VISHAL TIWARI versus UNION OF INDIA & ORS

34. Given the above position of law, the question that arises before the Court is whether, in the facts of the present case, the transfer of investigation from SEBI to another agency is warranted. ii. SEBI has prime facie conducted a comprehensive investigation

35. As noted above, out of the twenty-four investigations carried out by SEBI, twenty-two are concluded. Twenty-two final investigation 196 reports and one interim investigation report have been approved by the competent authority under SEBI’s procedures. With respect to the interim investigation reports SEBI has submitted that it has sought information from external agencies/entities and upon receipt of such information will determine the future course of action.

36. Further, in its status report, SEBI has provided the current status of each of the investigations conducted by it and the reasons for interim findings in two of the investigations. SEBI has also provided details such as the number of emails issued, summons for personal appearance, pages of documents examined, statements recorded on oath, etc. for each investigation. An overview of twenty-four investigations conducted by SEBI is as follows: Sr. No. Issues No. of Investigations Minimum Public Shareholding- alleged violation of Rule 19A of Securities Contracts (Regulation) Rules, 1957 Alleged manipulation of stock prices in contravention of existing laws Alleged related Party Transactions (RPT)-Failure to disclose transactions with Related Parties and other relevant information Other Issues: (A) Possible violation of SEBI (Foreign Portfolio Investors) Regulations, 2014 and 2019 (B) Possible violation of SEBI (Substantial Acquisition of Shares and Takeovers) Regulations, 2011 (C) Trading-Pre-post Hindenburg Report (D) Possible violation of SEBI (Prohibition of Insider Trading) Regulations, 2015 Total SEBI’s status report and the details of the twenty-four investigations does not indicate inaction by SEBI. In fact, to the contrary, the course of conduct by SEBI inspires confidence that SEBI is conducting a comprehensive investigation.

37. The petitioners have also raised questions about the delay by SEBI in submitting the status report before this Court. As noted earlier, by an order dated 2 March 2023, this Court directed SEBI to conclude its investigation within two months and file a status report before this [2024] 1 S.C.R.  VISHAL TIWARI v. UNION OF INDIA & ORS Court. This Court by its order dated 17 May 2023, granted SEBI an extension of time till 14 August 2023 to submit its status report about its investigation. Eventually, SEBI filed an interlocutory application intimating this Court about the status of the twenty-four investigations undertaken by SEBI on 14 August 2023. SEBI submitted a status report dated 25 August 2023 providing comprehensive details about all the investigations carried out by SEBI. Therefore, there is a delay of only ten days in filing the report. Such a delay does not prima facie indicate deliberate inaction by SEBI, particularly, as the issue involved a complex investigation in coordination with various agencies, both domestic and foreign.

38. Further, as noted in part C of this judgment, no apparent regulatory failure can be attributed to SEBI based on the material before this Court. Therefore, there is prima facie no deliberate inaction or inadequacy in the investigation by SEBI. iii. Reliance on the OCCRP report and the letter by DRI is misconceived

39. To assail the adequacy of SEBI’s investigation thus far, the petitioner has sought to rely on a report published by OCCRP and various newspapers referring to the report. The petitioner’s case appears to rest solely on inferences from the report by the OCCRP, a third-party organization involved in “investigative reporting”. The petitioners have made no effort to verify the authenticity of the claims.

40. The 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, as the petitioners state, can such inputs be regarded as “credible evidence”. The veracity of the inputs and their sources must be demonstrated to be unimpeachable. The petitioners cannot assert that an unsubstantiated report in the newspapers should have credence over an investigation by a statutory regulator whose investigation has not been cast into doubt on the basis of cogent material or evidence. 198

41. In addition to the OCCRP report, the petitioners have also relied on a letter dated 31 January 2014 sent by the DRI to the then SEBI Chairperson. The letter purportedly alerted SEBI about inter alia potential stock market manipulation by the Adani group through over-valuation of the import of power equipment from a UAE-based subsidiary. According to the petitioner, SEBI did not disclose the receipt of the letter and did not take adequate action based on it.

