The recent decision of the Securities Appellate Tribunal (“SAT”) in Hindustan Foods Limited v. BSE Limited & Anr. requires us to examine the expectations from settlement proceedings more carefully.
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?
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 ₹24.32 lakh and SEBI passed a settlement order on October 10, 2023. BSE thereafter imposed a fine of ₹52.21 lakh for violation of the very same Regulation 17(1)(b). SAT upheld the action of BSE.
The decision therefore raises a larger question: what exactly gets settled when a matter is settled with SEBI?
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 term “securities laws” is itself widely defined under Regulation 2(1)(zf) of the LODR Regulations and includes the SEBI Act, the Securities Contracts (Regulation) Act, the Depositories Act, rules and regulations made thereunder, general or special orders, guidelines and circulars issued by SEBI, and provisions of the Companies Act, 2013 or previous company law and subordinate legislation administered by SEBI.
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 result 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 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 imposition of a monetary penalty. Under the SEBI (Settlement Proceedings) 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 to be noted 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 Regulation 17(1)(b) default 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 as per 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 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.
The decision should, however, not be read to mean that multiple monetary consequences can be imposed merely by describing them differently. Each action must independently derive 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.
The unresolved question is proportionality
While SAT has clarified that both actions can legally co-exist, a broader policy issue remains.
The stock exchange is not operating in an unrelated regulatory framework. Its SOP powers arise from the LODR Regulations and a mechanism prescribed by SEBI itself. SEBI enforcement and exchange enforcement may operate in separate legal spheres, but for the listed entity they ultimately form part of the same regulatory exposure arising from the same compliance failure.
This raises a legitimate question: should foreseeable stock exchange fines be considered while determining settlement terms with SEBI, so that the overall monetary consequence remains proportionate?
The Hindustan Foods decision does not answer this question. It only confirms that, under the present framework, settlement with SEBI does not automatically eliminate exchange-level consequences.
Conclusion
Before deciding to settle a matter with SEBI, a listed entity should examine what exactly is being settled and 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 therefore form part of the entity’s assessment while evaluating the settlement.
Now, whether Hindustan Foods travels further to the Supreme Court remains to be seen.
Author: Ms. Radhika Varade [Deputy Manager (R&D Department)]