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TMI Blog2024 (8) TMI 1282X X X X Extracts X X X X X X X X Extracts X X X X ..... hramani, Ms. Vidhi Jhawar, Mr. Shourya J. Tanay, Mr. Deepank Annand i/b. JSA Advocates and Solicitors,. JUDGMENT (PER G. S. KULKARNI, J.) 1. These are two petitions filed under Article 226 of the Constitution of India. The reliefs prayed for are quite similar, which pertain to challenging the action of the Bombay Stock Exchange and the National Stock Exchange under the directives of the Securities and Exchange Board of India (SEBI) to freeze the Demat Accounts of the Petitioner. The first Petition No. 1590 of 2021 is filed by Dr. Pradeep Mehta and the second Petition (Writ Petition No. 2228 of 2021) is filed by his son Neil Pradeep Mehta. We proceed to adjudicate each of these Petition as under. Writ Petition No. 1590 of 2021 (Dr. Pradeep Mehta v/s. Union of India). 2. The challenge raised in the petition is to the freezing of the "demat account" of the petitioner by the respondent no. 6 - National Securities Depository Limited (for short "NSDL") under the regulations / orders of the Securities and Exchange Board of India (for short "SEBI") merely for the reason that at one time petitioner happened to be one of the promoters of a company. The case of the petitioner is that suc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mber 2015 issued by the SEBI. Shrenuj had taken up the issue with the SEBI by submitting its reply dated 20 March 2017 addressed to the BSE and National Stock Exchange Ltd. (for short "NSE"). 6. It is the petitioner's case that he had no control whatsoever in regard to the affairs of Shrenuj or its functioning, directly or indirectly. 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 NSDL merely for the reason that he was one of the promoters of Shrenuj having initially subscribed to its shares . It is stated that the background for this being in March 2017, the petitioner, when received his monthly statement of accounts, found that some of his shares in his demat account maintained with the Stock Holding Corporation of India Limited (for short "SHCIL") were frozen. The case of the petitioner is that the NSDL by communications dated 23 March 2017 and 13 April 2017 freezed the demat account of the petitioner applying Circul ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Madam, Sub: SEBI Circular No. SEBI/HO/CFD/CMD/CIR/P/2016/116 dated October 26, 2016. This is to inform you that in accordance with to the above SEBI circular and based on the emails received from NSE, 'Quantity level freeze' has been marked on following securities held in the Beneficial Owner (BO) account of Promoters/Promoter Group of the concerned non-compliant company as provided by NSE. Name of account holder Client ID DP ID ISIN Scrip Name Quantity PRADEEP MEHTA 17431870 IN301330 INE154A01025 ITC LIMITED EQ NEW FV RE.1/- 1240.42 3203210 5069 Yours faithfully, Amit Shinde Senior Manager Copy to: PRADEEP MEHTA, ANJALI MEHTA 4 SETHNA HOUSE 13 LABURNUM ROAD MUMBAI MUMBAI-100007" 7. The petitioner contends that even though the aforesaid letters were addressed to the SHCIL, and recorded that a copy of the same was endorsed to the petitioner, the petitioner never received such letters, although the purport of these letters was so draconian. 8. Meanwhile, Shrenuj addressed a letter dated 27 September 2017 to the BSE stating the reasons as to why the company could not submit the Quarterly Financial Results since the quarter ended on 30 June 2016. 9. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2016, September 2016 and December 2016. A fine of Rs. 25,10,815/- also came to be imposed on Shrenuj. Further, the Exchange, seven days before freezing the petitioner's shareholding, had issued a notice to Shrenuj informing of the freezing of the promoters' shareholding and recording that it would defreeze the petitioner's shares upon receipt of the fine amount from Shrenuj. 12. Respondent no. 3/BSE replied to the said representation of the petitioner by its letter dated 15 May 2018, stating that it is not in a position to issue instructions to de-freeze the petitioner's securities except in accordance with the SEBI circulars and further advised the petitioner as a promoter to insist upon Shrenuj to comply with the applicable requirements at the earliest. 13. It is contended by the petitioner that on 2 June 2018, BSE issued a public notice published in the daily newspaper "Financial Express" notifying the delisting of several companies including Shrenuj with effect from 4 July, 2018. In pursuance thereto, on 4 July 2018, SEBI delisted Shrenuj as per the public notice. NSE also issued a further notice dated 27 July 2018 to delist Shrenuj with effect from 8 August 2018. As a conse ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... between the parties, however, there was no response from the respondents. 18. It is on such conspectus, the petitioner has filed the present petition. The reliefs, as prayed for in the petition are required to be noted which read thus:- "A. Issue a writ of mandamus or any other writ to quash Regulation No. 97, 98 and 99 of the (LODR) Regulations issued by the Respondent No. 2 as being ultra vires the SEBI Act and declare that the Respondent No. 2 has no powers whatsoever to come out with any circular or notification that 'creates' offences. B. Issue a writ of mandamus or any other writ to quash the circulars issued by the Respondent No. 2 under the powers granted to itself under Regulation 98 of (LODR) and declare that the Respondent No. 2 has no powers whatsoever to come out with any circular or notification that empowers them to delegate the power to regulate, adjudicate, penalize or freeze accounts. C. Declare that the Respondent No. 3, 4, 5 and 6 have no powers whatsoever to direct collection of Penalties from the Listed