The Centre agreed to its proposal to set up a committee of experts to suggest ways to fix holes in the regulatory system so that Indian investors don’t lose money in volatile markets like they did during the Adani-Hindenburg case. On Monday, the Supreme Court agreed to the Centre’s request to suggest what the proposed committee could do.
In a note to the highest court, the Securities and Exchange Board of India (SEBI) said it was already looking into both the allegations in the Hindenburg report and the market activity right before and after the report came out to find violations of SEBI regulations, including those related to short selling.
After hearing two PILs filed in response to the Hindenburg report, which said that the Adani Group had committed fraud and manipulated stock prices, the SC said on the last date of hearing that it was “thinking out loud” about whether an expert committee could be set up to suggest ways to improve the regulatory mechanism.
Monday, Solicitor General Tushar Mehta, representing the Centre, told the bench of Chief Justice of India D. Y. Chandrachud, Justices P. S. Narasimha and J. B. Pardiwala that his “instructions are that the existing structure—SEBI and other agencies—are fully equipped, not only in terms of rules, but also in other ways, to handle the situation…
But in response to the idea that came from Your Lordships as a loud thought, we would have no problem with it. The government has no problem with forming a committee.
He also said, “The committee’s job would be very important because any unintentional message to international or domestic investors that even a regulator or statutory authority needs to be watched by a committee appointed by the highest court of the country will hurt the flow of money.” So, if your Lordships will let us, we’d like to suggest what that committee’s job should be, along with possible names for the committee, in a sealed envelope. Because it might not be appropriate to talk about this in open court, we’d like to suggest some names. They might or might not appeal to your Lordships, but they would be high-quality people with a good reputation in their fields, unless the other side objects, etc. So, from a business point of view, we can file it for Your Lordship to read… But the mission would be very important…”
The bench agreed to the request about the remit and asked the SG to bring the suggestions to the next hearing on February 17.
“You do this, and on Friday you bring back a plan for the committee’s job…
We’ll think about it and make a decision,” CJI Chandrachud told the SG. He also said that the court understood why the government said the remit was important.
“Because we don’t want to hurt the skills of the agencies, including the regulator and the system in place,” the SG said.
“You say what you think the remit can be. Then we can change it and think about it,” the CJI said.
In the wake of the Adani-Hindenburg case, two PILs were sent to the Supreme Court. One of the PILs has asked for a declaration that short selling is a form of fraud.
In its note, the SEBI said, “Securities market regulators in most countries, and especially in all developed securities markets, recognise short selling as a legitimate investment activity.” “Instead of banning short sales outright, they have made it possible for them to happen under certain rules.” The International Organisation of Securities Commissions (IOSCO) has also looked at how short selling and lending of securities are done in different markets and has said that short selling should be made more transparent instead of being banned. India has a policy of regulating short sales and has set up its system to do so.
SEBI said, “Indian markets have been through much worse times, especially during the Covid pandemic, when Nifty fell by about 26% from March 2, 2020, to March 19, 2020.” (13 trading days). Even when things were so bad, SEBI did not ban short selling, even though there were calls for it to be done. The markets continued to work well and recovered much faster than other markets around the world.
It also said that “overall, India’s market volatility is about the same as or less than that of major developed markets.”
The note also said, “SEBI has a strong set of frameworks and market systems to make sure trading and settlement go smoothly. These include frameworks for dealing with volatility and limits on short selling, even by foreign institutions.”
It said, “The events that are the subject of the PIL only affect one group of market entities and haven’t had a big effect on the system as a whole.” Even though pressure to sell has led to a big drop in the price of Group shares, the Indian market as a whole has been very strong. The Group companies don’t have any weight in the Sensex or the Nifty as a whole.
The Board also asked the court to understand that “for the regulator to make any statement about ongoing examinations/investigations of cases, or on the basis of third-party reports, could seriously hurt the entities under examination, so it would not be appropriate” for it “to make any statements until the due process is complete.”
The market regulator said that it “has a strong framework for enforcing market misconduct and other violations of its regulations” and that “the existing frameworks for investor protection and for ensuring stable operations and development of the market are robust and have been validated by the smooth operation and resilience of the markets at a systemic level, not just in recent weeks but even during the worst phases of the pandemic.”
The note also said, “If there are any lessons to be learned from the case that call for a policy review, SEBI, as a specialised regulator, would do so in the normal way, following its established process of consulting experts and the public.”