Bombay High Court
Pradeep Mehta vs Union Of India And 5 Ors on 26 August, 2024
Author: G. S. Kulkarni
Bench: G. S. Kulkarni
PRASHANT
VILAS
2024:BHC-OS:13006-DB
RANE
Digitally signed by
PRASHANT VILAS
RANE
sebi-wp-1590-21 24-8-24 final (2).odt
Date: 2024.08.26
23:27:18 +0530
PVR
IN THE HIGH COURT OF JUDICATURE AT BOMBAY
ORDINARY ORIGINAL CIVIL JURISDICTION
WRIT PETITION NO. 1590 OF 2021
Dr. Pradeep Mehta ..Petitioner
Vs.
1. Union of India
2. Securities and Exchange Board of India
3. Bombay Stock Exchange Ltd.
4. National Stock Exchange Ltd.
5. Central Depository Services (India) Ltd.
6. National Securities Depository Ltd. ..Respondents
WITH
WRIT PETITION NO. 2228 OF 2021
Neil Pradeep Mehta
Represented through its Constituted Attorney
Dr. Pradeep Mehta ..Petitioner
Vs.
1. Union of India
2. Securities and Exchange Board of India
3. Bombay Stock Exchange Ltd.
4. National Stock Exchange Ltd.
5. Central Depository Services (India) Ltd.
6. National Securities Depository Ltd. ..Respondents
__________
Mr. Yeshwant Shenoy with Ms. Navneetha Krishnan, Krishnan T., Ms.
Pooja Singh i/b. Nava Legal, for Petitioner.
Mr. Parag A. Vyas, for Union of India.
Mr. Suraj Choudhary with Mr. Omprakash Jha, Mr. Atul Agrawal i/b. The
Law Point, for Respondent No.2 (SEBI)
Ms. Sarnaab Aswad i/b. Khaitan & Co., for Respondent No.3 (BSE Ltd.)
Mr. Pradeep Sancheti, Senior Advocate with Mr. Ranjeev Carvalho with
Mr. Sachin Chandarana, Mr. Aagam Mehta, Mr. Amol Rasal i/b. Manilal
Page 1 of 90
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Ambalal & Co., for Respondent No.4 (National Stock Exchange of India)
Ms. Aparna Wagle i/b. Alliance Law, for Respondent No.5 (CDSL)
Mr. Kunal Katariya with Mr. Pulkit Sukhramani, Ms. Vidhi Jhawar, Mr.
Shourya J. Tanay, Mr. Deepank Annand i/b. JSA Advocates and Solicitors,
for Respondent No.6 (NSDL).
__________
CORAM : G. S. KULKARNI &
FIRDOSH P. POONIWALLA, JJ.
RESERVED ON : MARCH 12, 2024.
PRONOUNCED ON: AUGUST 26, 2024
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
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the reason that at one time petitioner happened to be one of the promoters
of a company. The case of the petitioner is that such action of the NSDL at
the behest of the Bombay Stock Exchange (for short "BSE") apart from
being wholly illegal under the relevant statutory provisions, crosses all
norms of fairness, reasonableness and legitimacy when tested on the
touchstone of the rights guaranteed to the petitioner under Article 14, 21
read with 300A of the Constitution of India.
3. The relevant facts are:
The petitioner is a medical practitioner. He is a Gynaecologist and a
senior citizen. He has investment in the shares and securities issued by
Indian companies, which are long term investments held in the Demat
accounts in question. Such investments were intended to have the benefit
of funds, as per his retirement. One of the investments the petitioner made
was in a company, which appears to have been promoted in the year 1989
by his father-in-law namely Shrenuj & Company Limited (for short
"Shrenuj"). The petitioner subscribed 2000 shares of Shrenuj in the year
1989 and thereafter 1000 shares in the year 1993. By way of a sub-division
(1:5) in the year 2005, the petitioner's shareholding in Shrenuj increased
to 15,000 and further by bonus shares in the proportion of 1:2 issued in
the year 2014, which made the petitioner's shareholding at 30,000 shares.
The petitioner contends that he sold 9478 shares in February 2016
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keeping his shareholding in Shrenuj to about 20,522 shares, which was
less than 0.01% of the total paid-up share capital of Shrenuj.
