The Securities Appellate Tribunal clarified the scope of Regulation 27(1) of the SEBI (Credit Rating Agencies) Regulations, 1999, holding that the additional conditions in sub-clauses (i)-(iii) apply to all three categories of promoter-related entities - borrowers, subsidiaries and associates. The decision overturns a ₹5 lakh penalty imposed on Acuite Ratings & Research Ltd and sets a precedent for interpreting conflict-of-interest restrictions on credit rating agencies.
Background & Facts
The Dispute
Acuite Ratings & Research Limited, a SEBI-registered credit rating agency, was penalised by SEBI for allegedly breaching Regulation 27(1) of the SEBI (CRA) Regulations, 1999. The penalty of ₹5 lakhs was imposed on the basis that the agency had assigned ratings to securities of eight entities that had borrowed money from its promoter, Small Industries Development Bank of India (SIDBI).
Key Facts
- 01 September 2022 to 31 August 2023: SEBI conducted an on-site inspection of Acuite Ratings.
- 22 April 2024: SEBI issued a Show Cause Notice (SCN) alleging violation of Regulation 27(1).
- After SCN: Acuite filed its reply contesting the interpretation of Regulation 27(1).
- 29 November 2024: Adjudicating Officer (AO) of SEBI passed the impugned order imposing a penalty of ₹5 lakhs.
- 23 January 2025: Acuite deposited the amount as directed by the AO.
- 1 September 2026: SAT delivered its judgment, setting aside the order.
Procedural History
- 12 June 2025: Appeal No. 19 of 2025 filed before the Securities Appellate Tribunal under Section 15T of the SEBI Act, 1992.
- 18 August 2026: Tribunal heard arguments and reserved its order.
- 1 September 2026: Judgment pronounced.
Parties' Positions
- Appellant (Acuite Ratings) argued that the word “or” in sub-clauses (a), (b) and (c) of Regulation 27(1) is disjunctive, and that the additional conditions in sub-clauses (i)-(iii) should apply to all three categories, not only to (c). It relied on SEBI’s 23 June 1999 press release, the 72nd Report of the Parliamentary Standing Committee on Finance (2018-19), and the parallel Regulation 28V which applies the conditions uniformly.
- Respondent (SEBI) contended that SIDBI, holding more than 10 % shareholding, qualifies as a “promoter” under Regulation 25(b). It maintained that Regulation 27(1) imposes a strict prohibition and that the conditions in (i)-(iii) are attached only to sub-clause (c). SEBI cited the literal meaning of the provision and relied on CCE, Customs & Service Tax v. Shapoorji Pallonji & Co. (P) Ltd. for a plain-text approach.
Relief Sought
The appellant sought (i) setting aside of the AO’s order dated 29 Nov 2024, (ii) refund of any deposit made on 23 Jan 2025, and (iii) a declaration that the conditions in (i)-(iii) apply to all categories of promoter-related entities.
The Legal Issue
The central question was whether the additional conditions in sub-clauses (i), (ii) and (iii) of Regulation 27(1) of the SEBI (CRA) Regulations, 1999 apply solely to the “associate” category (c) or whether they extend to the “borrower” (a) and “subsidiary” (b) categories as well.
Arguments Presented
For the Appellant
- Asserted that the word “or” between sub-clauses (a), (b) and (c) is disjunctive, requiring each category to satisfy the conditions in (i)-(iii).
- Emphasised that SEBI’s own 23 June 1999 press release and the 72nd Parliamentary Standing Committee Report treat the three categories uniformly.
- Highlighted Regulation 28V, which expressly applies the conditions to all three categories, supporting a harmonious construction.
- Submitted that five of the eight entities borrowed after the ratings were assigned, rendering the alleged conflict moot.
For the Respondent
- Maintained that SIDBI’s >10 % shareholding makes it a “promoter” under Regulation 25(b), triggering the prohibition.
- Argued that the structure of Regulation 27(1) places the conditions (i)-(iii) directly under sub-clause (c), indicating legislative intent to limit them to associates only.
- Relied on CCE, Customs & Service Tax v. Shapoorji Pallonji & Co. (P) Ltd. for a literal interpretation when the language is clear.
- Stated that the AO’s order was based on a correct reading of the regulation and that the penalty was therefore valid.
The Court's Analysis
The Tribunal began by reproducing the text of Regulation 27(1):
"27. (1) No credit rating agency shall, rate a security issued by an entity, which is;- (a) a borrower of its promoter; or (b) a subsidiary of its promoter; or (c) an associate of its promoter, if (i) there are common Chairman, Directors between credit rating agency and these entities. (ii) there are common employees. (iii) there are common Chairman, Directors, Employees on the rating committee."
The Tribunal noted that the language of the provision is not unambiguous because the placement of the qualifying conditions only under sub-clause (c) creates a textual tension with the parallel Regulation 28V, which applies the same conditions to all three categories. Citing State of W.B. v. Calcutta Municipal Corp. and Union of India v. Ind-Swift Laboratories Ltd., the Tribunal explained that when a provision is ambiguous, a harmonious construction is preferred over a literal reading.
The Tribunal observed that:
- The purpose of Regulation 27(1) is to avoid conflict of interest irrespective of whether the promoter-related entity is a borrower, subsidiary or associate.
- The disjunctive “or” between (a), (b) and (c) signals that each category is to be treated independently, and therefore the conditions in (i)-(iii) must attach to each.
- The legislative history, including the 1999 SEBI press release and the 72nd Parliamentary Standing Committee Report, consistently treats the three categories uniformly.
- Regulation 28V mirrors Regulation 27(1) but expressly applies the conditions to all categories, reinforcing the Tribunal’s view of a harmonious intent.
Consequently, the Tribunal held that the conditions in sub-clauses (i)-(iii) shall apply to sub-clauses (a) and (b) as well, rendering the AO’s interpretation erroneous.
"In the result, the following:
ORDER
i. Appeal is allowed. Order dated 29.11.2024 passed by the AO, SEBI is set aside."
Having found the AO’s construction to be flawed, the Tribunal set aside the penalty, ordered a refund of any deposit made, and declined to award costs.
The Verdict
The appeal succeeded. The SAT set aside the order dated 29 Nov 2024 imposing a penalty of ₹5 lakhs on Acuite Ratings & Research Ltd, directed SEBI to refund any deposit made under the order dated 23 Jan 2025, and ordered that no costs be awarded. All pending interlocutory applications, if any, were disposed of.
What This Means For Similar Cases
Uniform Application of Conflict-of-Interest Conditions
- Practitioners must now argue that the qualifying conditions in Regulation 27(1) apply to borrowers, subsidiaries and associates alike.
- Drafting of internal compliance manuals should reflect that common directors, employees or rating-committee members trigger the prohibition across all three categories.
Reliance on Harmonious Construction
- Courts are likely to adopt a harmonious reading when statutory language creates ambiguity, especially where parallel provisions (e.g., Regulation 28V) exist.
- Counsel should cite legislative history, press releases, and committee reports to support a broader interpretation.
Penalty Challenges
- Penalties imposed under a narrow reading of Regulation 27(1) can be contested if the appellant demonstrates that the conditions were satisfied for the relevant category.
- Evidence of the timing of rating assignments relative to borrowing, and of common personnel, becomes crucial.