entities or Promoters or Investors or to freeze demat accounts. D. Direct the Respondent No. 1 to inquire into violations/non-compliances with law ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... transfer of securities as provided under Section 11A of the SEBI Act. It is further stated that in terms of section 30 of the SEBI Act and section 31 of the Securities Contracts (Regulation) Act, 1956 (for short "SCR Act"), SEBI has power to make regulations to carry out the purposes of the Act. It is next stated that SEBI thus exercises powers to protect the investors' interests and make regulations consistent with the provisions of the SEBI Act and that similar to Section 31 of the SCR Act, Section 31 of the SEBI Act provides every regulation made by SEBI under the SEBI Act to be laid, as soon as after it is made, before each House of Parliament, while it is in session, for thirty days. If both Houses agree that any regulation should not be made or should be made in a modified form, such modification or annulment has to be followed. 20. It is next stated that pursuant to the powers conferred on the SEBI under Sections 11(2), 11A and 30 of the SEBI Act, read with Section 31 of the SCR Act, the SEBI (LODR) Regulations, 2015 were made and brought into force after following the procedure as stipulated in Section 31 of the SEBI Act. It is stated that under sub-section (2) of Section ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the SEBI (Delisting of Equity Shares) Regulations, 2009 (for short "Delisting Regulations 2009"), as applicable at the relevant time, which have been replaced by SEBI (Delisting of Equity Shares) Regulations, 2021. The affidavit further states that Circular dated 7 September 2016 pertaining to "Restrictions on Promoters and Whole-Time Directors of Compulsorily Delisted Companies Pending Fulfillment of Exit Offers to the Shareholders" was issued in terms of Chapter V of the Delisting Regulations 2009. It is stated that under Regulation 24 of Chapter V of the Delisting Regulations 2009, the company, its whole-time directors, its promoters and the companies promoted by any of them are not allowed to directly or indirectly access the securities market or seek the listing of any equity shares for ten years from the date of such compulsory delisting. It is next stated that under Regulation 23(3) of Chapter V, in case of compulsory delisting of the company, the promoters of such delisted company are required to acquire delisted equity shares from the public shareholders, subject to their option of retaining their equity shares, by paying public shareholders the fair value as determine ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... securities as may be applicable. (b).....In the instant case, several notices were issued to Shrenuj regarding its non-compliance with the LODR Regulations 2015 and the consequences flowing out of such non-compliance i.e. freezing of promoter shareholding was also duly informed to Shrenuj. An opportunity to rectify the non-compliance was also given by the Stock Exchanges which is abundantly clear from the documents produced on record by the Petitioner. Respondent No. 3, as per the SOP prescribed in the Impugned Circular dated 30.11.2015, issued a notice dated 02.03.2017 [Exh. A, Pg. 35, Petition] to Shrenuj intimating them of the non-compliance of Regulation 33 of the LODR Regulations 2015 and cautioning them that non-payment of fine would attract freezing of promoter and promoter group demat accounts. As Shrenuj did not pay the necessary fine, a Quantity Level Freeze was carried out on the Petitioner's demat account. 37... ... ... ... Further, it is denied that the personal demat accounts of the promoters or their relatives came to be frozen in violation of the Companies Act. I say and submit that their accounts were frozen as a direct consequence of continuous non-compli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laid before the Parliament as per Section 31 of the SEBI Act and then brought into force. I further say and submit that the action of freezing of demat account is not a blanket provision applicable to all investors of a listed entity." (emphasis supplied) Reply Affidavit of BSE 26. A reply affidavit on behalf of respondent no. 3-BSE of Ms. Arpita Joshi, Manager is filed. The primary contention urged in the reply affidavit is in regard to the non-compliance of the SEBI (LODR) regulations by Shrenuj, which is stated to have resulted in its compulsorily delisting from the platform of stock exchanges and freezing of the demat account of the promoter and promoter group of the Shrenuj. It is stated that the petitioner's demat account being frozen on account of non-compliance with the provisions of the SEBI (LODR) Regulations for two consecutive quarters by Shrenuj. It is stated that the Notice dated 3 March 2017 issued by respondent no. 3 also provides for freezing of the shareholding of promoter and promoter group of the Shrenuj. It is stated that the petitioner was admittedly classified as the promoter of Shrenuj and accordingly, the Demat account of the petitioner was frozen on acc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that Respondent No. 3 is duty bound to implement the SEBI circular dated 7 September 2016 providing for 'Restrictions on Promoters and Whole-Time Directors of Compulsorily Delisted Companies Pending Fulfillment of Exit Offers to the Shareholders', as a consequence of which the Demat account of the petitioner was freezed with effect from July, 2018 as the petitioner was admittedly classified as the promoter of Shrenuj. It is next stated that before freezing of the demat account, the petitioner never raised any objection of being classified under the 'promoter' category qua the said company. It is stated that after having failed to secure reliefs in respect of de-freezing his