2024 (8) TMI 1282 - HC - SEBI

Freezing of demat accounts held by the petitioner with NSDL are freezed at the behest of BSE / NSE under the directives of the SEBI on account of an alleged default of Shrenuj in compliance of the SEBI (LODR) Regulations - HELD THAT - The 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. Also after the incorporation of the company and constitution of the Board of Directors the status and role of the 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 the petitioner. Now coming to the impugned action of freezing of the demat accounts of the petitioner on the basis of SEBI Circular it does not contemplate freezing of the demat account of the promoter in the manner as resorted qua the petitioner. Also the circular dated 26 October 2016 provided that at the first instance to freeze the entire shareholding of the promoter and the promoter group in the listed company which is held liable for non-compliance for two consecutive periods and on a failure to comply with the notice issued by the concerned stock exchange as per paragraph 3 of Annexure II of Circular dated 30 November 2015. It is significant that the second part of paragraph 2.2 of the Circular provides that in addition to the freezeing of shares in the non-compliant listed company the holdings in the demat accounts of the promoter and promoter group in other securities shall be frozen to the extent of the liability which shall be calculated on a quarterly basis. In the present case there is nothing placed on record that there is a semblance of compliance of paragraph 2.2 of the Circular even assuming that the same is applicable to the petitioner. No show cause notice or a prior opportunity of a hearing was granted to the petitioner before the letters dated 23 March 2017 and 13 April 2017 were addressed to the SHCIL by NDSL freezing not only the petitioner s shares in Shrenuj but also the other shareholding of the petitioner in ITC Limited. For such reason also the impugned action on the part of NSDL is required to be held to be brazenly illegal unreasonable and arbitrary. As applicability of the Circular 26 October 2016 is concerned in our opinion this circular cannot make a provision when it provides in paragraph 2.2 that in addition to the freeze of shares in the non-compliant listed entity the holdings in the demat accounts of promoter and promoter group in other securities shall also be frozen to the extent of liability which shall be calculated on a quarterly basis. This would be contrary to the statutory requirements. For all these reasons to generally and/or casually freeze the securities of the promoters in a company other than the defaulter company is an action in the teeth of the provisions of the SEBI Act as also illegal arbitrary and unreasonable violative of Articles 14 21 and 300A of the Constitution. Circulars cannot have an overriding effect on the statutory provision under which it is issued and cannot be implemented in defiance of principles of natural justice. Looked from any angle under none of the provisions of law and regulations the impugned action of the respondent to freeze the petitioner s demat account can be sustained. Even recovery of the amount from the petitioner s demat account which is held with the depositories would certainly be governed by the provisions of the Depositories Act 1996 and even if any fine penalty is to be recovered it would be required to be recovered strictly adhering to the provisions of law which we have noted hereinabove. The recovery can also be in terms of what has been provided under Section 19F which necessarily attracts the provisions of Section 19H in regard to adjudication. Thus looked from any angle the impugned action of freezing the petitioner s demat account is grossly illegal arbitrary and unconstitutional. For the aforesaid reasons in our opinion the freezing of the petitioner s demat account qua all the shares held by him was unwarranted unjustified and in patent defiance of the principles of natural justice and brazenly illegal.The petitioner shall be free to deal with all his shares as held in the Demat accounts in question.The SEBI/BSE/NSE are directed to jointly pay to the petitioner cost of Rs.30 lakhs within a period of two weeks from today.

Summary

Issues Involved:
1. Freezing of Demat Accounts by SEBI, BSE, and NSE.
2. Legitimacy of SEBI Circulars and Regulations.
3. Role and Liability of Promoters.
4. Compliance with Principles of Natural Justice.
5. Compensation for Illegal Freezing of Demat Accounts.

Issue-wise Detailed Analysis:

1. Freezing of Demat Accounts by SEBI, BSE, and NSE:
The petitions challenge the freezing of demat accounts under SEBI directives. The petitioner, Dr. Pradeep Mehta, a senior citizen and medical practitioner, had his demat account frozen by NSDL due to his past role as a promoter of Shrenuj & Company Limited. The court noted that the freezing of demat accounts extended beyond Shrenuj shares to other shares like ITC Limited, which was deemed illegal and arbitrary.

2. Legitimacy of SEBI Circulars and Regulations:
The court scrutinized SEBI Circulars dated 7 September 2016 and 26 October 2016, which were used to justify the freezing of demat accounts. It was argued that these circulars could not override the substantive provisions of the SEBI Act. The court found that SEBI did not have explicit powers under the SEBI Act to freeze demat accounts of promoters for shares held in companies other than the defaulting company.

3. Role and Liability of Promoters:
The court examined the definition and role of a promoter under various laws, including the Companies Act, 2013, and SEBI regulations. It was determined that the petitioner's role as a promoter ceased after the formation of Shrenuj in 1989, and he had no active involvement or control over the company's affairs. Consequently, the petitioner could not be held liable for the company's non-compliance with SEBI regulations.

4. Compliance with Principles of Natural Justice:
The court emphasized the importance of adhering to principles of natural justice, noting that no notice or hearing was provided to the petitioner before freezing his demat accounts. This lack of due process rendered the actions of SEBI, BSE, and NSE illegal. The court highlighted that any action affecting a person's property rights must follow due legal procedures and provide an opportunity for the affected party to be heard.

5. Compensation for Illegal Freezing of Demat Accounts:
The court acknowledged the severe impact on the petitioner, who was deprived of his property rights and unable to trade shares for several years. Considering the arbitrary and high-handed actions of SEBI, BSE, and NSE, the court awarded compensation of Rs. 30 lakhs to Dr. Pradeep Mehta and Rs. 50 lakhs to his son, Neil Pradeep Mehta, whose demat account was also frozen without justification.

Conclusion:
The court declared the freezing of the petitioners' demat accounts illegal and invalid, allowing them to freely deal with their shares. The court also directed SEBI, BSE, and NSE to jointly pay compensation to the petitioners for the undue hardships caused by the illegal actions. The judgment underscores the necessity for regulatory bodies to act within their legal bounds and adhere to principles of natural justice.