4. In 2016, the petitioner learnt that there was some litigation in
regard to the affiliate of Shrenuj in Hong Kong. It was learnt that Shrenuj
was facing financial issues. It is stated that as a result of which , Shrenuj
could not file its financial results as per the SEBI Regulations namely the
"Securities and Exchange Board of India (Listing Obligations and
Disclosure Requirements) Regulations, 2015", (for short "SEBI (LODR)
Regulations")
5. On 2 March 2017, respondent no. 3 - BSE issued a letter to Shrenuj
in regard to non-submission of Financial Results under Regulation 33 of
the SEBI (LODR) Regulations, inter alia stating that the company had not
submitted to the Exchange its quarterly financial results for the period
ended in December 2016, and hence, the company was liable to pay a fine
of Rs. 1,84,000/- (penalty inclusive of service tax). The company was
further advised to refer to Circular No. CIR/CFD/CMD/12/2015 dated
30 November 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
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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 Circular
No.CIR/CFD/CMD/12/2015 dated 30 November 2015 and Circular No.
SEBI/HOCFD/CMD/CIR/P/2016/116 dated October 26, 2016. The
NSDL freezed not only the petitioner's shareholding in Shrenuj &
Company but also in ITC Limited. These communications addressed by
NSDL to the SHCIL are required to be noted which read thus:
" Exhibit
NSDL/SC/2017/ss/0070A March 23, 2017
Ms. Sheela Kothavle
Divisional Manager
Stock Holding Corporation of India Limited-IN"
Sub: SEBI Circular No. CIR/CT/D/CMD/12/2015 dated
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November 30, 2015.
This is to inform you that in accordance with to the above SEBI
circular and based on the emails received from the Stock
Exchange(s) on January 10, 2017, ISIN Level Freeze (Suspended for
Debit & Credit) has been marked in the following Beneficial Owner
(DO) account hased on list of PAN of Promoters/Promoter Group
of the concerned ann-compliant company as provided by Stock
Exchange(s) and holding securities of the arncerned non-compliant
company.
Name of Client ID DP ID ISIN Name of
account company
holder
PRADEE 17431870 IN301330 INE633A01028 Shrenuj &
P MEHTA Company
Ltd.
Yours faithfully,
Amit Shinde Senior Manager
Copy to: PRADEEP MEHTA
4 SETHNA HOUSE 13 LABURNUM
ROAD MUMBAI MUMBAI-4000007."
--------------------------------x--------------------------------
Exhibit D
NSDL/SC/2017/ND/0095 April 13, 2017
Ms. Sheela Kothavle
Divisional Manager
Stock Holding Corporation of India Limited - IN301330
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 Client ID DP ID ISIN Scrip Quantity
account Name
holder
PRADEEP 17431870 IN301330 INE154A01025 ITC 6235
MEHTA LIMITED
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EQ NEW
FV RE.1/-
Yours faithfully,
Amit Shinde
Senior Manager
Copy to: PRADEEP MEHTA
4 SETHNA HOUSE 13 LABURNUM
ROAD MUMBAI MUMBAI-100007
--------------------------------x--------------------------------
Exhibit E
NSDL/SC/2017/ND/0095 April 13, 2017
Ms. Sheela Kothavle
Divisional Manager
Stock Holding Corporation of India Limited - IN301330
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 Client ID DP ID ISIN Scrip Quantity
account Name
holder
PRADEEP 17431870 IN301330 INE154A01025 ITC 1240.42
MEHTA LIMITED 3203210
EQ NEW 5069
FV RE.1/-
Yours faithfully,
Amit Shinde
Senior Manager
Copy to: PRADEEP MEHTA, ANJALI MEHTA
4 SETHNA HOUSE 13 LABURNUM
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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. The petitioner also addressed a detailed letter dated 4 January 2018
to the SEBI stating that he was never in any direct or indirect control of
Shrenuj, and that he never held any post in the company; that he was
unaware of the company having allegedly violated the (LODR)
Regulations. He further stated that he was named as an investor promoter
of Shrenuj and company at the time of its incorporation in the year 1989
and that he had never been a director of the company or involved in any
of its day to day affairs. He stated that no notice or an opportunity of a
hearing was given to him before freezing his shares.