demat accounts, the Petitioner has belatedly filed this petition seeking diverse reliefs challenging the SEBI (LODR) Regulations as being ultra vires and claiming that compulsory delisting of securities of Shrenuj does not apply to him. Reply Affidavit of NSE 31. Reply affidavit filed on behalf of respondent no. 4 - NSE of Mr. Ajinkya Patil, Senior Manager (Legal), NSE, opposing the petition on the ground that the appropriate remedy is available to the petitioner against the order dated 11 May 2018 passed by r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso received an email communication dated 7 August 2018 from NSE forwarding a list of companies which had been compulsorily delisted w.e.f. 8 August 2018. NSE also provided details of promoters of such delisted companies and directed NSDL to freeze all demat accounts of such promoters in accordance with SEBI Circular dated 7 September 2016. It is hence stated that NSDL acted on the instructions of NSE and BSE and implemented a freeze on the demat accounts of promoters of companies, that have been compulsorily delisted in which Shrenuj was one such company and the Petitioner (having PAN AHXPM0093R), was disclosed as a promoter of the company. Accordingly, the demat account bearing DP ID IN301330 and Client ID 17431870 and DP ID IN300271 and Client ID 10100565 were 'Suspended for Debits', as the same were linked to the PAN of the Petitioner, a promoter of Shrenuj. It is next stated that NSDL, as a depository, acts only on the instructions received from SEBI/stock exchanges and is not involved in the decision-making process relating to freezing of any individual's demat accounts. 35. With reference to the contentions raised by the Petitioner in respect of transfer of shares held in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the securities market in any manner involved in violation of any of the provisions of the SEBI Act, or the rules or the regulations made thereunder. It is submitted that such substantive power as conferred on SEBI would not contemplate such action as impugned namely to freeze the demat account of the petitioner, even assuming that the petitioner could be held liable for the acts of the company (to which the petitioner is actually not). 38. It is submitted that no notice was issued to the petitioner before freezing of his demat accounts, which not only affected the shares held by the petitioner in Shrenuj, but also the shares he held in other companies. It is also submitted that no opportunity of a hearing in any form was granted to the petitioner before any action of freezing the property of the petitioner was taken. It is submitted that, apart from the breach of the principles of natural justice, no reasoned order is passed as to how and in what manner and under what provisions of the statute or the regulations, the petitioner becomes liable for the acts of Shrenuj. 39. It is next submitted that the circular dated 7 September 2016, on the basis of which the SEBI intends to rely ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the parties. With their assistance, we have perused the record and the relevant provisions of the law as involved. Reasons and Conclusion:- 45. At the outset, we may observe that this is a classic case wherein the demat accounts held by the petitioner with NSDL are freezed in July, 2018, 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. Such action against the petitioner is taken only for the reason that, when such company was formed in the year 1989, the petitioner was one of the promoters of the company. The impugned action is taken after about 29 years of the petitioner being declared to be the promoter. It appears that except for the fact that in 1989 when Shrenuj was incorporated when the petitioner was set out to be a promoter, the petitioner had no association whatsoever with Shrenuj, subsequent to the formation of the said company. The Petitioner had remained as an ordinary shareholder of Shrenuj qua his limited shareholding. He was never a director of the company. He was never involved with the company, in any other capacity, in managing the affairs of the company. Such sp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the date of submission (including the date of submission): Regulation Fine payable for 1st non-compliance Fine payable subsequent and consecutive non-compliance Regulation 33 Non-submission of the financial results within period prescribed under this regulation Rs.5,000 per day of non-compliance till the date of compliance and If non-compliance continues for more than 15 days, additional fine of 0.1% of Paid Up capital of the entity or Rs. 1 crore, whichever is less. Rs. 10,000 per day of Non-compliance till the date of compliance and if non-compliance continues for more than 15 days, additional fine of 0.1% of Paid Up capital of the entity or Rs. 1 crore, whichever is less. Paid up Captial as on the first day of the financial year in which the non-compliance occurs. The company is therefore advised to note that as per the provisions of this circular: * The aforesaid fines plus service tax alongwith the financial results for the said Quarter must be submitted within 15 days from the date of this letter. * Further In the event of this being the second consecutive quarter of non-compliance for this Regulation, non-payment of fines including service tax and non-submissi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ails: Scrip Code Regulation number & Quarter Amount paid TDS deducted, if any Net Amount paid Remitted by: Cheque/DD No. Date UTR No. for RTGS/NEFT Compliance Officer/Company Secretary 1. Please mention the Regulation No., Quarter, and amount of TDS deducted on the reverse side of the Cheque/Demand Draft. 