42. SEBI has submitted that after receiving the above letter, it sought information from the DRI on the issue and received the requisite inputs. Further, while SEBI examined the preliminary alerts by the DRI, the Additional Director General (Adjudication), DRI concluded their examination and held that the allegations were not established. The order of the Additional Director General was assailed by the Commissioner of Customs before the Customs, Excise and Service Tax Tribunal.14 The CESTAT passed an order on 8 November 2022 dismissing the appeal and concluding that the allegation of overvaluation was not proved. The order of the CESTAT was upheld by this Court on 27 March 2023. Further, SEBI has also submitted that its investigation based on the DRI alerts was concluded and the related findings were also placed before the Expert Committee.

43. None of the above facts have been disputed by the counsel for the petitioners. The petitioner is re-agitating an issue that has already been settled by concurrent findings of the DRI’s Additional Director General, the CESTAT and this Court. Therefore, 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 in 2014.

44. Additionally, it must be noted that in the present case, this Court has already exercised its extraordinary powers by setting up an Expert Committee to assess the situation in the market, suggest regulatory measures, and investigate whether there has been a regulatory failure. To expect the Court to monitor the investigation indefinitely, even after the committee has submitted its report and SEBI has completed its investigation in twenty-two out of twenty-four enquiries is not warranted. “CESTAT” [2024] 1 S.C.R.  VISHAL TIWARI v. UNION OF INDIA & ORS Allegations of conflict of interest against members of the Expert Committee

45. The petitioners have raised allegations against some of the members of the Expert Committee alleging that there was a conflict of interest which was not revealed to the Court.

46. On 2 March 2023, this Court constituted the Expert Committee comprising of domain experts and headed by a former judge of this Court. The allegations against certain members of the committee were raised by the petitioner for the first time only on 18 September 2023 almost six months after the constitution of the committee and several months after the Committee had submitted its report in May 2023. All the purported facts and documents relied on by the petitioner in this regard were available in the public domain well before the allegations were raised by the petitioner for the first time in September 2023. The belated allegations by the petitioner prima facie indicate that they have not been made in good faith.

47. In any event, the allegation against Mr Somasekhar Sundaresan is that he had represented the Adani group before various fora including the SEBI Board, as a lawyer. To buttress the submission, the petitioner has merely averred to one order of the SEBI Board dated 25 May 2007 which indicates that Mr Sundaresan has appeared for Adani Exports Ltd on an unconnected issue. On a specific query by the Court during the hearing, counsel appearing on behalf of the petitioner did not present any additional evidence. The acceptance of a professional brief by a lawyer in 2007 cannot be construed to reflect “bias” or even a “likelihood of bias” in 2023. There is an absence of proximity both in terms of time (the alleged appearance was sixteen years ago) and subject matter. There was also no justifiable reason for the petitioners to wait until the expert committee submitted its report.

48. Similarly, the allegations against Mr OP Bhatt and Mr Kamath have not been adequately substantiated by the petitioner. With regard to Mr OP Bhatt, the petitioner has alleged that he is presently working as the Chairman of a leading renewable energy company, which is working in partnership with the Adani group on certain projects. Additionally, the petitioner has also raised vague accusations against Mr OP Bhatt and Mr Kamath in relation to unconnected misconduct by Mr Vijay Mallya and the ICICI Bank, respectively. 200

49. The petitioner has not established the link between these unsubstantiated allegations and the appointment of Mr Bhatt and Mr Kamath to the committee. Here too, the petitioner has only annexed newspaper reports published after the appointment of the committee by this Court, without any attempts to verify their authenticity or supplement them with independent research.