10. In such circumstances, against the freezing of his demat account, the
petitioner preferred an appeal before the Securities Appellate Tribunal (for
short "the Tribunal"). The Tribunal disposed of petitioner's appeal by its
order dated 18 April 2018 directing the BSE and NSE to dispose of the
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representation made by the Petitioner. The relevant contents of the said
order are required to be noted which read thus:
"2. On 04.01.2018 appellant had made representation to SEBI
against the impugned communications dated 23.03.2017 and
13.04.2017 and copies of the said representation were also forwarded
to National Stock Exchange of India Limited )"NES" for short) and
Bombay Stock Exchange Limited ("BSE" for short). Admittedly,
SEBI has disposed of the representation made by the appellant by
stating that it is for NSE & BSE to consider the representation made
by the appellant. It is not in dispute that neither the BSE nor the
NSE have considered the representation made by the appellant.
3. In these circumstances, we dispose of the appeal by directing BSE
& NSE to dispose of the representation made by the appellant on
04.01.2018 within 4 weeks from today."
11. Pursuant to the order dated 18 April 2018 passed by the Tribunal,
Respondent no. 4 - NSE replied to the said representation of the
petitioner by its letter dated 11 May 2018 inter alia stating that in
accordance with the SEBI circulars dated 30 November 2015 and 26
October 2016 which prescribed for Standard Operating Procedure (SOP),
detailing the manner in which the Exchange shall deal with non-
compliance by the listed companies, the Exchange suspended the trading
in the securities of Shrenuj, as Shrenuj had defaulted in filing of its
Financial Results with the BSE for the quarters ending on June 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
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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
consequence of such delisting, the petitioner's demat accounts were
wholly frozen. Consequent thereto Respondent no. 6-NSDL issued a
letter dated 8 August 2018 informing the petitioner of freezing of his
demat account as 'suspended for debits'.
14. Subsequent thereto, the petitioner again filed an appeal before the
Tribunal, which was disposed of by an order dated 4 September 2018, in
view of an appeal as filed by Shrenuj (appeal no. 298 of 2018) being
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earlier disposed of by an order dated 28 August 2018, by which Shrernuj
was directed to make a representation within 15 days to the BSE, and BSE
was directed to consider the representation and pass a fresh order within 8
weeks thereafter. In this view of the matter, it was observed by the
Tribunal that nothing survived in the petitioner's appeal.
15. On 23 March 2021, the Petitioner received an email from the
Chairman of Action Financial Services (India) Ltd, (for short "AFSIL")
informing the petitioner that his demat account with a depository
participant "AFSIL" was either in suspended status or case of death
transmission and all accounts which could not be closed due to this issue
will get shifted to NSDL managed "Omnibus System" w.e.f. 23 March
2021. The petitioner however desired that the securities in the petitioner's
frozen demat account, be transferred to his other demat account, however,
due to the freezing of the securities by NSDL, the securities could not be
transferred and the same was sent to the 'omnibus system' of NSDL.
16. The petitioner on such backdrop, addressed an e-mail dated 5 May
2021 to the NSDL making a grievance that the action to freeze the
petitioner's demat account and the securities held by him was wholly
illegal. NSDL responded to such e-mail by its letter dated 1 June 2021,
directing the petitioner to approach BSE and NSE for clarification in
regard to the freezing of his account. The petitioner responded to such
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letter of NSDL by e-mail dated 8 June 2021 bringing to its attention the
NSDL's notices issued earlier, which clearly stated that the demat accounts
were 'suspended for debits'.
17. Lastly, the petitioner, through his advocates addressed a detailed
notice dated 7 June 2021 to respondent no. 2 - SEBI setting out its
grievances and requesting to immediately take steps to defreeze the
petitioner's demat accounts and the securities held by him. There were
exchange of letters 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 made by the Respondent No.2 that resulted in
thousands of crores of government revenues getting diverted.
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E. Direct the Respondent No. 3, 4, 5 & 6 to defreeze forthwith all
demat accounts of the Petitioner.
