{"id":329571,"date":"2024-08-29T16:00:38","date_gmt":"2024-08-29T10:30:38","guid":{"rendered":"https:\/\/www.scconline.com\/blog\/?p=329571"},"modified":"2024-09-03T18:06:02","modified_gmt":"2024-09-03T12:36:02","slug":"bomhc-directs-sebi-nse-bse-to-pay-rs-80-lakhs-costs-for-illegal-invalid-freezing-of-demat-accounts","status":"publish","type":"post","link":"https:\/\/www.scconline.com\/blog\/post\/2024\/08\/29\/bomhc-directs-sebi-nse-bse-to-pay-rs-80-lakhs-costs-for-illegal-invalid-freezing-of-demat-accounts\/","title":{"rendered":"Bombay High Court directs SEBI, NSE, BSE to pay Rs 80 lakhs costs for illegal and invalid freezing of demat accounts"},"content":{"rendered":"
\n

Bombay High Court:<\/span> In the present case, two petitions were filed under Article 226<\/a> of the Constitution<\/a>, challenging the action of Respondent 3, Bombay Stock Exchange Ltd. (‘BSE’) and Respondent 4, National Stock Exchange Ltd. (‘NSE’) under the directives of the Respondent 2, Securities and Exchange Board of India (‘SEBI’) to freeze the Demat Accounts of petitioner. Petition No. 1590 of 2021 was filed by Pradeep Mehta and Petition No. 2228 of 2021 was filed by his son Neil Pradeep Mehta. The Division Bench of G.S. Kulkarni*<\/span> and Firdosh P. Pooniwalla, J., declared the freezing of the demat account of both the petitioners as illegal and invalid and awarded a total of Rs 80 lakhs costs to be paid to petitioners jointly by BSE, NSE, and SEBI.<\/p>\n

Background<\/p>\n

Writ Petition No. 1590 of 2021<\/p>\n

Petitioner, a Gynaecologist and a senior citizen had invested in the shares and securities issued by Indian companies, which were long term investments held in the Demat accounts, and such investments were intended to have the benefit of funds, as per his retirement. One of the investments petitioner made was in a company, which appear to have been promoted in 1989 by his father-in-law namely Shrenuj and Company Limited (‘Shrenuj’). Petitioner subscribed 2000 shares of Shrenuj in 1989, 1000 shares in 1993 and there was a time when petitioner’s shareholding was at 30,000 shares.<\/p>\n

In 2016, petitioner came to know that there was some litigation regarding the affiliate of Shrenuj in Hong Kong and Shrenuj was facing financial issues, as a result if which, Shrenuj could not file its financial results as per the Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015<\/a>, (‘SEBI (LODR) Regulations’). BSE issued a letter to Shrenuj regarding non-submission of Financial Results under Regulation 33 of the SEBI (LODR) Regulations, stating that Shrenuj had not submitted to the Exchange its quarterly financial results for the period ended in December 2016, and hence, Shrenuj was liable to pay a fine of Rs 1,84,000. Shrenuj was further advised to refer to Circular No. CIR\/CFD\/CMD\/12\/2015 dated 30-11-2015 issued by SEBI, thereafter, Shrenuj took up the issue with SEBI by submitting its reply dated 20-03-2017 addressed to BSE and NSE.<\/p>\n

Petitioner submitted that he had no control regarding the affairs of Shrenuj or its functioning, directly or indirectly and he was never a part of its management or ever acted in any advisory capacity. He was classified as a ‘Promoter’ merely based on his relationship with the Chief Promoter of the Company, i.e., his father-in-law, about which he was unaware until June 2017, which he learnt only when his demat accounts were frozen by Respondent 6, National Securities Depository Ltd. (‘NSDL’) merely because he was one of the promoters of Shrenuj having initially subscribed to its shares. Petitioner also submitted that NSDL freezed not only its shareholding in Shrenuj but also in ITC Limited and no notice\/opportunity of hearing was given to him before freezing his shares. It was contended that the impugned action of freezing the demat accounts of petitioner could not have been taken by NSDL at the behest of BSE\/NSE and SEBI, as the same was in contravention of Section 11<\/a> of the Securities and Exchange Board of India Act, 1992<\/a> (‘the SEBI Act’).<\/p>\n

