Private Hands, Public Power: Legal Limits of SEBI's Enforcement Extensions

Kabir Kumar^*

INTRODUCTION

This article examines whether SEBI's move to empower Recognised Stock Exchanges (“RSEs”) by delegating the RSE's with its authority to impose penalties aligns with its statutory mandate or not, by relying on Section 11A(2) of the SEBI Act, 1992 (“SEBI Act”), read alongside 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. In doing so, this article draws on the legal doctrine of delegatus non potest delegare  a well-accepted principle in Indian jurisprudence which means that a delegatee cannot further delegate its powers. The analysis focuses on whether expanding the enforcement powers of RSEs is consistent with their role as first-tier regulators, who under the SCRA are primarily empowered to create and implement their own bye-laws to oversee securities contracts and ensure regulatory compliance at the trading level.

EXAMINING THE STATUTORY FRAMEWORK GOVERNING IMPOSITION OF PENALTIES

Chapter VII of the Master Circular deals with “Penal Actions for Non-Compliance,” directing RSEs to initiate measures against breaches of LODR provisions, which may include imposing monetary penalties or suspension of trading activities. While RSEs are allowed to depart from these prescribed actions in specific cases, such deviations must be justified with documented reasons and are contingent upon SEBI’s approval, thereby placing them within SEBI’s discretion.

To understand if SEBI’s allocation of powers to RSEs holds up legally, one must examine the broader statutory scheme, specifically that of the SEBI Act and the SCRA, in relation to Regulation 98 of the LODR. This provision enables SEBI to ensure compliance through measures like trading halts, freezing of promoter assets, and monetary sanctions. The authority for this flows from Sections 11(1), 11A(2), and 30, which grant SEBI the power to supervise the securities market and set listing standards. Additionally, Section 21A of the SCRA allows RSEs to delist securities, aligning with SEBI’s regulatory framework.

Although SEBI’s authority to frame listing and delisting regulations is well-established, there is no specific statutory provision that clearly permits SEBI to empower RSEs to impose penalties. Section 11(1) of the SEBI Act gives SEBI broad powers to protect investor interests but does not outline how such powers can be delegated. Similarly, Sections 11(1) and 11A(2) empower SEBI to regulate matters pertaining to listing, but do not expressly authorise the sub-delegation of such quasi-judicial functions. This raises the key question of whether these provisions can be interpreted to include such implied delegation.

Section 9 of the SCRA authorises RSEs to impose and collect fees, fines, and penalties under their own bye-laws. In contrast, Section 10 permits SEBI to modify or introduce such bye-laws through a Gazette Notification, following consultation with the relevant exchange. Chapter VII of the Master Circular diverges from this framework—it applies uniformly to all RSEs without amending individual bye-laws, and skips both, the consultative process and Gazette publication, by relying solely on a Circular.

Sections 9 and 10 of the SCRA might seem similar to Regulation 98 of the LODR in function, but they differ legally. In NSE v. Union of India, the Delhi High Court affirmed that statutory law has primacy over delegated legislation, thereby outranking circulars. Since, the SEBI Act is a statutory instrument, it cannot independently create law and thus, subordinate legislation must conform to the parent statute.

This brings to light two principal concerns about the legitimacy of SEBI’s framework for imposing penalties:

·          First, Section 9 confers upon RSEs the power to impose fines through their respective bye-laws.

·     Second, there is no express legislative sanction granting SEBI the power to define penalty framework for RSEs. As a result, any circular that seeks to enforce such framework could be deemed to exceed the scope of authority granted by virtue of Section 9.

Even assuming arguendo that Section 19 of the SEBI Act permits assignment of statutory powers and duties i.e., functions which involve adjudicatory elements, whether judicial or quasi-judicial in nature, can only be transferred when there is clear legislative backing. Section 19 provides no such explicit clause. In Bombay Municipal Corp. v. Dhondu Narayan Chowdhary, the Supreme Court clarified that unless specifically authorised by law, judicial power is ordinarily not transferable to another body.

In Pradeep Mehta v. Union of India, the Bombay High Court underscored that while SEBI may delegate its functions, such delegation must remain within the bounds of statutory authority and include appropriate procedural safeguards. Under Section 11 of the SEBI Act, the regulator is tasked with investor protection and regulating the securities market. Delegation to entities like depositories and exchanges promotes operational efficiency, but it does not relieve SEBI of its core responsibilities. Rather, exchanges such as BSE and NSE operate as frontline regulators under Section 9 of the SCRA, with SEBI maintaining overall oversight and control.

The rulings in A.K. Roy v. Union of India and Clariant International Ltd. v. SEBI further reiterate that any power delegated to SEBI must be exercised strictly within the boundaries of the parent statute and duly accompanied by the necessary procedural protections.