F. Direct the Respondent No. 3 & 4 to pay a compensation of Rs. 1 Crore
each to the Petitioner for freezing his demat accounts illegally and for
preventing him from trading in shares.
G. Direct the Respondent No. 5 & 6 to compensate the Petitioner with
Rs. 1 Crore each for maligning his public image by unethical public display
of names under "Accounts Frozen based on SEBI Orders" section since
2017 even when no such order was passed.
H. Pending disposal of this Writ Petition this Hon'ble Court direct the
Respondent No. 6 to transfer the securities of the Petitioner lying in the
omnibus system to his demat account.
I. Pending disposal of this Writ Petition this Hon'ble Court direct the
Respondent No. 3, 4, 5 & 6 to stop public display of the Petitioner's name
on their portals.
J. For ad-interim relief in terms of prayer clause (H) & (I).
K. The costs and expenses of this Petition to be paid to the Petitioner.
L. Any other orders be passed as this Hon'ble Court may deem fit and
proper."
Reply Affidavits
Reply Affidavit of SEBI
19. A reply affidavit is filed on behalf of the respondent no. 2 - SEBI of
Ms. Suvarna Agarwal, Assistant Manager, Corporation Finance
Department, Securities and Exchange Board of India. The affidavit states
that the petitioner's demat accounts are frozen in pursuance of the
Circulars dated 30 November 2015 and 26 October 2016 issued by SEBI
which prescribe the 'Standard Operating Procedure', for suspension and
revocation of trading of specified securities, detailing the manner in which
the exchanges shall deal with non-compliance or contravention of SEBI
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(LODR) Regulations, 2015, by listed companies. It is stated that SEBI was
established to inter alia protect the interests of investors in securities and
to promote the development of and to regulate the securities market. It is
stated that under section 11 of the Securities and Exchange Board of India
Act, 1992 (for short "SEBI Act"), SEBI has wide powers to protect the
interests of the investors in securities and to promote the development of
and to regulate the securities market. These powers inter alia include the
power to specify the requirements for listing and 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
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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 11A of
the SEBI Act, SEBI may specify the requirements of listing and transfer of
securities or other incidental matters. Prior to SEBI (LODR) Regulations
2015, the listing obligations and disclosure requirements were governed by
the listing agreements entered into between a company which intended to
be listed on the stock exchanges. Clause 39 of such Listing Agreements
entered between the companies intending to get listed and the Stock
Exchange(s) provided that such Company would agree that in the event of
the application for listing being granted, such listing shall be subject to the
Rules, Bye-laws and Regulations of the Exchange which are in force at the
time of entering into the agreement or thereafter. It is stated that the Bye-
Laws of the Stock Exchanges inter alia mandate that every listed Company
shall comply with the conditions of the Listing Agreement as prescribed
from time to time by such Stock Exchanges and/or SEBI and shall be liable
to pay such fine(s) as may be prescribed by such Stock Exchanges and/or
SEBI for non-compliance of the Listing Agreement or any of the SEBI
Regulation dealing with listing.
21. It is next stated in SEBI's affidavit that a need was felt for laying
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down a regulatory framework by consolidating the listing obligations and
disclosure requirements for listed entities at one place. It is stated that
accordingly, the SEBI (LODR) Regulations 2015 were framed, to ensure
that the rights of shareholders are protected and transparency in necessary
disclosures by listed entities is maintained. Such regulations also provides
for the rights, obligations, duties etc. of the listed companies and the stock
exchanges. It is hence contended that the issuance of impugned Circulars
dated 30 November 2015 and 26 October 2016 is well within the powers
of SEBI under Regulations 97, 98, 99 and 102 read with Regulation
101(2) of SEBI (LODR) Regulations 2015. It is contended that the actions
taken by respondent nos. 3 to 6 are in consonance with the SEBI (LODR)
Regulations 2015 and the aforesaid circulars of SEBI.