2. In case of payment through RTGS/NEFT, you are requested to send a soft copy of this annexure to be revocation@bseindia." (emphasis supplied) 46. It is clear from the reading of the aforesaid communication addressed by BSE to Shrenuj that a "penalty/fine" is to be recovered from Shrenuj. However, while doing so, BSE has also put Shrenuj to notice of the "Freezing of Promoter and Promoter Group Demat accounts for non-compliance with certain provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015" to be applicable immediately with respect to non-payment of fine. 47. However, what is pertinent is that once the petitioner's role as the promoter had come to an end after the format ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uch other intermediaries as the Board may, by notification, specify in this behalf; (c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds; (d) promoting and regulating self-regulatory organisations; (e) prohibiting fraudulent and unfair trade practices relating to securities markets; (f) promoting investors' education and training of intermediaries of securities markets; (g) prohibiting insider trading in securities; (h) regulating substantial acquisition of shares and take-over of companies; (i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market; [(ia) calling for information and records from any person including any bank or any other authority or board or corporation established or constituted by or under any Central or State Act which, in the opinion of the Board, shall be relevant to any investigation or inquiry by the Board in respect of any transaction in securities; (ib) calling for informa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... inspection of any book, or register or other document or record of the company referred to in sub-section (2A); (v) issuing commissions for the examination of witnesses or documents. (4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely:- (a) suspend the trading of any security in a recognised stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is under investigation; (e) attach, for a period not exceeding ninety days, bank accounts or other property of any intermediary or any person associated with the securities market in any manner involved in violation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... positories Act, 1996 (22 of 1996), as the case may be, shall be credited to the Investor Protection and Education Fund established by the Board and such amount shall be utilised by the Board in accordance with the regulations made under this Act. Section 15-A. Penalty for failure to furnish information, return, etc.-If any person, who is required under this Act or any rules or regulations made thereunder,- (a) to furnish any document, return or report to the Board, fails to furnish the same or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents, he shall be liable to a penalty, of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; (b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents, he shall be liable to a penalty of one lakh rupees for each day during which such failure continues or one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lt of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the repetitive nature of the default. 15JA. Crediting sums realised by way of penalties to Consolidated Fund of India. All sums realised by way of penalties under this Act shall be credited to the Consolidated Fund of India. ... ... .. .. .. Section 30. Power to make regulations - (1) The Board may, by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely:- (a) the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-section (1) of Section 7 including the quorum necessary for the transaction of business; (b) the term and other conditions of service of officers and employees of the Board under sub-section (2) of Section 9; (c) the matters relating to issue of capital, transfer of securities and other matters incidental thereto and the manner in which such matters shall b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons specified in clauses (b) and (c) of sub-regulation (1), shall be as specified in circulars or guidelines issued by the Board. 99. Failure to pay fine. If listed entity fails to pay any fine imposed on it within such period as specified from time to time, by the recognised stock exchange(s), after a notice in writing has been served on it, the stock exchange may initiate action. 102. Power to relax strict enforcement of the regulations. (1) The Board may in the interest of investors and securities market and for the development of the securities market, relax the strict enforcement of any requirement of these regulations, if the Board is satisfied that: (a) any provision of Act(s), Rule(s), regulation(s) under which the listed entity is established or is governed by, is required to be given precedence to; or (b) the requirement may cause undue hardship to investors; or (c) the disclosure requirement is not relevant for a particular industry or class of listed entities; or (d) the requirement is technical in nature; or (e) the non-compliance is caused due to factors affecting a class of entities but being beyond the control of the entities. (1A) The Board may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tory or participant or any person associated with the securities market; or (b) to any issuer, as may be appropriate in the interest of investors or the securities market. Explanation.-For the removal of doubts, it is hereby declared that power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. (2) Without prejudice to the provisions contained in sub-section (1) and section 19H, the Board may, by order, for reason to be recorded in writing, levy penalty under sections 19A, 19B, 19D, 19E, 19F, 19FA and 19G after holding an inquiry in the prescribed manner. .... ... .. . 19F. Penalty for failure to comply with directions issued by Board under section 19 of the Act.