Five Offshore Funds Challenge SEBI at SAT Over 'Mechanical' Proceedings in Hindenburg Saga

Five Offshore Funds Challenge SEBI at SAT Over 'Mechanical' Proceedings in Hindenburg Saga​

The Securities Appellate Tribunal (SAT) has adjourned a significant legal matter involving five major offshore funds, setting a crucial hearing for June 22. These funds, named in the highly scrutinized January 2023 Hindenburg report, are challenging the initiation of proceedings by an adjudicating officer of the Securities and Exchange Board of India (SEBI).

The dispute centers on procedural fairness. The funds allege that SEBI initiated its proceedings without providing adequate reasons for such action, forcing them to seek redressal from the apex tribunal.

The Legal Challenge Posed by Offshore Funds​

Senior Advocate Zal Andhyarujina, representing one of the funds, put forth a detailed argument regarding adherence to the SEBI Adjudication Rules. He contended that Rule 4(3) mandates the adjudicating officer to form and express an opinion after considering the response received from the challenged entities.

Andhyarujina submitted that the officer initially declined to provide an opinion, reportedly stating he was "not bound to do it." Furthermore, he argued that the reasons issued by the officer only after the appeal was filed were a "mechanical reproduction of the show-cause notice."

The funds' representative prayed that no further action should be taken until a proper and reasoned opinion is officially issued regarding their replies to the initial show-cause notices.

SEBI’s Defense: Opinion Formation Across Adjudication Stages​

Countering these claims, Senior Advocate Chetan Kapadia, representing SEBI, argued that the funds "don't want the inquiry to proceed." He explained that opinions are formed at various stages of the adjudication process itself.

Kapadia submitted that after receiving a response to the show-cause notice and before any personal hearing is scheduled, the officer must internally examine the material. This examination determines whether the proceedings should be closed or if a formal hearing is necessary.

The SEBI representative also noted that the funds had appealed SEBI's decision to call them for a hearing in an attempt "to bring an end to the matter."

Clarifying Regulatory Requirements Under SEBI Rules​

The core of the regulatory conflict lies within specific sections of the SEBI Adjudication Rules. As per Rules 4(3) and 4(4), when any person or entity receives a show-cause notice and submits a reply, the adjudicating officer must first consider that explanation.

If the officer determines that further examination is required, an inquiry may be initiated. In such instances, a formal notice specifying the hearing date must be issued to all parties involved.

Context: Alleged Violations and Disclosure Norms​

SEBI had previously alleged violations regarding disclosure requirements and investment limits against several offshore funds named in the Hindenburg report. The regulator had initially issued show-cause notices seeking explanations for these alleged breaches of norms.

It was specifically alleged that while the offshore funds disclosed their investments in Adani Group companies on a fund-by-fund basis, SEBI required the disclosure of these holdings to be aggregated at the offshore fund group level.