22. It is next stated that respondent no. 3 and 4 issued directions to
respondent no. 5 and 6 to freeze the demat account of the petitioner
under the aforesaid statutory mechanism. It is also stated that the freezing
of demat account of the petitioner is also a consequence of Compulsory
Delisting of Shrenuj, under the provisions 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
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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 determined by the independent valuer
appointed by the concerned stock exchange. It is stated that Regulation
29 of the Delisting Regulations 2009 itself envisages that the respective
recognized stock exchanges shall monitor compliance with the provisions
of these regulations and shall report to the Board any instance of non-
compliance which comes to their notice. It is hence stated that as a result
of compulsory delisting of the securities of Shrenuj, NSDL informed the
petitioner on 8 August 2018, that the petitioner's account was "Suspended
for Debits" in accordance with the Circular dated 7 September 2016.
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23. It is next stated that the power to regulate has been delegated to the
recognised Stock Exchanges by the Parliament by virtue of Section 9 of the
SCR Act to include power to levy fees, fines and penalties. It is stated that
by virtue of the powers conferred under the SCR Act, the stock exchanges
are first level regulators to regulate the companies listed on the exchange.
However, it is denied that SEBI has delegated its own powers to regulate
securities market to the stock exchanges.
24. It is further stated that if petitioner is aggrieved by the actions taken
by the Stock Exchanges then under Section 23 of SCR Act, the statutory
remedy lies before the Tribunal. Further, if the petitioner is aggrieved by
the orders dated 18 April 2018 (Ex-H of the petition) and 4 September
2018 (Ex-M of the petition) passed by the Tribunal, then the remedy
would lie before the Supreme Court pursuant to Section 15Z of the SEBI
Act.
25. The relevant extracts from the SEBI's affidavit are required to be
noted which read thus:-
"36. .....(a) .. ... A promoter plays a vital role in raising capital for a
company and, therefore, the promoter who continues to flout the
byelaws and rules of exchange, LODR regulations and SCRA has to
be dealt appropriately to protect the interest of the
investors/shareholder of the said company. Additionally, under
Regulation 5 of the LODR Regulations 2015, the Promoters,
directors, key managerial personnel or any other person dealing with
the listed entity are obligated to fulfil the responsibility assigned to
the listed entity under the said Regulations. In addition to this, the
Impugned Circulars are also in conformity with Regulation 98 of
the LODR Regulations 2015 which explicitly provide for freezing of
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promoter/promoter group holding of designated 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-compliance of the LODR
Regulations 2015 and non-payment of fines. Further, while it may
be correct that the liability of a shareholder is curtailed only to the
unpaid portion of the shares held by him/her, the Petitioner being a
member of the promoter group is still liable in the said capacity for
the actions, fines, and penalties as prescribed in the securities laws
and regulations.
38... ... ... ...As per the contents of the said letter, the petitioner
stated that he was named as an investor promoter of the Company at
the time of its incorporation in the year 1989.
39. .. ... .. ....I submit and reiterate that under the Impugned
Circulars, the stock exchanges are authorised to collect fines for non-
compliance of LODR Regulations 2015, in the matter specified
therein. It is further denied that the fines collected by the stock
exchanges are being deposited into the account of stock-exchanges
in violation of the Section 15JA of the SEBI Act.
47.. .. ... .....I refer and rely upon the contents of paragraph 12 and
submit that the Stock Exchanges have power to freeze the
promoter/promoter group holding of designated securities in
coordination with the depositories when such freezing is in terms of
and in the manner specified by the Respondent No 2 under the
SEBI Act and SCRA and the Regulations and Circulars issued
thereunder. SEBI/ Respondent No. 2 Circular dated 07.09.2016
issued under the Delisting Regulations 2009 also provides for
coordination between the depository and the stock exchanges in
order to ensure the compliances of the said regulations and initiate
actions for non-compliance.
48. .. ... .. .... As stated in the foregoing paragraphs, the Petitioner in
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his correspondences has admitted to being the promoter of the said
Company since 1998 and as a promoter, he ought to have known
the consequences of non-compliance of LODR Regulations,
Delisting Regulations and the Circulars issued under the said
Regulations, by the Company promoted by him. The freezing
actions taken against him come as a direct consequence of the non-
compliance with the LODR Regulations 2015 and the compulsory
delisting carried out in accordance with the Delisting Regulations
2009.