-If any person fails to comply with the directions issued by the Board under section 19, within the time specified by it, he shall be liable to a penalty which shall not be less than one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI (Delisting of Equity shares) Regulations 2009 also need to be noted which reads thus :- "23. Rights of public shareholders in case of a compulsory delisting: (1) Where equity shares of a company are delisted by a recognised stock exchange under this Chapter, the recognised stock exchange shall appoint an independent valuer or valuers who shall determine the fair value of the delisted equity shares. (2) The recognised stock exchange shall form a panel of expert valuers from whom the valuer or valuers shall be appointed for purposes of sub-regulation (1). (3) The promoter of the company shall acquire delisted equity shares from the public shareholders by paying them the value determined by the valuer, subject to their option of retaining their shares. Explanation: For the purposes of sub-regulation (1), - (a) 'valuer' means a chartered accountant within the meaning of clause (b) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949), who has undergone peer review as specified by the Institute of Chartered Accountants of India constituted under that Act, or a merchant banker appointed to determine the value of the delisted equity shares; (b) value of the del ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ry. 54. We may also observe that the SEBI's contention referring to Regulation 98 of the SEBI (LODR) Regulations, being applicable so as to justify the freezing of the petitioner's demat account also cannot be accepted. This for the reason that we are not shown any primary obligation as fixed on the promoters and that too at a stage after almost 29 years of the formation of the company (Shrenuj), that the promoter nonetheless, would have certain obligations to be discharged under the Act and/or the Regulations. In our opinion, unless such basic obligation is statutorily fastened on the promoter, Regulation 98 cannot be applied in vacuum and moreso considering the facts and circumstances of the present case. 55. The object of SEBI (LODR) Regulation primarily concerns the listing obligations and a disclosure requirement to be complied by a company. In the present case, the company was formed in the year 1989, and after all statutory compliances, it was listed on the Bombay Stock Exchange. We are not shown any material that the petitioner did not cease to have any role, after the company was formed and/or till it defaulted under the said Regulation although it was managed by the Boa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... panies Act, 2013, which read thus: 2 (69) "promoter" means a person - (a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or (b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity; (emphasis supplied) 58. Thus, clause (a) of Section 2 (69) of the Companies Act, 2013 refers to a de jure position, where a person is expressly named in a prospectus or is identified by the company as a promoter in the annual return referred to in Section 92. Clause (b) and (c) describes a de facto position where a promoter is a person who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; clause (c) provides that the Board of Directors of the company is accustomed to act in accordance with the advice, directions or instructions of such person. Provi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... riber for one or more shares.[Official Liquidator v. VeluMudaliar, (1938) 8 Com Cases 7 : AIR 1938 Mad 192] ....But persons who act in a professional capacity such as counsels, solicitors, accountants, engineers or other technicians, will not become promoters by reason of so acting, unless they exceed their professional function and do anything or take any interest in promoting the company. ....... ... The relationship between the promoter and the company that he has floated must be deemed to be a fiduciary relationship from the day the work of floating the company started CIT v. Bijli Cotton Mills Ltd., (1953) 23 Com Cases 114, 120 : AIR 1953 All 232 and continued upto the time that the directors take into their hands what remains to be done in the way of forming the company, Twycross v. Grant, (1877) 2 CPD 469, 541 (CA) and when there is no question open between the promoter and the company Eden v. Rids Dales Rly. Lamp & Lighting Co. Ltd, (1889) 23 QBD 368 (CA). .... The status of a promoter is generally terminated when the Board of directors has been formed and they start governing the company." (emphasis supplied) 61. Thus, the promoter is a person who forms a company t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rtain and describe them as they are." (emphasis supplied) 63. We are of the opinion that the above principles would necessarily apply when any action under the SEBI Act or Regulations framed thereunder is being taken against any promoter. This would necessarily involve robust evidence to be available and considered in regard to the role of the promoter not only qua the company but also whether any active role of the promoter exists qua the shareholders at large and whether the fiduciary capacity in which the promoter is required to discharge his role in formation of a company, would still bind him for various compliances, under the SEBI Regulations or it would be the liability of the company managed by the Board of Directors for achieving all the compliances, which are necessary to protect the interest of the investors who subscribe to the shares of a company. If there is no consideration and examination of such essential attributes before taking any action against the promoters, it would certainly lead to a serious prejudice and / or even a gross absurdity, rendering any action of penalty or