The Securities and Exchange Board of India (SEBI), the regulator of the country’s financial markets, has sent ‘show cause’ notices to six listed companies in the Adani Group. This was revealed by the companies themselves in recent filings to stock-exchange authorities.
A notice to show cause is a formal document issued to a party in a dispute that sets out details about an alleged offence or misconduct. Such a notice is usually issued by a law-enforcing authority. The receiving party has a chance to explain itself or face consequences of violating a rule or a provision of law.
Adani Enterprises Ltd (AEL), Adani Ports and Special Economic Zone Ltd (APSEZ), Adani Power Ltd (APL), Adani Energy Solutions Ltd (AESL, formerly Adani Transmission Ltd), Adani Total Gas Ltd (ATGL) and Adani Wilmar Ltd (AWL) have informed the National Stock Exchange that they received eight show cause notices (two each for AEL and APL), ‘alleging non-compliance of provisions of the Listing Agreement and LODR (Listing Obligations and Disclosure Requirements) Regulations pertaining to related party transactions in respect of certain transactions with third parties and validity of peer-review certificates of statutory auditors with respect to earlier years.’
SEBI commenced investigating the Adani Group’s alleged LODR violations in 2020. In January 2023, after Hindenburg Research levelled its famous allegations of corporate misgovernance, SEBI extended the scope of its investigation, culminating in the issuing of these show-cause notices.
This is not the first time Adani Group companies and their promoters have been probed by SEBI following allegations of corporate misgovernance. In May 2007, after an investigation that lasted over a year, SEBI imposed a two-year ban on several Adani Group companies and their promoters from participating in stock-trading activities because of their involvement in alleged manipulation of share prices of Adani Exports Limited (that was later renamed Adani Enterprises Limited) between 1999 and 2001.
These companies and individuals were accused of acting in collusion with an infamous stockbroker, Ketan Parikh, to rig share prices. A Joint Parliamentary Committee confirmed these allegations.
SEBI barred Adani Group promoters, including Gautam Adani, his older brother, Vinod Adani, and his younger brother, Rajesh Adani, from participating in India’s stock markets for two years. The Adani Group settled its dispute with SEBI the following year after paying a fine of US$140,000.
The Adani Group again faces turbulence with SEBI’s issuing of notices to the six key companies listed above. These notices allege various infractions, including related-party transactions and non-compliance with listing rules. These developments led to a fall in the share price of some of the companies. As mentioned, AEL and APL received two notices each, whereas APSEZ, AESL, ATGL and AWL received one notice each.
When SEBI initiated these investigations in 2020, the matter later came up in the Indian Parliament. In response to inquiries from the opposition Trinamool Congress politician and former MP Mahua Moitra, the then Union Minister of State for Finance submitted that ‘SEBI is investigating some Adani Group companies with regard to compliance with SEBI Regulations.’
When Hindenburg Research aired these allegations (at the same time as taking a short position on Adani stocks) in January 2023, what followed was a $150-billion wipeout of the Adani Group's market capitalisation. Hindenburg alleged undisclosed related-party transactions, serious corporate governance issues, manipulation of share prices, insider trading and numerous violations of LODR regulations.
Subsequently, SEBI extended its ongoing investigations into the veracity of the allegations. Meanwhile, three petitions were filed in the Supreme Court of India, asking the court to order a court-monitored investigation by a Special Investigation Team (SIT). Two of the petitions were filed by lawyers Vishal Tiwari and M L Sharma and one by a functionary of the opposition Congress party, Jaya Thakur. During the hearing, the court instituted an expert committee to examine the progress of the ongoing investigation by SEBI.
In its report, the committee informed the court that SEBI's suspicion, which prompted investigations into the shareholding of thirteen Foreign Portfolio Investors (FPIs), revealed that most of these FPIs’ portfolios were concentrated in Adani Group companies and had a perceived opacity in their ownership structures. This opacity arose from a lack of clarity about the ultimate chain of beneficial ownership of the following overseas entities:
Albula Investment Fund,
Cresta Fund,
Marshal Global Capital Fund,
Asia Investment Corporation (Mauritius) Limited,
APMS Investment Fund,
Elara India Opportunities Fund,
Vespera Fund,
LTS Investment Fund,
Opal Investments Private Limited,
Polus Global Fund,
New Leaina Investments Private Limited,
EM Resurgent Fund, 1
Emerging India Focus Fund
A recent report disclosed that SEBI sent two separate show-cause notices to many of these FPIs, asking them why their registration should not be cancelled for violating disclosure norms. Eight of the thirteen FPIs mentioned in the Supreme Court committee’s report then filed multiple ‘settlement applications’ with SEBI for various disclosure violations, including failure to disclose the ultimate ownership and breaching the investment limits in Adani Group companies at various times.
This raises a very pertinent question. If these FPIs had not violated the regulations, why would they file ‘settlement applications’ with SEBI? If SEBI accepts these applications and settles the issue by imposing monetary penalties, what is the guarantee that these FPIs will not use similar questionable methods of operation in the future?