54. ... .... .....I say and submit that the freezing of accounts is in
consonance with the LODR Regulations 2015 and the Delisting
Regulations 2009 (now Delisting Regulations 2021), which were
duly 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
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and accordingly, the Demat account of the petitioner was frozen on
account of such default of Shrenuj. Respondent No.3 contends that the
petitioner had never objected of being classified as a "promoter" until the
freezing of his demat account.
27. It is next stated that the petition suffers from delay and laches
inasmuch as the petitioner has approached the court after a considerable
delay of three years. The Petitioner's demat account was frozen in July
2018, hence, the cause of action to file any proceeding had accrued to the
petitioner in the year 2018, however, the petitioner approached the court
in the July/September 2021, that is after 3 years of delay. It is also stated
that this petition also suffers from the vice of non-joinder of necessary
party as Shrenuj was required to be impleaded as a respondent, for the
reason that the consequence of freezing of demat account has befallen
upon the petitioner on account of the non-compliance with provisions of
the SEBI (LODR) Regulations by Shrenuj and its compulsory delisting
from stock exchange platforms.
28. It is next stated that the securities of Shrenuj were suspended from
trading w.e.f. 27 March 2017 on account of non-compliance with
Regulation 33 of the SEBI (LODR) Regulations for two consecutive
quarters i.e., June 2016 and September 2016, pursuant to the provisions of
Circular no. CIR/CFD/CMD/12/2015 dated 30 November 2015 and
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subsequent Circular no. SEBI/HO/CFD/CMD/CIR/P/2016/116 dated 26
October 2016 issued by SEBI with respect to Standard Operating
Procedure (SOP) for non-compliance of SEBI (LODR) Regulations, in
terms of Notice bearing reference number 20170303-14 dated 3 March
2017 issued by respondent no.3/BSE. It is stated that the said notice also
prescribed for freezing of the shareholding of promoter and promoter
group of Shrenuj.
29. It is next stated that the petitioner challenged the freezing of the
Demat Account in an appeal filed before the Securities Appellate
Tribunal, which was disposed of by an order dated 18 April, 2018
directing Respondent-BSE to dispose of the representation made by the
Petitioner dated 4 January 2018, within 4 weeks therefrom. Accordingly,
respondent no. 3-BSE disposed of the petitioner's representation by its
communication dated 15 May 2018 inter alia recording that the petitioner
was a promoter of Shrenuj, hence, the consequences of freezing of the
demat account of Shrenuj applied to the petitioner.
30. It is next stated 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
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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 respondent no. 4, freezing the
demat account of the petitioner lies before the Securities Appellate
Tribunal, and the remedy in respect of the order dated 4 September 2018
of the Securities Appellate Tribunal lies before the Supreme Court.
Reply Affidavit of CDSL
32. Reply affidavit of Mr. Nilay R. Shah, Group Secretary and Head
Legal, Central Depository Service (India) Limited (for short "CDSL") is
filed on behalf of respondent no. 5 - CDSL inter alia contending that the
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petitioner holds no demat account maintained with respondent no. 5, yet
the petitioner has made monetary claims against respondent no. 5.
Therefore, the petitioner's claim for compensation does not arise and be
dismissed.
Reply Affidavit of NSDL
33. Reply affidavit is filed on behalf of respondent no. 6 -NSDL of Mr.
K.R. Harish Kumar, Senior Manager, National Securities Depository Ltd.
It is stated that on 6 March 2017 and on 6 April 2017, NSE addressed
emails to NSDL and directed for freezing of certain other securities held
by the promoter/promoter group entities of certain listed entities (which
included Shrenuj) on account of non-compliance, by such listed entities
with the provisions of the "SEBI (LODR) Regulations". The said emails of
NSE contained details of the Petitioner by virtue of him being a promoter
of Shrenuj and the shares of ITC Limited, that were required to be frozen
as held in the petitioner's Demat Account, in accordance with the SEBI
Circular dated 26 October 2016. It is stated that accordingly NSDL
initiated an ISIN level freeze in respect of shares of ITC Limited, based on
the directions received from NSE. It s stated that thereafter, on 9 July
2018, BSE informed NSDL that trading notices had been issued by BSE
for compulsory delisting of certain companies from the trading platform of
the exchange w.e.f. 4 July 2018. BSE also shared a list of such companies
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along with details of promoters, including PAN number of such
companies and directed NSDL to freeze all demat accounts of such
promoters as per the SEBI Circular dated 7 September 2016. Accordingly,
based on PANs of promoter/promoter group of compulsorily delisted
companies as received from BSE, the Petitioner's account was marked as
'Suspended for Debit' until further instructions from BSE/ SEBI and the
same was communicated to the Petitioner vide letters dated 8 August
2018.