Writ Petition No. 2228 of 2021<\/p>\n

Petitioner in this petition was the son of petitioner in Writ Petition No. 1590 of 2021 and his demat account was freezed merely because he held a demat account along with his father, who was the second holder.<\/p>\n

Analysis, Law, and Decision<\/p>\n

Writ Petition No. 1590 of 2021<\/p>\n

The Court observed that in the present case the demat accounts held by petitioner with NSDL were freezed in July, 2018, at the behest of BSE\/NSE under the directives of SEBI on account of an alleged default of Shrenuj in compliance of the SEBI (LODR) Regulations and such action against petitioner was taken only for the reason that, when such company was formed in 1989, petitioner was one of the promoters of the company. The Court noted that the impugned action was taken after about 29 years of petitioner being declared to be the promoter.<\/p>\n

The Court stated that except for the fact that in 1989 when Shrenuj was incorporated when petitioner was set out to be a promoter, petitioner had no association whatsoever with Shrenuj, subsequent to the formation of the said company. Petitioner had remained as an ordinary shareholder of Shrenuj qua his limited shareholding, was never a director of the company and was never involved with the company, in any other capacity, in managing the affairs of the company.<\/p>\n

The Court took note of the communication addressed by BSE to Shrenuj that a penalty\/fine was to be recovered from Shrenuj, however, BSE had also put Shrenuj to notice of the Freezing of Promoter and Promoter Group Demat accounts for noncompliance with certain provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015<\/a> to be applicable immediately with respect to non-payment of fine. The Court referred to Sections 11<\/a>, 15-A<\/a>, 15-I<\/a>, 15-J<\/a>, 15-JA<\/a>, and 30<\/a> of the SEBI Act<\/a>; provisions of the SEBI (LODR) Regulations, the Depositories Act, 1996<\/a>, and the SEBI (Delisting of Equity Shares) Regulations, 2009<\/a> and opined that it did not find any explicit provisions that SEBI would have a power to attach the demat account of the promoter much less qua the securities he would hold of companies other than the one of which he was a promoter.<\/p>\n

The Court opined that none of the provisions postulate that such drastic order was to be passed against the promoter which was in the nature of a penalty without even a notice being furnished to him and as per Regulation 98(1)(c) and 98(1)(d) of SEBI (LODR) Regulations, a listed entity or any other person, who contravenes any of the provisions of the regulations, shall be held liable by the respective stock exchange(s) for actions such as imposition of fines, suspension of trading, “freezing of promoter\/promoter group holding”, of designated securities, as might be applicable, in coordination with depositories or any other action as might be specified by the Board from time to time. The Court thus stated that the action to freeze the holdings of the promoter\/promoter group could apply only to those holdings of the promoter in the listed company that had violated SEBI (LODR) Regulations and hence, the action of freezing other shareholdings of petitioner could not be justified and the same was ex-facie illegal, unjust, and completely arbitrary.<\/p>\n

The Court referred to the definition of “promotor” as defined under Regulation 2(za) of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009<\/a> and under Section 2(69)<\/a> of the Companies Act, 2013<\/a> (‘the 2013 Act’) and stated that as per Section 2(69)(a) of the 2013 Act, a person was a promotor when he was expressly named in a prospectus or was identified by the company as a promoter in the annual return referred to in Section 92 of the 2013 Act. Thus, the Court stated that for SEBI\/BES\/NSE to justify its action to take petitioner as the promoter, it must look into the last annual return filed by Shrenuj and its declaration qua the promoters as per the requirement of Section 92(1)(e) of the 2013 Act. The Court also stated that by no stretch of imagination, the first promoters of the company who might have severed their interest with Shrenuj could be held to be liable for any subsequent defaults of Shrenuj.<\/p>\n