50. Therefore, the allegations of conflict of interest against members of the Expert Committee are unsubstantiated and do not warrant this Court’s serious consideration. Other recommendations by the Expert Committee

51. The Expert Committee met on 17 March 2023 and noted that it would require specific factual briefings from SEBI on all four aspects within the remit of the Committee. It further sought inputs from market participants with regard to (i) suggestions and measures to strengthen investor awareness; (ii) strengthen the statutory and regulatory framework; and (iii) secure compliance with the existing framework. We have discussed the committee’s analysis on the issue of whether there was a regulatory failure above. The other observations and recommendations of the Expert Committee report are discussed below. i. Volatility and short selling

52. The Court in its order dated 10 March 2023 expressed concern over the impact of volatility in the securities market on Indian investors. It therefore empowered the Expert Committee with the remit to enquire into and assess the volatility in the market. The enquiry was to give a sense of direction to increase investor awareness, address deficiencies in the regulatory framework and enable the Committee to make any other suggestions to avoid unanticipated volatility which would adversely impact the interests of investors.

53. Market forces act on the assessment of available information and its anticipated impact. This behaviour creates volatility in the market. However, such volatility is an inherent feature of the market and becomes a matter of concern when it has wide ramifications. The stocks of the Adani group witnessed volatility in the aftermath of the publication of the Hindenburg Report. This volatility was examined by the Expert Committee, which after examining the facts presented by SEBI and engaging with market participants, opined that the impact of the Adani group-related events on the overall market was low. [2024] 1 S.C.R.  VISHAL TIWARI v. UNION OF INDIA & ORS

54. The report of the Committee indicates 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 volatility in Adani stocks in the aftermath of the Hindenburg Report was stabilised due to market forces and mitigatory measures. While shares of the group fluctuated, it did not pose any systemic market- level risk. According to the Expert Committee the trend observed in volatility in the Indian market in comparison with the global volatility index has been consistent since the COVID-19 pandemic and was maintained even during the period when volatility was observed in the Adani stocks. Therefore, according to the Committee, while events related to Adani stocks had an impact at an individual scale, it did not result in volatility in the market.

55. After drawing the above conclusion, the Expert Committee has additionally made the following recommendation upon considering the submissions of SEBI and other market participants: “47. ⁠SEBI has submitted that only recently, it has made a regulatory intervention in terms of supervising the construction of stock indices. SEBI must consider directing index writers to construct indices to compute volatility of stocks that are constituents of indices so that volatility in these stocks can be compared with volatility in the indices. The availability of such data on a real time basis would enable the market to be more informed in making its investment and divestment decisions. SEBI must ensure that there are secular norms and periodic reviews for construction and design changes in indices.” In its note filed in compliance with this Court’s order dated 10 February 2023, SEBI had submitted that it has implemented measures to deal with issues which may impact sudden and unusual price movements, excessive volatility, etc. by measures like Market Wide Circuit Breakers, Circuit Filters/Price bands on individual shares, additional surveillance measures15, and Market Wide Position Limits. SEBI has inter ASM 202 alia reiterated these submissions before the Expert Committee and has further, in its affidavit dated 10 July 2023 placed on record the existing ASM and graded surveillance measure16 framework. We are inclined to direct SEBI to further consider the recommendations and take appropriate measures.

56. The chain of events which triggered the Adani group-related events and eventually the petitions filed before this Court were attributable to the report by short-seller Hindenburg Research. The Expert Committee also points to the publication of the report to explain the volatility observed. The petitioner on the other hand has argued that the real cause of the loss of investor money was the alleged unchecked violations of law and artificial boosting of share prices which would always entail the risk of volatility upon being discovered in one way or the other. These allegations have been investigated by SEBI including some investigations which were directed by this Court. SEBI as the statutory regulator has stated that it would complete the process in accordance with law.

57. However, this Court had sought inputs as to the role of short sellers, like Hindenburg, and the rules governing their actions as well as measures which may be taken to regulate them. Hindenburg Research describes itself as a research firm that specialises in “forensic financial research”. The firm purports to seek out situations where companies may have accounting irregularities, bad actors in management, undisclosed related party transactions, illegal/unethical business or financial reporting practices and undisclosed regulatory, product or financial issues.