freezing of any demat account of a promoter, as in the present case to be grossly arbitr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uture of the Company, and it is this control which lies at the root of the fiduciary relation of the promoter to the Company. Nor is he the less a promoter if all or most of these activities are performed nominally by a Company which he controls. But a person who has done much less than this-takes a much less prominent part-may bring himself within the meaning of the term and may be held liable as a promoter." Each case must be decided according to the evidence. If it is clear that the persons charged were merely servants or agents of the promoters or servants or agents of the Company, they cannot be classified as promoters, and in this connection the learned author makes mention of brokers, bankers and solicitors. Of course, brokers, bankers and solicitors could put themselves in the position of being promoters, but in order to do so they would have to travel outside their ordinary spheres. Now, what are the facts here? As I have indicated the question of promotion only applies to the first respondent. It is said that he must be deemed to have taken part in the formation of the Company and to be a promoter because he signed the Memorandum and Articles of Association and subs ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion and promotion of the Company. For the reasons indicated it must he held that the Official Liquidator was not entitled to take out a summons against the first respondent on the ground that he was a promoter." (emphasis supplied) 65. Thus, applying such settled position in the context of the present case, 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. 66. Now coming to the impugned action of freezing of the demat accounts of the petitioner on the basis of SEBI Circular No. SEBI/HO/CFD/DCR/CIR/P/2016/81 dated 07 September 2016 and SEBI/HO/CFD/CMD/CIR/P/2016/116 dated 26 October 2016, in the context in hand, it may be necessary to extract these circulars, which reads thus: "CIRCULAR SEBI/HO/CFD/DCR/CIR/P ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ters and whole-time directors of the compulsorily delisted company shall also not be eligible to become directors of any listed company till the exit option as stated at 4.a. above is provided. 5. For the aforesaid purposes, "compulsorily delisted company" means a company whose equity shares are delisted by the recognised stock exchange under Chapter V of the Delisting Regulations. 6. The concerned recognised stock exchanges and depositories shall co-ordinate with each other for ensuring compliance of these requirements. SEBI may also take any other appropriate action(s) against the promoters/promoter group and directors of the compulsorily delisted company for non-compliance with sub-regulation (3) of regulation 23 of the Delisting Regulations. 7. This circular is issued in exercise of powers conferred under section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities markets. 8. A copy of this circular is available on SEBI website at www.sebi.gov.in under the category "Legal Framework/Circulars. Yours faithfully, Amit Tandon Deputy General Ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the recognized stock exchange shall have discretion in determining which of the securities and holdings of which promoter or promoter group entity are to be frozen. 3. The depositories, shall furnish to the exchange upon receipt of request, all such information pertaining to holdings in the demat accounts of promoter and promoter group of such listed entities. 4. All provisions of Circular No. CIR/CFD/CMD/12/2015 dated November 30, 2015 shall continue to be applicable. 5. The stock exchanges and depositories shall implement the circular in coordination with one another. 6. The Stock Exchanges are advised to bring the provisions of this circular to the notice of listed entities and also to disseminate the same on their websites. 7. This circular shall come into force with immediate effect. The circular shall be applicable to all fines outstanding on or after the date of this circular levied in accordance with Circular No. CIR/CFD/CMD/12/2015 dated November 30, 2015 and Circular No. CIR/CFD/POLICYCELL/13/2013 dated November 18, 2013. 8. This circular is issued under regulations 97, 98, 99 and 102 read with regulation 101 (2) of Securities and Exchange Board of India (Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nsofar 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 as the provisions we have noted hereinabove mandate and the basic requirement of Article 300A of the Constitution of India in the absence of any role of the promoter in the compliances as required to be discharged by a company. 70. The circular can only be recognized if it is validly issued, when the law would permit issuance of a circular qua its contents. The SEBI (LODR) Regulations do not confer any power with SEBI to issue a circular to freeze the demat account and shareholdings of the promoters which he would possess in respect of the shares held by him of companies other than the defaulting company of which he was a promoter. For any such action to be recognized under the Circular dated 26 October 2016, such power ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fine from penalty. "DISTINGUISHED FROM "penalty". In its broadest sense "penalty" includes fines, as well as all other kinds of punishment. (Esselink v. Campbell, 4 lowa. 296.) DISTINGUISHED FROM FORFEITURE, "A fine is pecuniary penalty," while "a forfeiture is a penalty by which one loses his rights and interests in his property." (Esselink v. Campbell, 4 lowa, 296, 300,)1" 73. In the above context, we may also refer to the decision of the Supreme Court in Director of Enforecement Vs. M.C.T.M. Corporation Pvt. Ltd. & Ors. (1996) 2 SCC 471, wherein it has been held that the expression 'penalty' is a word of wide significance. Sometimes, it means recovery of an amount as a penal measure even in civil proceedings. An exaction, which is not compensatory in character, is also termed as a 'penalty'. 