The Court stated that petitioner, a practicing gyneacologist, did not exceed his professional position, to take interest in the formation of Shrenuj or to promote or manage its day-to-day affairs and after the incorporation of the company and constitution of the Board of Directors, the status and role of petitioner as a promoter had come to an end. Hence, the obligation of non-submission of Financial Results and non-compliance with the provisions of SEBI (LODR) Regulations could not have been fastened and imposed on petitioner. The Court further stated that the shares, subject matter of such account, etc. were petitioner’s property and any coercive action in respect of one’s property was required to be taken in accordance with law and after complying with the basic principles of natural justice. No show cause notice or prior opportunity of hearing was granted to petitioner before the letters dated 23-03-2017 and 13-04-2017 were addressed NDSL, freezing not only petitioner’s shares in Shrenuj but also ITC Limited and such shares were certainly a property within the meaning and purview of Article 300-A<\/a> of the Constitution<\/a> and thus, no action could have been taken to deprive petitioner the benefits of his property without following the procedure in law. Thus, the impugned action on NSDL’s part was required to be held to be brazenly illegal, unreasonable, and arbitrary.<\/p>\n

Thus, the Court opined that BSE\/NSE and SEBI clearly failed to discharge their duties and to act in accordance with law to deprive petitioner of his shares in the demat account held by him which certainly was an infringement of petitioner’s rights guaranteed under Articles 14<\/a>, 21<\/a> and 300-A<\/a> of the Constitution<\/a>. The Court awarded Rs 30 lakhs costs to be paid to petitioner jointly by BSE, NSE, and SEBI and declared the freezing of the demat account of petitioner as illegal and invalid.<\/p>\n

Writ Petition No. 2228 of 2021<\/p>\n

The Court opined that in the present case ex-facie there were no reasons to freeze petitioner’s demat account which came to be freezed merely because petitioner’s father happened to be a second holder of his demat account. Petitioner in this case was never the promoter of Shrenuj and when the petition was filed; petitioner was 39 years of age and when Shrenuj was promoted in 1989, petitioner was 7 years of age, when his father was styled as one of the promoters of Shrenuj.<\/p>\n

The Court stated that petitioner was an NRI based in Singapore, and he had invested in shares and securities of Indian Companies, and accordingly, petitioner had held the demat account with his father as a second holder to be so included for logistic purpose. The Court opined that petitioner in no manner whatsoever much less in the capacity as promoter was concerned and connected with Shrenuj and he could not be held liable for any default of Shrenuj much less that he could face any action of freezing of his demat account for the default of Shrenuj.<\/p>\n

The Court observed that the present case was more gross and was a classic example of high-handed action and a reckless action to freeze the demat account of petitioner. There was patent non-application of mind by any of the authorities, who were statutorily governed in resorting to take such drastic action and even the elementary principles of natural justice of a fair opportunity of calling upon petitioner to show cause, a hearing and appropriate order to be passed had been thrown to the winds. This was certainly not the manner or method in which the rule of law would mandate respondents to act.<\/p>\n

The Court awarded Rs 50 lakhs costs to be paid to petitioner jointly by BSE, NSE, and SEBI and declared the freezing of the demat account of petitioner as illegal and invalid.<\/p>\n

[Pradeep Mehta v. Union of India, 2024 SCC OnLine Bom 2771<\/a>, decided on 26-08-2024<\/span>]<\/p>\n

*Judgment authored by: Justice G.S. Kulkarni<\/span><\/strong><\/p>\n\n

Advocates who appeared in this case:<\/p>\n

For the Petitioner:<\/span> Yeshwant Shenoy with Navneetha Krishnan, Krishnan T., Pooja Singh i\/b. Nava Legal<\/p>\n

For the Respondents:<\/span> Parag A. Vyas; Suraj Choudhary with Omprakash Jha, Atul Agrawal i\/b. The Law Point; Sarnaab Aswad i\/b. Khaitan & Co.; Pradeep Sancheti, Senior Advocate with Ranjeev Carvalho with Sachin Chandarana, Aagam Mehta, Amol Rasal i\/b. Manilal Ambalal & Co.; Aparna Wagle i\/b. Alliance Law; Kunal Katariya with Pulkit Sukhramani, Vidhi Jhawar, Shourya J. Tanay, Deepank Annand i\/b. JSA Advocates and Solicitors<\/p>\n

Buy Constitution of India  HERE<\/a><\/h3>\n

\"Constitution<\/a><\/p>\n<\/div>\n","protected":false},"excerpt":{"rendered":"