58. 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 GSM [2024] 1 S.C.R.  VISHAL TIWARI v. UNION OF INDIA & ORS 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. SEBI submits that any restrictions on short selling, may distort efficient price discovery, provide promoters unfettered freedom to manipulate prices, and favour manipulators rather than rational investors. Therefore, the International Organisation of Securities Commission recommends that short selling be regulated but not prohibited with an aim to increase transparency. We record the statement made by the Solicitor General before this Court that measures to regulate short selling will be considered by the Government of India and SEBI. SEBI and the investigative agencies of the Union Government shall also enquire into whether there was any infraction of law by the entities, which engaged in short-selling on this occasion. The loss which has been sustained by Indian investors as a result of the volatility caused by the short positions taken by Hindenburg Research and any other entities acting in concert with Hindenburg Research should be probed. ii. Investor Awareness

59. Informed decisions made by an aware investor population are a pre- requisite to an efficient market. The data from 2019 to 2022 provided by SEBI shows that there is an increase in the number of investors in the Indian economy in the ‘future and options segment’ of the stock market.17 This requires specialized knowledge. The creation of a framework for this knowledge to percolate to investors lies in the policy domain. However, this Court sought an assessment of the existing framework to aid a determination of whether the regulatory framework suffers from infirmities which would lead to an adverse impact on the Indian investors. The Court also sought inputs on measures which may be taken to increase investor awareness thereby creating a conducive environment for a more efficient market. The Expert Committee solicited views and perspectives from SEBI and various market participants.

60. Before the Expert Committee, SEBI submitted that there has been no market default owing to price movements due to the measures SEBI, Analysis of Profit and Los of Individual Traders dealing in Equity F&O Segment, 25 January 2023, available at <https://www.sebi.gov.in/reports-and-statistics/research/jan-2023/study-analysis-of-profit- and-loss-of-individual-traders-dealing-in-equity-fando-segment_67525.html#> 204 taken by SEBI. These measures include an index-based market- wide “circuit breaker” system, limit of 20% in movement of prices in individual shares, price bands at 10% of the previous day’s closing price for the future and options segment, stock specific surveillance mechanisms like ASM and GSM, and cautionary messages displayed to brokers placing orders for stocks under ASM or GSM.

61. The Expert Committee has concluded that having systems like ASM and GSM is not sufficient and that there must be a real prospect of investors being aware of heightened surveillance by measures, such as clients being alerted when stocks are under ASM or GSM at the point of entry of orders. The Expert Committee also highlighted the possibility of there being a surfeit of information in which investors find themselves drowned. Measures to communicate relevant information in a comprehensive manner to the investors are therefore imperative for informed decision making.

62. The Committee also explored investor awareness with respect to unclaimed securities, dividends and bank deposits of deceased next of kin which may be lost due to the legal framework. The Committee invited the Investor Education and Protection Fund Authority18 to present its workings and manner of administration. Based on its findings, the Committee recommended that the Government of India establish a centralised authority to handle and process unclaimed private assets. It suggested creating the Central Authority for Unclaimed Property which must aim to reunite assets of deceased persons with their next of kin. The Committee also made some suggestions in the context of IEPFA which state: “a. The integrated portal announced in the Finance Minister Budget Speech should be expedited and process re-engineering delegation to the issuer companies based upon type and threshold of the claims must be considered; b. The same may be reviewed on incremental basis from time to time considering the benefits on reducing the timeline for disposal of claims vis-à-vis the risks of fraud. IEPFA [2024] 1 S.C.R.  VISHAL TIWARI v. UNION OF INDIA & ORS c. Pilot projects such as taking up names from the death registry in a given area to map it with the database of the IEPFA and proactively attempting to reach out to the next of kin should be considered; d. Registered market intermediaries who are answerable to the regulatory regime of financial sector regulators could be identified and recognized as agents for service delivery to enable release of unclaimed dividend and securities; e. An officer strength of a dozen personnel is evidently disproportionate. The IEPFA would need a full time Chief Executive Officer who would have specific key performance indicia that would be fixed by the governance oversight of the Authority.” The Committee made further recommendation to induce financial literacy and make it a fundamental part of pedagogy right from school curricula.