INVOKING THE PRINCIPLE OF DELEGATUS NON POTEST DELEGARE

Given the absence of express statutory authority, it becomes important to assess whether SEBI’s powers under Sections 11(1) and 11A(2) of the SEBI Act may include any implied authority. According to the principle of delegatus non potest delegare, a body exercising delegated powers cannot transfer those powers further, unless such re-delegation is clearly permitted by the law.

In A.K. Roy v. State of Punjab, the Supreme Court ruled that sub-delegation of authority is ordinarily not allowed unless the enabling legislation clearly provides for it. However, in Sahni Silk Mills, a view later affirmed in IG Registration v. K. Bhaskaran, the Court acknowledged that while the principle is applied rigorously, sub-delegation of administrative powers may be permissible where expressly allowed by statute, especially in light of the growing complexity of regulatory governance.

Indian courts have repeatedly disapproved of transferring judicial or quasi-judicial functions to private entities. In Smt. Savita Chaudhary v. State of Uttarakhand, the Uttarakhand High Court reiterated that such powers cannot be delegated further. Likewise, in Oberoi Motors v. UT Administration, Chandigarh, the Punjab and Haryana High Court, relying on Barium Chemicals Ltd. v. Company Law Board, held that discretionary powers conferred upon a delegate must be exercised by that very delegate. This is because such powers are entrusted based on the delegate’s expertise and the legislature’s confidence in their judgment. Permitting further delegation would defeat that purpose. Where a statute designates a particular authority to perform a function, its execution by another is impliedly barred to preserve accountability and uphold statutory integrity.

In BRD Securities Ltd. v. Union of India, the Kerala High Court allowed SEBI to delegate quasi-judicial tasks to its own officials under Section 19 of the SEBI Act. Yet, it cautioned that the delegatus non potest delegare rule, discussed in Sahni Silk Mills, should not be applied automatically. Each instance of sub-delegation needs case-specific scrutiny. Since Section 19 excludes any mention of RSEs, this judgment doesn’t support extending such powers to them.

Granting RSEs enforcement powers lacks firm statutory basis and conflicts with prior rulings that demand legislative clarity. In PNGRB v. Indraprastha Gas Ltd., the Supreme Court rejected the idea that regulators can stretch their powers using loosely framed mandates. It emphasized that authority must originate from clear statutory language. SEBI’s action, without clear backing, replicates the same regulatory overreach that the Apex Court condemned in the PNGRB case.

SEBI is conferred with sweeping powers, such as rule-making, enforcement, initiation of prosecution and imposition of penalties. However, when it becomes both regulator and judge, that is, engages in executive adjudication, it raises serious questions under the doctrine of nemo iudex in sua causa, meaning no one should judge his own case. Statutory provisions ensure judicial review and procedural safeguards, but transferring these powers to a private body, like an RSE, undermines checks and balances, raising constitutional concerns.

The principle of delegatus non potest delegare essentially states that you cannot hand off a job that needs your own know‑how and direct control, since adjudication is an important aspect of fair regulation. If you let a private entity discharge such functions, without an explicit green light from the law, it eliminates oversight and violates fundamental principles pertaining to delegation.

Challenging fines imposed by RSEs often becomes an impractical option due to the high legal costs involved, frequently exceeding the amount of the penalty itself. This discourages the affected parties from seeking redressal and weakens the rule of law by discouraging legal scrutiny of regulatory decisions. Under the rational choice theory, most people choose the cheaper path, paying the fine even when the penalty is unfair. This creates space for SEBI’s actions to go unchecked. Small businesses are hit the hardest, as repeated unchallenged fines drain resources, and reduce their ability to compete. When access to justice becomes too expensive, it raises serious concerns about procedural fairness. As a result, SEBI’s responsibility to foster equitable and transparent markets is compromised, weakening trust and damaging market integrity.

CONCLUSION

This practice by SEBI of allowing RSEs to issue penalties raises important questions about its legal foundation. Neither the SEBI Act nor the SCRA, provide direct statutory authority for SEBI to pass this responsibility to the exchanges. Indian courts have been clear: in cases like Sahni Silk Mills and Bombay Municipal Corporation, they have ruled that unless a statute clearly allows sub-delegation, it cannot be assumed. Moreover, enforcement through Regulation 98 and the Master Circular bypasses safeguards in Section 10 of the SCRA such as prior consultation and formal notification. These gaps matter. Without proper procedure, smaller businesses face penalties they cannot afford to challenge, and the system permits such unchecked regulatory expansion.

When RSEs function as both, adjudicators and recipients of penalties, it violates the principle of nemo judex in causa sua. In PNGRB, the Supreme Court stressed that regulatory powers must come from clear legislation to avoid misuse. Without robust safeguards, SEBI’s current model risks compromising fairness, investor confidence, and natural justice. To ensure accountability, SEBI must secure legislative backing and implement due process mechanisms.

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^* Kabir Kumar is a third-year B.B.A. LL.B. student at O.P. Jindal Global University. He can be reached at kabirkumar2005@gmail.com for any discussion related to this article.