Walter Smith fears Rangers would be in danger of being relegated from the Clydesdale Bank Premier League if the Scottish Football Association carry out sanctions imposed on the club.
The administration-hit Glasgow giants were hit with a £160,000 fine and a 12-month embargo on registering players over the age of 17 by the SFA's judicial panel.
Rangers will appeal the punishment, which was handed out by the independent panel after finding the club guilty of five charges in relation to their finances and the appointment of Craig Whyte as chairman.
But Smith believes Rangers would be unable to compete in the SPL under such constraints and the former Ibrox boss insists the whole of the top-flight would suffer as a result.
He said: "I don't personally know who was on that panel but I think it should be footballing people.
"In many ways, they have maybe underestimated the problems Rangers have at the present moment.
"They have gone into administration and they have had to make arrangements with players who, at the end of the season, can walk away.
"In the circumstances they are in, the majority of them might take that option.
"With no way to replace them, it means that Rangers could effectively be playing a team that is full of under 18 players.
"In that situation, relegation would face the club.
"Despite all the joy that a lot of people might be taking at the situation that Rangers are in, no-one - especially in the SPL - wants to see Rangers leave with the support they carry and the amount of money they bring to the league itself.
"The sanctions they have given would, in my mind, put them in danger of relegation and every club in the league would suffer then."