63. SEBI has submitted that while it is open to considering some of the above suggestions, it is not empowered to implement others as they lie outside its prescribed sphere of competence and expertise. In particular, SEBI has submitted that the recommendations on creation of a financial redressal agency, central unclaimed property authority, and framework to set up a multi-agency committee would require multiple regulators and the Government may need to look into these recommendations. We find it appropriate to direct both the Government of India and SEBI to consider the recommendations of the Expert Committee with respect to investor awareness and create an appropriate legal framework to implement the recommendations. iii. Recommendations of the Expert Committee to strengthen regulatory framework and secure compliance to protect investors

64. The Expert Committee was also directed to suggest measures to (i) strengthen the statutory and/or regulatory framework; and (ii) secure compliance with the existing framework for the protection of investors. Pursuant to its remit, the Committee in its report dated 6 May 2023 has made the following suggestions: 206 a. Structural Reform: SEBI must perform its complex functions in a structured form by ensuring greater transparency in law- making, and greater societal involvement in contributing to the law. This will lead to greater compliance with the laws; b. Effective Enforcement Policy: SEBI must optimize its resources and lay down policies for effective enforcement of its law by stipulating the criteria by which it may use its powers to initiate measures. This must be consistent with the legislative policy of SEBI and an attempt must be made to apply the law prospectively; c. Judicial Discipline: Adjudicating Officers and Whole Time Members must show consistency and not take differing views in similar circumstances. Judicial discipline must be followed in applying ratios of previous decisions as well as following the decisions made at the appellate stage; d. Settlement Policy: SEBI must have a robust settlement policy and formulate objective criteria to regulate it. It must not be hesitant to enter settlements whereby financial injury commensurate with the alleged violation may be inflicted on the party; e. Timelines: SEBI must lay down and adhere to strict timelines for initiation of investigations, completion of investigations, initiation of proceedings, disposal of settlement, and disposal of proceedings; f. Surveillance and Market Administration Measures: The element of human discretion must be done away with as far as possible. It must be saved for extraordinary circumstances that would not have been factored in already. With regard to disclosures, all provision of data should be in machine-readable format and inter-operable across electronic platforms; g. The suggestions made on structural reforms by committees in the past should be followed. These include (i) the creation of a Financial Redress Agency that handles investor grievances across sectors; (ii) easing and centralizing the process for recovering unclaimed private property, which is currently spread across agencies, either through the aegis of the Financial Stability and Development Council or even by appropriate legislation; (iii) creation of a framework for a multi-agency committee to investigate complex enforcement matters. The same must have [2024] 1 S.C.R.  VISHAL TIWARI v. UNION OF INDIA & ORS a temporary shelf life which ends upon initiation of prosecution. It may only be used in cases involving serious cross-sectoral repercussions which would need multi-disciplinary skill sets to act in coordination; and (iv) following the doctrine of separation within SEBI in its quasi-judicial, and executive arm.

65. SEBI has addressed these recommendations in its affidavit dated 10 July 2023. SEBI has inter alia submitted that its existing framework already accounts for the recommendations of the Expert Committee on effective enforcement policy, judicial discipline, settlement policy, and surveillance & market administration measures. SEBI has opposed the recommendations with respect to laying down timelines on the ground that the time taken to form a prima facie opinion and conduct an investigation is contingent on many variable factors which render the process and time taken subjective. SEBI submits that they cannot be uniformly bound to a time limit. Further, as noted above, SEBI has submitted that creation of financial redressal agency, central unclaimed property authority, and framework to set up a multi-agency committee would require multiple regulators and the Government may need to look into these recommendations. SEBI argues that it is not competent to enforce the same and requires the Government of India to consider them.

