2025 (9) TMI 1001 - AT - SEBI

Penalty set aside as SECC Regulations 2012 and 2018 held inapplicable where subsidiaries, not the exchange, made investments

BSE Limited Versus Securities and Exchange Board of India, Mumbai

The AT set aside the penalty, holding that the challenged regulations did not apply where investments were made by subsidiaries rather than the stock ... Applicability of Section 38(2) of the SECC Regulations (Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012), 2018 read with Regulation 41(3) of SECC Regulation, 2012 - BTPIL and BIL came into existence prior to 2012 Regulations coming into force - Imposition of penalty - BSE Ltd. engaged in unrelated activities without the prior approval of SEBI - HELD THAT:- It is an admitted position that the subsidiaries of BSE have made investments and not the BSE. We may record that SEBI has not placed on record any material such as a resolution passed by the BSE's Board to invest/acquire stake in the said three entities or authorizing the subsidiaries to acquire their stakes. It is settled that penal provisions must be read strictly. Both 2012 and 2018 Regulation do not even remotely suggest that activities of any subsidiary can be attributed as violation committed by its principal, the BSE in this case. There is no material on record such as BSE‟s board resolution authorizing the investment. Therefore, Regulation 43(1) of 2012 Regulations and Regulation 38(2) of the 2018 Regulations have no application. Hence, the impugned order is unsustainable. ISSUES PRESENTED AND CONSIDERED 1. Whether Regulation 41(3) of the SECC Regulations, 2012 and Regulation 38(2) of the SECC Regulations, 2018 apply to activities undertaken by subsidiaries or joint ventures of a recognised stock exchange so as to attribute those activities as violations by the recognised stock exchange itself. 2. Whether investments or activities undertaken by subsidiaries/joint ventures without a board resolution or express authorization by the recognised stock exchange fall within the prohibition on engaging in activities 'unrelated or not incidental' to the stock exchange's business, thereby attracting penalties under the SECC Regulations. 3. Whether penal provisions in the SECC Regulations should be strictly construed against the regulator when the statutory text does not expressly attribute subsidiary conduct to the parent recognised stock exchange. ISSUE-WISE DETAILED ANALYSIS Issue 1 - Applicability of Regulation 41(3) (2012) and Regulation 38(2) (2018) to subsidiaries/joint ventures Legal framework: Regulation 41(3) (2012) prohibits a recognised stock exchange from engaging in activities that are unrelated or not incidental to its activity as a stock exchange except through a separate legal entity and as permitted by the Board. Regulation 38(2) (2018) prohibits a recognised stock exchange from carrying on any activity whether involving deployment of funds or otherwise without prior approval of the Board, with provisos permitting treasury investments per board-approved policy and permitting unrelated activities only through a separate legal entity subject to Board approval. Precedent treatment: Reliance was placed on a prior decision of this Tribunal dealing with similar issues. The Tribunal considered that precedent in support of the contention that the provisions are not intended to regulate the independent business of subsidiaries absent attribution to the parent. Interpretation and reasoning: On a plain reading, both provisions prohibit a 'recognised Stock Exchange' from engaging in unrelated activities except through a separate legal entity with Board/SEBI approval. The Tribunal found no textual basis in either provision to treat activities of a subsidiary or joint venture as the direct activities of the recognised stock exchange when the investment/ activity was undertaken by the subsidiary itself. The record lacked any material (for example, a board resolution) showing that the recognised stock exchange authorised or directly undertook the impugned investments. The object to 'ring-fence' the exchange does not, on the facts, convert independent subsidiary investments into actions of the parent without supporting material showing control/authorization sufficient for attribution. Ratio vs. Obiter: Ratio - The statutory text does not, by plain language, extend the prohibition to activities independently undertaken by subsidiaries/joint ventures unless the recognised stock exchange itself engaged in or authorised those activities; thus the parent cannot be held liable under these provisions on the facts where subsidiaries independently made investments and no board authorisation by the exchange is shown. Obiter - Observations on policy (ring-fencing rationale) were noted but held insufficient to displace the statutory interpretation. Conclusions: Regulation 41(3) (2012) and Regulation 38(2) (2018) do not, on their face, apply to activities carried out by subsidiaries or joint ventures absent material showing attribution (such as a board resolution or direct engagement by the recognised stock exchange). Consequently, the provisions were held inapplicable on the facts. Issue 2 - Attribution, authorization and evidentiary requirement to impose penalties Legal framework: SECC Regulations impose prohibition and contemplate penal consequences for violations. General principle of statutory interpretation requires penal provisions to be construed strictly. Attribution of acts of separate legal entities to a parent ordinarily requires evidence of control, authorization, or other indicia justifying such attribution. Precedent treatment: The Tribunal relied on settled principles regarding strict reading of penal provisions and on prior Tribunal authority addressing similar questions of attribution and applicability. Interpretation and reasoning: The Tribunal emphasized that the impugned order penalised the recognised stock exchange for investments in three entities made by its subsidiaries. There was no material on record demonstrating that the exchange's board had authorised those investments or that the recognised exchange itself carried out the activities. Given the absence of documentary evidence of authorization, and given the need to construe penal provisions strictly, the Tribunal held that the AO could not validly attribute the subsidiaries' activities to the recognised stock exchange for the purpose of imposing penalties under the cited Regulations. Ratio vs. Obiter: Ratio - Penalties under the SECC Regulations cannot be imposed on a recognised stock exchange for activities undertaken by its subsidiaries unless there is material establishing that the exchange itself engaged in, authorised, or should be attributed with those activities. Obiter - The Tribunal acknowledged the regulatory objective of ring-fencing but treated it as insufficient, in isolation, to override the textual and evidentiary requirements for imposing penalties. Conclusions: In the absence of any board resolution or other material showing that the recognised stock exchange authorised or directly undertook the investments/activities, the adjudicating authority's imposition of penalty on the recognised stock exchange was unsustainable. Issue 3 - Temporal argument regarding investments made prior to the 2012 Regulations Legal framework: The appellant contended that certain investments were made prior to the promulgation of the 2012 Regulations and therefore not subject to those Regulations. Precedent treatment: The Tribunal noted the contention and the reliance placed on prior authority but resolution of the appeal did not require a detailed determination of the temporal argument because the primary legal defect in the AO's order was attribution to the parent absent evidence. Interpretation and reasoning: Although raised, the Tribunal disposed of the appeal on the ground that the statutory provisions do not, on their face, attribute subsidiary acts to the recognised stock exchange and that no evidence of authorisation existed. The absence of such evidentiary foundation made it unnecessary to adjudicate the temporal applicability point conclusively. Ratio vs. Obiter: Obiter - The temporal argument was noted but was not essential to the Tribunal's decision; the Tribunal resolved the matter on attribution and evidentiary grounds. Conclusions: The Tribunal did not decide, as a necessary basis for the judgment, whether investments made prior to the 2012 Regulations were immune; instead the order was set aside because the AO failed to show that the recognised stock exchange (and not only its subsidiaries) engaged in the impugned activities. Cross-references and final disposition Cross-reference: Issues 1 and 2 are interlinked - statutory interpretation (Issue 1) controls the attribution/evidentiary requirement for imposing penalties (Issue 2); the Tribunal's ruling on attribution renders the AO's penalty unsustainable regardless of the regulatory purpose invoked by the regulator. Final conclusion: The AO's order imposing a monetary penalty for alleged violations of Regulation 41(3) (2012) and Regulation 38(2) (2018) was set aside because the prohibitions do not, by plain language or on the record, extend to independent investments by subsidiaries in the absence of material demonstrating that the recognised stock exchange itself authorised or engaged in the impugned activities; penal provisions were read strictly and no costs were imposed.