74. As freezing of the petitioner's account for recovery of the amounts levied as penalty / fine is being resorted, the arguments as advanced on behalf of the petitioner of due adherence to the provisions of Section 15-A, 15-I and 15-J also become imperative. It cannot be overlooked that section 15A of the SEBI Act provides for a penalty for failure to furnish information, return, etc. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ven a fine, a procedure known to law is required to be followed. Even otherwise, if there were some other powers (there appear to be none) nonetheless it was incumbent on the SEBI/NSDL to follow the due procedure in compliance with the principles of natural justice and only thereafter take a decision to freeze the demat account of the petitioner. 77. There can be no manner of doubt that in his demat account the petitioner was holding shares not only of Shrenuj, but also of other companies. Such shares as held by the petitioner in the demat account are certainly a property within the meaning and purview of Article 300A of the Constitution of India and thus, no action could have been taken to deprive the petitioner the benefits of his property without following the procedure in law. Thus, looked from any angle, even assuming that the powers to defreeze the demat account of the promoter, the same could not have been done in the manner as in the present case. The action is fully draconian which cannot be sustained in law. 78. The action of freezing the petitioner's demat accounts is extremely coercive potentially attracting civil consequences. Such position in law is well settled. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... th amendments to the Constitution, and by various acts of Congress made in pursuance thereof. (p. 1487, Black's Legal Dictionary) The interest of a candidate at an election to Parliament regulated by the Constitution and the laws comes within this gravitational orbit. The most valuable right in a democratic polity is the "little man's" little pencil-marking, assenting or dissenting, called his vote. A democratic right, if denied, inflicts civil consequences. Likewise, the little man's right, in a representative system of Government, to rise to Prime Ministership or Presidentship by use of the right to be candidate, cannot be wished away by calling it of no civil moment. It civics mean anything to a self-governing citizenry, if participatory democracy is not to be scuttled by the law, we shall not be captivated by catchwords. The straight forward conclusion is that every Indian has a right to elect and be elected and this is a constitutional as distinguished from a common law right and is entitled to cognizance by courts subject to statutory regulation. We may also notice the further refinement urged that a right accrues to a candidate only when he is declared return ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to a person or entity. 33. In State of Orissa v. Dr (Miss) Binapani Dei, a two-judge bench of this Court held that every authority which has the power to take punitive or damaging action has a duty to give a reasonable opportunity to be heard. This Court further held that an administrative action which involves civil consequences must be made consistent with the rules of natural justice: "9. [...] The rule that a party to whose prejudice an order is intended to be passed is entitled to a hearing applies alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. It is one of the fundamental rules of our constitutional set-up that every citizen is protected against exercise of arbitrary authority by the State or its officers. Duty to act judicially would therefore arise from the very nature of the function intended to be performed: it need not be shown to be super-added. If there is power to decide and determine to the prejudice of a person, duty to act judicially is implicit in the exercise of such power. If the essentials of justice be ignored and an order to the prejudice of a person is made, the order is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... civil consequences entail infractions not merely of property or personal rights, but also of civil liberties, material deprivations, and non-pecuniary damages. Every order or proceeding which involves civil consequences or adversely affects a citizen should be in accordance with the principles of natural justice." (emphasis supplied) 80. In the context of the provisions of the Depositories Act, 1996, it also cannot be overlooked that a communication dated 23 March 2017 addressed by NSDL to SHCIL clearly records that the freezing of the petitioner's demat account is in pursuance of the SEBI circulars and based on the e-mail received from the Stock Exchanges (BSE and NSE) dated 10 January 2017 and as marked to the Beneficial Owner (BO) account, based on listing of company of promoters / promoters group on the non-compliance company Shrenuj as provided by the Stock Exchange. Thus, the depository is taking an action at the behest of the Stock Exchanges and in compliance of the requirements of the SEBI under the provisions of the SEBI Act and SEBI (LODR) Regulations. The provisions of Section 19 of the Depositories Act confers power on the SEBI to give directions in certain cases. S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uld not be utilized by him which itself is a valuable property under Section 300A of the Constitution. The petitioner was illegally deprived of his property and on a completely untenable pretext, merely because he was a promoter. Over and above these respondents have acted in complete contravention of law and non-application of mind in precipitating and compounding such action. In this view of the matter, we would be failing in our duty if we take a casual view of the matter and let the proceedings pass without any deterrent, failing which we shall be failing in our duty. We are therefore inclined to make an appropriate order imposing costs. 