Analyzing the Legality of SEBI’s Sub-Delegation of Penalty-Levying Powers to Stock Exchanges under LODR and Master Circular

[Tanay and Ayush are students at NALSAR University of Law.]

This blog post analyses the appropriateness of the delegation of the power to levy penalties by the Securities and Exchange Board of India (SEBI) to recognized stock exchanges (RSEs) under Section 11A(2) of the SEBI Act 1992 read with Sections 9 and 21 of the Securities Contracts (Regulation) Act 1956 (SCRA) and Regulation 98 of the SEBI Listing Obligations and Disclosure Requirements Regulations 2015 (LODR) read with the master circular for compliance with the provisions of the LODR dated 11 July 2023 (Master Circular). Taking guidance from the maxim “delegatus non potest delegare” which translates to “a delegate cannot delegate” and which is well accepted in Indian jurisprudence, an attempt is made to analyse the appropriateness of said expansion of regulatory powers of RSEs, when they have been envisaged only as first-level regulators, empowered to frame and enforce their own bye-laws for the regulation and control of contracts for or relating to the purchase of securities as per SCRA.

Tracing the Legislative Scheme of the Penalty-Levying Provisions 

Chapter VII of the Master Circular outlines “Penal Actions for Non-Compliance”, mandating that RSEs take action against LODR violations, including trading suspensions and fines. RSEs may deviate from these provisions with recorded reasons, such deviations require SEBI’s approval, making them subject to SEBI’s discretion.

To assess whether SEBI’s delegation to RSEs is legally permissible, it is important to compare Regulation 98 of the LODR with its parent statutes (the SEBI Act 1992 and the SCRA). Regulation 98 of LODR empowers SEBI to enforce compliance through fines, trading suspensions, and freezing promoter holdings. SEBI’s authority is derived from Sections 11(1), 11A(2), and 30 of the SEBI Act 1992, which collectively enable SEBI to regulate the securities market, set listing requirements, and frame necessary regulations. Additionally, Section 21A of the SCRA permits RSEs to delist securities, aligning with SEBI’s regulatory framework.

While SEBI’s power to establish listing/delisting regulations is undisputed, no statutory provision explicitly authorises SEBI to mandate RSEs to impose penalties. Section 11(1) of the SEBI Act 1992 broadly empowers SEBI to safeguard investor interests but does not specify how this authority may be delegated. Similarly, Sections 11(1) and 11A(2) of the SEBI Act 1992 together allow SEBI to take necessary measures and regulate incidental listing matters but do not explicitly permit the sub-delegation of quasi-judicial powers to RSEs. Therefore, it is crucial to determine whether these provisions implicitly allow SEBI to delegate penalty-levying powers.

Section 9 of the SCRA grants RSEs the authority to levy and recover fees, fines, and penalties through their by-laws. However, Section 10 allows SEBI to amend these by-laws or introduce new ones via Gazette Notification after consulting the concerned RSEs. Chapter VII of the Master Circular does not align with Section 10, as it applies to all RSEs rather than amending specific by-laws. Moreover, it bypasses the consultative process and Gazette Notification, by being issued through a Circular.

Although Sections 9 and 10 of the SCRA are functionally similar to Regulation 98 of LODR, they are analytically distinct. In NSE v. UOI, the Delhi High Court outlined a legal hierarchy where statutory law supersedes delegated legislation, which in turn prevails over administrative instructions like circulars. Since the SEBI Act 1992 is a statutory instrument, it cannot create law, and subordinate legislation must conform to the parent statute.

This raises two key concerns regarding the validity of SEBI’s penalty-levying provisions:

1. Section 9 reserves the power to impose fines and penalties for RSEs through their by-laws.

2. No statutory provision explicitly empowers SEBI to prescribe penalty standards for RSEs. Therefore, any circular establishing such a standard may be ultra vires Section 9.

In arguendo, even if Section 19 of the SEBI Act 1992 allows for delegation of powers and functions, judicial and quasi-judicial functions can only be delegated through an express statutory provision, which Section 19 does not provide. In Bombay Municipal Corporation v. Dhondu Narayan Chowdhary, the Supreme Court held that judicial power cannot ordinarily be delegated unless explicitly permitted by law.

In Pradeep Mehta v. Union of India, the court emphasised that while SEBI can delegate its powers within statutory limits, such delegation must maintain procedural safeguards. SEBI’s role under Section 11 of the SEBI Act 1992 includes investor protection and market regulation, and its delegation to stock exchanges and depositories ensures efficient oversight. However, this delegation does not absolve SEBI of its statutory duties but enables exchanges like BSE and NSE to function as first-level regulators under Section 9 of the SCRA, with SEBI retaining supervisory control.