66. The Expert Committee has made the above suggestions after applying its mind to the wealth of information collected from SEBI, market participants, invitees and from their own expertise. These suggestions merit favourable consideration with a positive intent. We direct the Government of India and SEBI to consider these suggestions and to take the benefit of the efforts put in by the Expert Committee. We may add that the approach in considering these suggestions must not be defensive but constructive. The Committee has favourably noted some of the measures that SEBI has taken in reaction to the events and learnings from the market. The same attitude of advantaging from the perspectives should be taken by the Government of India and SEBI. The Union Government and SEBI would be at liberty to interact with the Committee so as to take this forward. Since a member of the Bar who was a member of the Committee has been appointed to the Bench since the submission of the report, the Chairperson of the Committee will be at liberty to nominate a member with legal expertise and domain knowledge for the purpose of interacting with the Union Government and SEBI. 208 Conclusion

67. In a nutshell, the conclusions reached in this judgement are summarized below: a. The power of this Court to enter the regulatory domain of SEBI in framing delegated legislation is limited. The court must refrain from substituting its own wisdom over the regulatory policies of SEBI. The scope of judicial review when examining a policy framed by a specialized regulator is to scrutinise whether it violates fundamental rights, any provision of the Constitution, any statutory provision or is manifestly arbitrary; b. 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. The procedure followed in arriving at the current shape of the regulations does not suffer from irregularity or illegality. The FPI Regulations and LODR Regulations have been tightened by the amendments in question; c. SEBI has completed twenty-two out of the twenty-four investigations into the allegations levelled against the Adani group. Noting the assurance given by the Solicitor General on behalf of SEBI we direct SEBI to complete the two pending investigations expeditiously preferably within three months; d. This Court has not interfered with the outcome of the investigations by SEBI. SEBI should take its investigations to their logical conclusion in accordance with law; e. The facts of this case do not warrant a transfer of investigation from SEBI. In an appropriate case, this Court does have the power to transfer an investigation being carried out by the authorized agency to an SIT or CBI. Such a power is exercised in extraordinary circumstances when the competent authority portrays a glaring, willful and deliberate inaction in carrying out the investigation. The threshold for the transfer of investigation has not been demonstrated to exist; f. The reliance placed by the petitioner on the OCCPR report to suggest that SEBI was lackadaisical in conducting the [2024] 1 S.C.R.  VISHAL TIWARI v. UNION OF INDIA & ORS investigation is rejected. A report by a third-party organization without any attempt to verify the authenticity of its allegations cannot be regarded as conclusive proof. Further, the petitioner’s reliance on the letter by the DRI is misconceived as the issue has already been settled by concurrent findings of DRI’s Additional Director General, the CESTAT and this Court; g. The allegations of conflict of interest against members of the Expert Committee are unsubstantiated and are rejected; h. The Union Government and SEBI shall constructively consider the suggestions of the Expert Committee in its report detailed in Part F of the judgment. These may be treated as a non- exhaustive list of recommendations and the Government of India and SEBI will peruse the report of the Expert Committee and take any further actions as are necessary to strengthen the regulatory framework, protect investors and ensure the orderly functioning of the securities market; and i. SEBI and the investigative agencies of the Union Government shall probe into whether the loss suffered by Indian investors due to the conduct of Hindenburg Research and any other entities in taking short positions involved any infraction of the law and if so, suitable action shall be taken.

68. Before concluding, we must observe that public interest jurisprudence under Article 32 of the Constitution 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.

69. We are grateful to all the members and the Chairperson of the Expert Committee for their time, efforts, and dedication in preparing their erudite, comprehensive, and detailed report in a time-bound manner. Subject to the consent and availability of the members and 210 Chairperson of the Expert Committee, SEBI and the Government of India may draw upon their expertise and knowledge while taking necessary measures pursuant to the recommendations of the Committee.

70. The Petitions shall accordingly stand disposed of in the above terms.

71. Pending applications, if any, stand disposed of. Headnotes prepared by: Nidhi Jain Result of the case: Petitions disposed of.