82. Having noted the provisions of SEBI Act, SCR Act, SEBI (LODR) Regulations, 2015, the Depositories Act, 1996 and the SEBI (Delisting of Equity Shares) Regulations, 2009, the following consequences of applicability of the various provisions would be evident: i) That the SCR Act, 1956 is enacted to prevent undesirable transactions in securities by regulating the business of dealing therein and by providing for matters connected therewith. It inter alia makes provisions for recognition of stock exchanges, contracts and options in securities, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... mine the role of the person whether he is the promoter at the relevant time considering the relevant facts and in the real sense as the law would mandate. Thus, reference of the respondents to the SEBI (Delisting of Equity Shares) Regulations, 2009 appears to be an exercise in total futility. (iv) Insofar as the SEBI (LODR) Regulation and Circular framed thereunder as observed above, the same cannot be stretched to an extent to take such draconian action of freezing the demat accounts of the petitioner and more particularly to recover any peanlty/fine payable by the company (Shrenuj). A determination of the petitioner's role whether in the real sense the law would mandate he continues to be a promoter, was required to be determined. (v) In the context of the Depositories Act, 1996 as observed by us in paragraph 80, none of the provisions would support the contentions of the respondents that a power is conferred to freeze the demat accounts of the petitioner, so as to recover the amounts due and payable by the defaulter company (Shrenuj). A lawful procedure to impose any penalty and/or fine is certainly not adhered by the respondent even assuming that what is sought to be recove ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by us is certainly a serious affair and cannot be permitted to happen in the manner respondents in the present case have resorted in such casual approach. 86. In the light of the aforesaid discussion, the petition needs to succeed. It is accordingly allowed in terms of the following order: ORDER (i) The freezing of the demat account of the petitioner pursuant to the impugned communications dated 23 March, 2017 (Exhibit "C"), 13 April, 2017(Exhibit 'D' & 'E') ,8 August 2018 (Exhibit 'L') is declared to be illegal and invalid; (ii) The petitioner shall be free to deal with all his shares as held in the Demat accounts in question. (iii) 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. (iv) In regard to the petitioner's contention on the amounts of penalty/fine not being deposited in the Consolidated Fund of India, inter alia considering the provisions of Section 15JA of SEBI Act, Section 23K of the SCR Act and Section 19J of the Depositories Act, it is for the appropriate Ministry of Government of India to look into these issues and in the context of the observations as made by us hereinabove. In the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Beneficial Owner account has been 'Suspended for Debits' till further instructions in received from BSE/SEBI. Such communication is not different from the one issued to Dr. Pradeep Mehta, petitioner's father in the above writ petition. 92. The petitioner contends that the petitioner's advocate addressed two letters dated 9 August 2018 and 23 August 2018 to NSDL protesting against the freezing of his demat account. On 28 August 2018, NSDL replied to the advocate of the petitioner stating that NSDL vide letters dated 10 July 2018 and 8 August 2018 informed the Depository Participant - HDFC Bank Ltd. with copy of the same endorsed to the petitioner that the Beneficial Owner (BO) account of the petitioner has been "Suspended for Debits" in accordance with SEBI Circular No. SEBI/HO/CFD/DCR/CIR/P/2016/81 dated 7 September 2016 and based on Promoters/Promoter Group of compulsorily delisted companies i.e., Shrenuj received from BSE and NSE. 93. Thereafter, the petitioner addressed another letter dated 15 October 2019 to respondent no. 3 - BSE stating that HDFC Bank had asked the petitioner to have a resident Indian as a joint holder for logistic reasons such as having local telephone nu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed by statutes and regulations. We say so as in the present case ex-facie there were no reasons whatsoever, to freeze the petitioner's demat account which came to be freezed merely because the petitioner's father happens to be a second holder of his demat account. The petitioner in this case was never the promoter of Shrenuj. When the petition was filed, the petitioner was 39 years of age and when Shrenuj was promoted in the year 1989, the petitioner was 7 years of age, when his father Dr. Pradeep Mehta was styled as one of the promoters of Shrenuj. 98. The petitioner is a Non-Resident Indian (NRI) based in Singapore. His wife is also based in Singapore. The petitioner has invested in shares and securities of Indian Companies, and accordingly, the petitioner has held the demat account in question with his father as a second holder to be so included for logistic purpose. 99. On the face of it, it is evident that the petitioner in no manner whatsoever much less in the capacity as promoter was concerned and connected with Shrenuj. Thus, 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 S ..... X X X X Extracts X X X X X X X X Extracts X X X X
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