The Adani Group’s non-disclosure of related-party transactions is not new. According to the independent auditor's report of Adani Ports and Special Economic Zone (‘Adani Ports’) Limited for the financial year 2022-23 (the twelve months that ended on 31 March 2023), ‘the company has made significant contracts for Engineering, Procurement, and Construction (EPC) purchases with one of its own subsidiaries, referred to as the "Contractor."’
The auditor found that at the end of March 2023, the said ‘contractor’ owed hundreds of millions of dollars to Adani Ports, but the company assured the auditor that this ‘contractor’ was not a related party.
Adani Ports then refused to conduct an independent audit of its books of account. In August 2023, Deloitte Haskins & Sells (the Indian affiliate of the global professional services firm, Deloitte), the auditor of APSEZ, resigned as the statutory auditor of the company, citing limited scope, a reason that Adani Ports claimed was ‘unconvincing.’
Following the release of the Hindenburg Research report in January 2023, Adani Enterprises Limited hired accounting firm Grant Thornton to initiate a review of some of the group companies through an independent evaluation in April 2023. Whether the review was completed and what was written in the report by Grant Thornton is not in the public domain.
On 3 January 2024, the Supreme Court disposed of various petitions filed in 2023, including those seeking a court-monitored independent investigation into the allegations in the Hindenburg Research report. In its order, the Court directed SEBI to expedite the remaining investigations, preferably concluding within three months.
SEBI, the regulator of India’s capital markets, is a quasi-judicial body. Even though SEBI comes under the Ministry of Finance of the government of India, it has autonomous powers to make rules and regulations related to the country’s financial sector. The only mandate of the expert committee appointed by the Supreme Court in March 2023 was to examine the progress of SEBI’s ongoing investigations into the Adani Group’s alleged violations of stock market violations.
As per the findings of the expert committee, SEBI initiated investigations into Adani Group companies in October 2020, following complaints received by the regulator nearly four years ago in June-July 2020. However, until recently, SEBI had not commenced any regulatory actions, such as issuing show-cause notices, claiming an inability to establish a prima facie case. Despite investigation, SEBI has yet to identify the ‘ultimate beneficial owners’ of the Foreign Portfolio Investors whose investments were concentrated in the Adani Group companies.
This failure to establish prima facie violations was influenced by successive amendments done by SEBI to the regulations concerning Foreign Portfolio Investors (FPIs) and Listing Obligations and Disclosure Requirements (LODR) regulations, as outlined in the expert committee’s report. Significant changes in 2018 and 2019 diluted definitions of ‘opaque structures’ of FPIs and ‘beneficial owners’, effectively enabling Adani Group promoters, particularly Vinod Adani and his business associates, to invest in Adani Group stocks through some of the FPIs mentioned in the expert committee report.
SEBI also sought assistance from the Enforcement Directorate (ED) in the Ministry of Finance (which enforces the Foreign Exchange Management Act and the Prevention of Money Laundering Act or PMLA) and the Central Board of Direct Taxes (CBDT) to investigate further and establish a prima facie case against suspected FPIs. However, the ED and CBDT indicated they could only initiate investigations if SEBI files a case under the PMLA, 2002, alleging violations of tax laws. The expert committee report said SEBI’s investigation had hit a wall and described the deadlock as a ‘chicken-and-egg’ situation.
In their financial results for the January-March quarter of the financial year 2023-24, the listed companies in the Adani Group claimed they had not committed significant violations of laws and regulations and that there would be no consequential effects on the companies’ finances.
However, the auditors of all these listed companies except those for Adani Total Gas and Adani Wilmar, issued qualified opinions on the financial statements, suggesting there could be potential impacts of the SEBI investigation on future balance sheets of the companies.
In a qualified opinion, S. R. Batliboi & Co LLP, the auditors of Adani Power, remarked: ‘On account of pending adjudications/outcome of the investigations by SEBI and based on our review of related documents, we are unable to comment on the possible adjustments and/or disclosures, if any, that may be required to be made in the accompanying Statement in respect of this matter.’
Jairam Ramesh, spokesperson of the largest opposition party, the Indian National Congress (INC), issued a statement on his social media platform, characterising SEBI's actions as an ‘illustration of the hollowness of the false claim of the Adani Group and the BJP and their supporters’ assertions that the Supreme Court Expert Committee issued a ‘clean chit’.’
A show-cause notice is the first step for a law-enforcing agency or a statutory authority to start an investigation into a possible violation of a law or rule. In that sense, it is a rap on the knuckles for Adani – the group has been denying any wrongdoing and has been claiming that SEBI had not found anything against the companies in the group whose shares are listed for trading on stock exchanges. The Adani Group has also been claiming that the Supreme Court appointed committee had given it a ‘clean chit’. Both these claims now stand refuted by the issuance of the show-cause notices by SEBI.
After the concerned companies respond to SEBI's notices (the details of which are not public), SEBI will issue an order that may entail the imposition of a fine, a temporary ban or moratorium on trading in the stocks of the company, or worse still for the companies concerned, delisting the companies' shares.
After SEBI issues its order (and there is no time limit for issuing such an order – it has taken years in certain instances) and the company concerned is aggrieved by the order, it can appeal to the SAT (Securities Appellate Tribunal) and if it is still aggrieved, it can move the Supreme Court of India.
In short, we don't know if this is the beginning of something bigger or just a slap on the wrist for Adani.
