VISHAL TIWARI vs UNION OF INDIA, 2024
Case Title and Citation
The case is titled Vishal Tiwari v. Union of India & Ors.. The matter involved Writ Petition (C) No. 162 of 2023 (With connected petitions). The judgment citation is 2024 INSC 3. The judgment was rendered by a bench including Dr Dhananjaya Y Chandrachud, CJI.
Factual Background
A batch of writ petitions was filed before the Supreme Court under Article 32 of the Constitution in February 2023. These petitions expressed concerns over the precipitate decline in investor wealth and volatility in the share market due to a fall in the share prices of the Adani Group of Companies. This market turbulence was purportedly caused by a report published on January 24, 2023, by an “activist short seller,” Hindenburg Research, concerning the financial transactions of the Adani Group. The report alleged that the Adani group manipulated its share prices and failed to disclose transactions with related parties in violation of SEBI regulations and securities legislation. Significantly, Hindenburg Research stated in its report that it had taken a short position in the Adani group.
Petitioners sought several directions, including the constitution of a committee monitored by a retired judge to investigate the Hindenburg Report, a court-monitored investigation by a Special Investigation Team (SIT) or the CBI into allegations of fraud, and directions to register an FIR against the founder of Hindenburg Research for short-selling.
On March 2, 2023, the Court directed the Securities and Exchange Board of India (SEBI) to continue its investigation into non-exhaustive issues, including alleged violations of Rule 19A of the Securities Contracts (Regulation) Rules, 1957, failure to disclose related party transactions, and stock price manipulation. The Court also constituted an Expert Committee, chaired by former Justice Abhay Manohar Sapre, to provide an overall assessment, suggest measures to strengthen the regulatory framework, and investigate whether there had been regulatory failure. SEBI subsequently filed a status report detailing that it had completed twenty-two out of twenty-four investigations.
Issue(s)
- Whether the Supreme Court should direct SEBI to revoke its amendments to the SEBI (Foreign Portfolio Investments) Regulations, 2014 (FPI Regulations) and the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (LODR Regulations), based on allegations of regulatory failure.
- Whether the investigation into the Adani Group should be transferred from SEBI to another agency, such as the CBI or an SIT.
- Whether reliance on external reports (such as the OCCRP report and the 2014 DRI letter) warranted interference with the comprehensive investigation conducted by SEBI.
- Whether the allegations of conflict of interest against members of the Expert Committee were substantiated.
- Whether SEBI and the Union Government must constructively consider the suggestions made by the Expert Committee to strengthen the regulatory framework and secure compliance to protect investors.
- Whether the conduct of entities, including Hindenburg Research, in taking short positions should be probed for any infraction of law that led to investor loss.
Decision of the Supreme Court
The Supreme Court refused to transfer the investigation from SEBI to an SIT or the CBI. The Court also refused to interfere with SEBI’s regulatory amendments to the FPI and LODR Regulations. SEBI was directed to complete the two pending investigations expeditiously, preferably within three months. Furthermore, the Union Government and SEBI were directed to constructively consider the suggestions provided by the Expert Committee to strengthen the regulatory framework. Finally, SEBI and Union investigative agencies were directed to probe any infraction of law related to the short positions taken by Hindenburg Research and other entities, and the loss suffered by Indian investors as a result of the volatility caused by such short positions.
Reason for the decision
Regulatory Framework and Judicial Review: The Court reiterated that its power to review the delegated legislation of a specialized regulator like SEBI is limited. Courts must refrain from substituting their own wisdom for the policies framed by SEBI unless the action is manifestly arbitrary or violates constitutional or statutory mandates. The amendments to the FPI Regulations and LODR Regulations were upheld because the procedure followed in framing them was not tainted by illegality. SEBI successfully argued that the amendments, contrary to the petitioners’ claims, tightened the regulatory framework by making disclosure requirements mandatory, bringing them in line with the PMLA.
Transfer of Investigation: The Court held that the transfer of an investigation from the statutorily authorized agency to an SIT or CBI is exercised only in extraordinary circumstances where the authorized agency displays “a glaring, willful and deliberate inaction”. SEBI had completed twenty-two out of twenty-four complex investigations and provided comprehensive details, leading the Court to conclude that the threshold for mandatory transfer was not met.
External Evidence and Reports: The Court rejected the petitioners’ reliance on the third-party OCCRP report, noting that such reports without verification cannot be regarded as conclusive proof against the investigation of a statutory regulator. Reliance on the 2014 DRI letter was deemed misconceived because the underlying allegations of overvaluation had already been settled by the concurrent findings of the DRI’s Additional Director General, the CESTAT, and the Supreme Court itself.
Expert Committee Allegations: The allegations of conflict of interest against the Expert Committee members were found to be unsubstantiated. The Court noted that these allegations were raised belatedly, almost six months after the committee was constituted, despite the purported facts being publicly available. An alleged professional appearance by a lawyer-member in 2007 was found to lack proximity both in time and subject matter to construe “bias” or “likelihood of bias” in 2023.
Conclusion
The petitions were disposed of. The Court upheld the primacy and credibility of SEBI as the expert regulatory agency. The Government of India and SEBI were directed to constructively consider the suggestions of the Expert Committee to further strengthen the regulatory framework, increase investor awareness, and secure the orderly functioning of the securities market. Furthermore, SEBI and Union investigative agencies must probe potential legal infractions arising from the conduct of Hindenburg Research and other entities involved in taking short positions. Finally, the Court issued a caution regarding Public Interest Litigation (PIL), observing that petitions that rely on unverified and unrelated material tend to be counterproductive.
