Conditions under Regulation 27(1)(i)–(iii) apply equally to promoter borrowers, subsidiaries, and associates.

Acuite Ratings & Research Limited, a SEBI-registered credit rating agency, was inspected by SEBI for the period from 1 September 2022 to 31 August 2023.

SEBI alleged that the appellant had rated securities issued by eight entities that had borrowed funds from SIDBI, which held more than 10% of the appellant’s share capital and was therefore its promoter under Regulation 25(b) of the SEBI (Credit Rating Agencies) Regulations, 1999.

SEBI issued a show-cause notice alleging violation of Regulation 27(1), and the Adjudicating Officer imposed a penalty of ₹5 lakh by order dated 29 November 2024.

The appellant challenged that order under Section 15T of the SEBI Act, 1992.

Whether the conditions in sub-clauses (i), (ii) and (iii) of Regulation 27(1)(c) of the CRA Regulations also apply to entities covered under Regulation 27(1)(a) and (b), namely, a borrower or subsidiary of the CRA’s promoter.

Whether the appellant violated Regulation 27(1) by rating securities issued by entities that had borrowed from its promoter, SIDBI, in the absence of the common-chairperson, director or employee relationships contemplated by sub-clauses (i)–(iii).

The court applied Regulation 27(1) of the SEBI (Credit Rating Agencies) Regulations, 1999, which restricts a CRA from rating securities issued by an entity that is a borrower, subsidiary or associate of its promoter; the dispute concerned whether the qualifying conditions in clauses (i)–(iii) extend to all three categories.

The Tribunal relied on the principle of harmonious construction, particularly where statutory language is ambiguous, and on the object of preventing conflicts of interest.

It also considered Regulation 28V, which expressly applies similar conditions to borrowers, subsidiaries and associates of a promoter, SEBI’s press release dated 23 June 1999, and the 72nd Report of the Parliamentary Standing Committee on Finance, all of which indicated that the conditions were intended to apply across the three categories.

The Tribunal distinguished Commissioner, Customs, Central Excise and Service Tax, Patna v. Shapoorji Pallonji & Co. (P) Ltd., (2024) 3 SCC 358, which states that harmonious construction is unnecessary where statutory language is plain and unambiguous, because Regulation 27 was found to contain ambiguity.

The Tribunal accepted that SIDBI was the appellant’s promoter and that the appellant had rated securities issued by eight entities that had borrowed from SIDBI.

However, it rejected SEBI’s interpretation that clauses (i)–(iii) applied exclusively to associates under Regulation 27(1)(c).

Reading the provision literally in that manner would create an incongruous distinction: a CRA could be prohibited from rating an associate only where specified common relationships existed, while being absolutely prohibited from rating a borrower or subsidiary regardless of whether any conflict-producing relationship existed.

The Tribunal held that the common purpose of Regulation 27 and Regulation 28V was to prevent conflicts of interest in the rating process.

SEBI’s 1999 press release expressly referred to borrowers, subsidiaries and associates together, and the Parliamentary Standing Committee’s report adopted the same understanding.

Accordingly, harmonious construction required clauses (i)–(iii) to apply to borrowers and subsidiaries under clauses (a) and (b) as well.

Since the impugned penalty was based on the contrary interpretation and the relevant qualifying conditions had not been established, the alleged violation was not made out.

It consequently allowed the appeal, set aside the Adjudicating Officer’s order dated 29 November 2024 imposing a ₹5 lakh penalty, directed SEBI to refund any amount deposited pursuant to the interim order dated 23 January 2025, and disposed of pending interlocutory applications.

No order as to costs was made.