered with – SEBI’s wide powers, coupled with its expertise and robust information gathering mechanism, lend a high level of credibility to its decisions as a regulatory, adjudicatory and prosecuting agency – Court must be mindful of the public interest that guides the functioning of SEBI and refrain from substituting its own wisdom in place of the actions of SEBI. [Paras 17]

Constitution of India – Art. 32 – Investigation conducted by SEBI into the allegations that the Adani group manipulated its share prices and failed to disclose transactions with related parties and other information in violation of the SEBI regulations – Regulatory failure, if attributable to SEBI:

Held: No reason to interfere with the regulations made by SEBI in the exercise of its delegated legislative powers – SEBI has traced the evolution of its regulatory framework, and explained the reasons for the changes in its regulations – Procedure followed in arriving at the current shape of the regulations is not tainted with any illegality – There are no submissions that the regulations are unreasonable, capricious, arbitrary, or violative of the Constitution – Petitioners have not challenged the vires of the Regulations but have contended that there is regulatory failure based on SEBI’s alleged inability to investigate which is attributed to changes in the regulations – Such a ground is unknown to this Court’s jurisprudence – Critique of the regulations made as an afterthought and based on a value judgment of economic policy is impermissible – Prayer seeking directions to SEBI to revoke its amendments to the FPI Regulations and LODR Regulations must fail – No valid grounds have been raised for this Court to direct SEBI to revoke its amendments to the FPI Regulations and the LODR Regulations which were made in exercise of its delegated legislative power – Thus, the procedure followed in arriving at the current shape of the regulations does not suffer from irregularity or illegality – FPI Regulations and LODR Regulations have been tightened by the amendments in question. [Para 28, 29, 30, 67c]

Constitution of India – Arts. 32 and 142 – Transfer of the investigation from SEBI to another agency or to SIT – Power of:

Held: Court does have the power u/Art. 32 and 142 to transfer an investigation from the authorized agency to the CBI or constitute an SIT – However, such powers must be exercised sparingly and in extraordinary circumstances – Unless the authority statutorily entrusted with the power to investigate portrays a glaring, willful and deliberate inaction in carrying out the investigation, the court will ordinarily not supplant the authority which has been vested with the power to investigate – Such powers must not be exercised by the court in the absence of cogent justification indicative of a likely failure of justice in the absence of the exercise of the power to transfer – Petitioner must place on record strong evidence indicating that the investigating agency has portrayed inadequacy in investigation or prima facie appears to be biased. [Para 32] 

Constitution of India – Arts. 32 – Investigation – Comprehensive investigation conducted by SEBI into the allegations that the Adani group manipulated its share prices and failed to disclose transactions with related parties:

Held: Out of the twenty-four investigations carried out by SEBI, twenty-two are concluded – Twenty-two final investigation reports and one interim investigation report have been approved by the competent authority under SEBI’s procedures – As regards the delay of only ten days in filing the report, such a delay does not prima facie indicate deliberate inaction by SEBI, when the issue involved a complex investigation in coordination with various agencies, both domestic and foreign – No apparent regulatory failure can be attributed to SEBI based on the material before this Court – Thus, prima facie no deliberate inaction or inadequacy in the investigation by SEBI. [Paras 35, 37, 38].

Constitution of India – Arts. 32 – Investigation conducted by SEBI into the allegations levelled against the Adani group – Adequacy of SEBI’s investigation – Challenge to – Reliance on the OCCRP report of a third-party organization and the letter by DRI:

Held: Reliance on newspaper articles or reports by third-party organizations to question a comprehensive investigation by a specialized regulator does not inspire confidence – Such reports by “independent” groups or investigative pieces by newspapers may act as inputs before SEBI or the Expert Committee – However, they cannot be relied on as conclusive proof of the inadequacy of the investigation by SEBI nor, can such inputs be regarded as “credible evidence” – Also the petitioner’s assertion that SEBI was lackadaisical in its investigation is not borne out from the reference to the letter sent by the DRI. [Paras 40, 43]

Shares and securities – Short selling – Meaning of:

Held: Short selling is a sale of securities which the seller does not own but borrows from another entity, with the hope of repurchasing them at a later date with a lower price, thus, attempting to profit from an anticipated decline in the price of the securities – In its report, Hindenburg Research admits to taking a short position in the Adani group through US-traded bonds and non-Indian traded derivative instruments – SEBI has submitted that short selling is a desirable and essential feature to provide liquidity and to help price correction in over-valued stocks and hence, short selling is recognised as a legitimate investment activity by securities market regulators in most countries – Short selling is regulated by a circular notified by SEBI on 20 December 2007 – Any restrictions on short selling, may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors – Thus, the International Organisation of Securities Commission recommends that short selling be regulated but not prohibited with an aim to increase transparency – Measures to regulate short selling will be considered by the Government of India and SEBI. [Para 58]

Constitution of India – Arts. 32 – Public interest jurisprudence under – Scope of:

Held: It was expanded by this Court to secure access to justice and provide ordinary citizens with the opportunity to highlight legitimate causes before this Court – It has served as a tool to secure justice and ensure accountability on many occasions, where ordinary citizens have approached the Court with well-researched petitions that highlight a clear cause of action – However, petitions that lack adequate research and rely on unverified and unrelated material tend to, in fact, be counterproductive – This word of caution must be kept in mind by lawyers and members of civil society alike. [Para 68]

Constitution of India – Arts. 32 – Allegations that the Adani group manipulated its share prices and failed to disclose transactions with related parties – Recommendations of the Expert Committee to strengthen regulatory framework and secure compliance to protect investors – Elucidated. [Para 64-66]