The recent decision of the Securities Appellate Tribunal (“SAT”) in Hindustan Foods Limited v. BSE Limited & Anr.1 requires us to examine the expectations from settlement proceedings more carefully.
Hindustan Foods had approached SEBI under the settlement mechanism in relation to, inter alia, non-compliance with Regulation 17(1)(b) of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”). The company paid a settlement amount of Rs. 24.32 lakh and SEBI passed a settlement order on October 10, 2023. BSE thereafter imposed a fine of Rs. 52.21 lakh for violation of the very same Regulation 17(1)(b). SAT upheld the action of BSE.
The case raises an interesting question: if proceedings relating to a regulatory non-compliance have already been settled with SEBI, can the stock exchange still impose a monetary consequence for the same non-compliance?
Parallel consequences under regulation 98?
SAT relied on Regulation 98 of the LODR Regulations. It provides that a listed entity contravening the LODR Regulations shall, “in addition to liability for action in terms of the securities laws,” be liable for action by the respective stock exchange. Such action may include imposition of fines, suspension of trading, freezing of promoter/promoter group holdings and such other action as may be specified by SEBI.
The words “in addition to” are important. They indicate that action under securities laws and action by the stock exchange are not necessarily alternatives.
The regulatory structure, therefore, contemplates two channels – action under the securities laws and action by the stock exchange under the framework prescribed by SEBI.
The SEBI Circular dated January 22, 2020, follows the same approach. Clause 7 provides that action under the SOP is without prejudice to SEBI’s power to take action under the securities laws. SAT specifically relied upon this provision.
Seen in this context, the outcome in Hindustan Foods follows from the language of the regulatory framework itself.
What, then, does a SEBI settlement settle?
This is perhaps the more important question from a business perspective.
Section 15JB of the SEBI Act deals with the settlement of administrative and civil proceedings. It enables the settlement of proceedings that have been initiated or may be initiated in respect of specified alleged defaults.
A settlement is not the same as an adjudication followed by the imposition of a monetary penalty. Under the SEBI (Settlement Proceedings) Regulations, 2018 (“Settlement Regulations 2018”), the amount paid pursuant to the settlement is a settlement amount, and the proceedings are disposed of on the basis of the approved settlement terms.
It is important to note that the settlement order of Hindustan Foods itself expressly stated that it was without prejudice to action, if any, that may be initiated by recognised stock exchanges under the January 22, 2020 Circular.
Is this double punishment?
Economically, the concern is obvious. One underlying default regulation 17(1)(b) resulted in a Rs. 24.32 lakh settlement payment to SEBI and a further Rs. 52.21 lakh fine payable to BSE.
Legally, however, describing this as two penalties is not entirely accurate.
The amount paid to SEBI was a settlement amount under the Settlement Regulations 2018, not a penalty imposed after adjudication. The fine levied by BSE, on the other hand, was a fine imposed pursuant to the SEBI circular dated 22 January 2020.
More importantly, there is no general principle of civil or regulatory law that the same factual conduct can give rise to only one monetary consequence. The relevant question is whether the governing law framework permits cumulative action. Here, Regulation 98 expressly does so.
SAT also relied upon its earlier decision in Alien Developers Private Limited, where it observed that regulatory compliances vis-à-vis SEBI and BSE operate in “different spheres”. Accordingly, the pleas of res judicata and double jeopardy were rejected.
Therefore, it can be seen that each action must independently derive its authority from the applicable law. In Hindustan Foods, that authority arose from Regulation 98, the SOP Circular and the express reservation in the settlement order.
Settlement is subject to SEBI’s discretion
It is to be noted that under the existing Settlement Regulations, 2018, a settlement application filed suo-motu by an applicant may be accepted by SEBI unless it falls under prescribed criteria where a settlement application may be rejected.
To clarify, if the application is complete and is not barred under regulation 5(1), SEBI may take it up for consideration. However, SEBI may decline to settle a matter where the alleged default has a market-wide impact, has caused loss to a large number of investors, affects market
integrity, or where other circumstances specified in the Settlement Regulations 2018 make settlement inappropriate.
Accordingly, unlike an SOP fine imposed by a stock exchange upon occurrence of a certain non-compliance, settlement with SEBI is not automatic. Whether a matter is settled remains subject to the regulatory framework and SEBI’s discretion under the Settlement Regulations.
Conclusion
Before deciding to settle a matter as per Settlement Regulations, a listed entity should examine not only what is being settled, but also what regulatory exposure may survive the settlement.
Where the settlement order preserves the right of recognised stock exchanges to take action, the possibility of an SOP fine should form part of the entity’s assessment while evaluating the settlement.
Whether Hindustan Foods will travel further to the Supreme Court remains to be seen.
Author: Ms. Radhika Varade [Deputy Manager (R&D Department)]