Respondents have not shown any active role of petitioner in the capacity of the promoter, in the management of the company, Shrenuj, and any role and obligation factually fastened on petitioner in the various compliance which are required to be undertaken under SEBI (LODR) Regulations, at the time of freezing of his demat 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Mahalingam (Whole Time Member) imposed a penalty of Rupees One Crore on HDFC Bank for acting in contravention with the interim order passed by SEBI in BRH Wealth Kreators Ltd. On 07-10-2019, SEBI had directed BRH to immediately desist from undertaking any\u2026","rel":"","context":"In "Case Briefs"","block_context":{"text":"Case Briefs","link":"https:\/\/www.scconline.com\/blog\/post\/category\/casebriefs\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":83611,"url":"https:\/\/www.scconline.com\/blog\/post\/2016\/11\/02\/sebi-to-freeze-promoter-and-promoter-group-demat-accounts-for-non-compliance-with-sebi-listing-obligations-and-disclosure-requirements-regulations-2015\/","url_meta":{"origin":329571,"position":1},"title":"SEBI to freeze Promoter and Promoter group demat accounts for non-compliance with SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015","author":"Saba","date":"November 2, 2016","format":false,"excerpt":"Sub: Freezing of Promoter and Promoter group Demat accounts for non-compliance with certain provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 1. SEBI, vide Circular No. CIR\/CFD\/CMD\/12\/2015 dated November 30, 2015, had prescribed the uniform fine structure for non-compliance with certain provisions of SEBI (Listing Obligations and Disclosure\u2026","rel":"","context":"In "Hot Off The Press"","block_context":{"text":"Hot Off The Press","link":"https:\/\/www.scconline.com\/blog\/post\/category\/news\/hot_off_the_press\/"},"img":{"alt_text":"","src":"","width":0,"height":0},"classes":[]},{"id":288058,"url":"https:\/\/www.scconline.com\/blog\/post\/2023\/03\/28\/sebi-extended-timelines-for-existing-account-holders-to-provide-choice-of-nomination-details-by-either-furnishing-of-nomination-or-declaration-for-opting-out-nomination-legal-update-legal-research-l\/","url_meta":{"origin":329571,"position":2},"title":"SEBI extends timeline for existing account holders to provide “choice of nomination details” till 30-9-2023","author":"Kriti","date":"March 28, 2023","format":false,"excerpt":"On 27-3-2023, the Securities and Exchange Board of India (\u2018SEBI\u2019) has extended timelines for the existing account holders to provide choice of nomination details by either furnishing of nomination or declaration for opting out nomination. 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Key points: All demat accounts of stock brokers which are untagged need to be appropriately tagged by June 30,\u2026","rel":"","context":"In "Legislation Updates"","block_context":{"text":"Legislation Updates","link":"https:\/\/www.scconline.com\/blog\/post\/category\/legislationupdates\/"},"img":{"alt_text":"SEBI","src":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/03\/MicrosoftTeams-image-111-4.jpg?resize=350%2C200&ssl=1","width":350,"height":200,"srcset":"https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/03\/MicrosoftTeams-image-111-4.jpg?resize=350%2C200&ssl=1 1x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/03\/MicrosoftTeams-image-111-4.jpg?resize=525%2C300&ssl=1 1.5x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/03\/MicrosoftTeams-image-111-4.jpg?resize=700%2C400&ssl=1 2x, https:\/\/i0.wp.com\/www.scconline.com\/blog\/wp-content\/uploads\/2022\/03\/MicrosoftTeams-image-111-4.jpg?resize=1050%2C600&ssl=1 3x"},"classes":[]},{"id":245918,"url":"https:\/\/www.scconline.com\/blog\/post\/2021\/03\/22\/stock-exchange\/","url_meta":{"origin":329571,"position":5},"title":"SAT | Separate penalties by the stock exchanges can be imposed | While positing, rejects appeal","author":"Editor","date":"March 22, 2021","format":false,"excerpt":"Securities Appellate Tribunal (SAT): A Coram of Tarun Agarwala, J., (Presiding Officer) and M.T. 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