SEBI slaps Rs. 6 crore penalty on NSE for alleged investment in 'unrelated' businesses

The Securities and Exchange Board of India (SEBI) levied a penalty of Rs. 6 crore on the National Stock Exchange (NSE) for allegedly investing in six companies unrelated or non-incidental to the stock exchange business.

The SEBI had observed that the NSE had failed to obtain approval from SEBI for setting up NSE Strategic Investment Corporation Limited (NSIC) and engaging in non-related or non-incidental activities in violation of Regulation 41 (3) of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012 (SECC Regulations).

These firms are Power Exchange India (PXIL), Computer Age Management Systems (CAMS), NSEIT, NSDL E-Governance Infrastructure (NEIL), Market Simplified India (MSIL), and Receivables Exchange of India (RXIL). The NSE held 25% to 100% stakes in these entities through its subsidiary NSE Investments as of September.

SEBI concluded that the NSE had engaged, directly or through its wholly-owned subsidiary, in activities that are unrelated or non-incidental to its activities as a stock exchange by way of acquisition of stakes in PXIL, CAMS, NSEIT Ltd, NEIL, MSIL, and RXIL without seeking approval of SEBI. Thus, it has violated the provisions of regulation 38(2) of SECC (Stock Exchange and Clearing Corporation) 2018 read with regulation 41(3) of SECC 2012.

The SEBI order read, "As per Regulation 41(3), the recognized stock exchange cannot engage in any activity which is not related or incidental to these defined activities on its own except through a separate legal entity and with permission of the Board."

In its submission to SEBI, the NSE had argued that most of these investments were related to the stock exchange business. However, the regulator rejected the argument.

For instance, in the case of CAMS investments, the regulator said, "The contention of the NSE that activities of CAMS are related to the activities of a stock exchange was not found acceptable by SEBI as the activities of CAMS are that of a market intermediary and it provides back-end services to market participants. Activities of market intermediaries are always incidental to the securities market wherein buying and selling of securities takes place. However, it is not related to function of the stock exchange, which is for the purpose of assisting, regulating or controlling the business of buying, selling or dealing in securities… which is different from the activities specified for other intermediaries to the securities market."

The NSE argued that the investments were done by a wholly-owned subsidiary, which had no control over investee companies. SEBI observed that the exchange had nominated directors on the boards of most of these entities. The NSE also said some of the SECC regulations were being applied with retrospective effect as investments or incorporation of the entities were done before the SECC regulations 2018 came into existence. The SEBI rejected this argument, stating that the SECC had commenced from June 2012.

The Adjudicating Officer, Amit Pradhan stated, "The Noticee argued that the Competition Act, 2002 (Competition Act) also confers a comparable meaning to the term 'activity', which is defined in the explanation to Section 2(h) of the Competition Act to include "profession or occupation". In this context, in order to elicit the meaning of 'occupation', reference can also be made to the following observations of the Gujarat High Court in the matter of Commissioner of Expenditure Tax v. Ambalal Sarabhai: "activity in a specific line of endeavour which engages or occupies time and attention of a person and which is carried on with a certain amount a continuity or regularity in the sense that it is not "momentary" - not "an isolated or semi-occasional and temporary adventure" in that line of endeavour - would certainly constitute "occupation".

The SEBI order further stated that the mere formation of a wholly owned subsidiary and transfer of its Investments to NSIC cannot be construed as 'engaging in an activity' in terms of regulation 41(3) of the SECC Regulations. The Re-organization was related and incidental to its activities, and therefore, there did not exist any requirement for SEBI approval to be obtained under regulation 41(3) of the SECC Regulations.

The AO also mentioned, "The instant proceedings are initiated pursuant to the decision of the competent authority to inquire and adjudicate the allegations and charges contained in the investigation report that the Noticee had incorporated NSIC for the purpose of making / holding strategic investments in the equity shares and /or other securities of NSE group companies. NSE had allegedly failed to obtain approval from SEBI for setting up NSIC and engaging in non-related / non-incidental activities and therefore, violated the provisions of regulation 41 (3) of the SECC Regulations. The allegations and charges are specifically mentioned in the SCN issued by the 1 st erstwhile AO which are based on the investigation report. The said SCN also mentions the provisions of SECC Regulations alleged to have been violated. I, therefore, do not find any infirmity in the SCN as sought to be contended by the Noticee."

The SEBI disposed of the show-cause notices to the NSE without imposing penalty for setting up a company called NSE Strategic Investment Corporation and transferring the 100% stake of DotEx to it. The regulator, however, said that the business activity of DotEx was incidental to the stock exchange business "may be an issue of examination".

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