The decisions in AK Roy v. Union of India and Clariant International Limited v. SEBI reaffirm that SEBI’s exercise of delegated powers must operate within the statutory framework and procedural safeguards

Violation of Delegatus Non Potest Delegare 

With SEBI’s lack of explicit powers established, it is necessary to examine the scope of its implicit powers under Sections 11(1) and 11A(2) of the SEBI Act 1992. The maxim delegatus non potest delegare states that delegated powers cannot be further delegated unless expressly or implicitly permitted by law.

In AK Roy v. State of Punjab, the Supreme Court held that sub-delegation is generally impermissible unless explicitly authorised by the legislature. In Sahni Silk Mills (followed in IG Registration v. K Bhaskaran), the court recognised that while the maxim is strictly applied, administrative discretion may be sub-delegated if permitted by statute due to the increasing complexity of regulatory functions.

Courts have consistently opposed delegating judicial or quasi-judicial powers to private bodies. In Smt. Savita Chaudhary v. State of Uttarakhand, the Uttarakhand High Court reaffirmed that such powers cannot be delegated. Similarly, in Oberoi Motors v. UT Administration, Chandigarh, the Punjab and Haryana High Court, citing Barium Chemicals Limited v. Company Law Board, held that when a delegate is assigned discretionary power, it must be exercised personally. This is because the delegates are chosen based on specific expertise, skill, and trust, and allowing re-delegation would undermine legislative intent. If a statute mandates that certain acts be performed by a designated authority, their execution by another is impliedly prohibited to ensure accountability and prevent dilution of statutory safeguards.

In BRD Securities Limited v. Union of India, the Kerala High Court upheld SEBI’s sub-delegation of quasi-judicial powers to its members under Section 19 of the SEBI Act 1992. However, it clarified that the principle of delegatus non potest delegare, as set out in Sahni Silk Mills v. ESI Corporation, cannot be applied blindly. Each case of sub-delegation must be evaluated on its own merits. Since Section 19 does not explicitly mention RSEs, this ruling lacks precedential value for validating SEBI’s sub-delegation of quasi-judicial powers to RSEs.

The delegation to RSEs contradicts established precedents requiring explicit legislative authorisation. In PNGRB v. Indraprastha Gas Limited (PNGRB), the Supreme Court ruled that regulatory bodies cannot expand their powers through open-ended mandates, emphasising that express statutory conferral is necessary to prevent power usurpation. SEBI’s delegation to RSEs, lacking clear statutory backing, mirrors the overreach in PNGRB.

SEBI wields extensive powers, including rule-making, enforcement, prosecution, and penalty imposition. However, executive adjudication, where SEBI acts as both regulator and adjudicator, raises concerns under the principle of nemo judex in sua causa, which means that no individual should act as the judge in their own case. Statutory provisions ensure judicial review and procedural safeguards, but transferring such powers to a private entity like an RSE undermines checks and balances, raising constitutional concerns.

The delegatus non potest delegare principle is rooted in the delegation of unique skills requiring expertise and oversight. Adjudication, a core function of regulation and fairness, falls within this category. Assigning this function to private entities without legal backing eliminates oversight, violating fundamental delegation principles.

Additionally, contesting RSE-imposed penalties is financially burdensome, discouraging legal challenges. Challenging a penalty costs more than the penalty itself, eroding the rule of law by discouraging legal scrutiny of regulatory decisions. Legal systems rely on the ability to contest rulings, but under rational choice theory, individuals will opt for the economically efficient choice of paying the fine rather than incurring greater costs. This limits opposition to SEBI’s regulatory overreach and prevents the correction of unjust penalties. Unchecked penalties unfairly affect smaller businesses, therefore discourages innovation and competition. The inability to afford legal challenges raises concerns of economic due process, as fair procedure becomes inaccessible. This undermines SEBI’s mandate to ensure fair markets, leading to reduced accountability, weakened trust in the system, and a decline in market integrity.

Conclusion 

SEBI’s delegation of penalty-levying powers to RSEs lacks explicit statutory backing under the SEBI Act 1992 and SCRA. Judicial precedents, including Bombay Municipal Corporation v. Dhondu Narayan Chowdhary and Sahni Silk Mills v. ESIC, affirm that delegated powers cannot be further delegated without clear legislative intent. Moreover, Regulation 98 of LODR, and Chapter VII of the Master Circular impose penalties without statutory consultation or Gazette notification, bypassing Section 10 of the SCRA. This compromises control, results in procedural injustice, and disproportionately impacts smaller businesses and therefore discourages legal challenges while allowing unrestricted regulatory expansion.

Furthermore, RSEs serving as both enforcers and penalty beneficiaries violates the principle of nemo judex in causa sua. The Supreme Court in PNGRB, emphasised that regulatory powers need clear statutory authority to prevent abuse. SEBI’s present structure runs the danger of undercutting natural justice, market confidence, and investor trust without appropriate control. SEBI has to get legislative permission, apply procedural protections, and set tougher monitoring systems if it is to guarantee accountability and fairness.