34. It is next stated that NSDL also 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
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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 demat account with AFSIL, a depository
participant of NSDL, it is contended that since participantship of AFSIL
was terminated w.e.f. 20 March 2021, all demat accounts of investors held
with AFSIL were taken over into NSDL omnibus system. In accordance
with the NSDL's bye-laws and Business Rules, the demat accounts of
investors held with AFSIL (a terminated depository participant) were
frozen for debit, and fresh credit by way of transfer of securities was
disabled in these accounts. It is stated that in this regard, as a standard
procedure, an intimation was sent by NSDL to all the investors holding
demat account with AFSIL, including the Petitioner, setting out the
procedure to be followed for transfer of securities and closure of demat
accounts held with AFSIL. Accordingly, a letter dated 4 May 2021 was
issued to the Petitioner from NSDL. Upon receiving a reply from the
Petitioner, it was clarified to the Petitioner that since his demat account
had been frozen as per the instructions received from NSE and BSE, it was
advised to the petitioner to approach NSE and BSE for defreezing of his
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demat account.
36. It is next stated that it is the petitioner's case that he had no
control over Shrenuj or its functioning, however, petitioner in his
representation dated 4 January 2018 (Exhibit G) has categorically
admitted that he was named as an investor promoter of Shrenuj and
Company at the time of its incorporation in the year 1989. It is stated that
as admittedly the Petitioner was named as a promoter of Shrenuj, in due
compliance with the directions of the stock exchanges, NSDL had initiated
a freeze on the demat accounts of the Petitioner.
Submissions
37. On behalf of the petitioner, it is submitted that the impugned action
of freezing the demat accounts of the petitioner could not have been taken
by the NSDL at the behest of BSE/NSE and the SEBI, as the same is in
contravention of Section 11 of the Securities and Exchange Board of India
Act, 1992. It is submitted that Section 11 of the SEBI Act provides for
functions of the Board, and more particularly Section 11(4)(e) which
provides that the Board may, by an order, for reasons to be recorded in
writing, in the interests of investors or securities market, take the measures
to attach, for a period "not exceeding ninety days", bank accounts or other
property of any intermediary or any person associated with the securities
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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 in justifying the impugned
action, cannot go beyond the provisions of the SEBI Act.
40. It is submitted that the provisions of Section 15A of the SEBI Act
provides for penalty for failure to furnish information, return, etc., in
which the maximum penalty is Rs. 1 crore, provided the essential
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requirements of Section 15A are satisfied for levy of such penalty. It is
hence submitted that in any case, penalty cannot be imposed unless the
procedure in law is followed, namely, that hearing be given to the person
on whom penalty is to be imposed. Such amount of penalty is not being
taken in the Consolidated Fund of India but as income as GST and TDS
are deducted. It is submitted that such action on the part of the SEBI is, in
fact, as good as a scam as in such manner large amounts of money are
being collected, in a manner not recognized by law and not credited to the
Consolidated Fund of India.
41. It is submitted that Section 15-I of the SEBI Act specifically confers
power to adjudicate for the purpose of adjudging under Section 15A in the
manner as prescribed by the said provision. The procedure contemplated
is of an inquiry to be held in a prescribed manner and after giving the
person concerned, a reasonable opportunity of being heard for imposing
penalty.
42. On the other hand, learned Counsel for the SEBI has relied on the
reply affidavit to justify the impugned action referring to the provisions of
the SEBI Act, SCR Act and the regulations framed thereunder as referred
to in the reply affidavit. The arguments are not different from what has
been contended in the reply affidavit, which we have referred to in detail
in the foregoing paragraphs. Additionally, it is argued that Section 9(2) of
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the Securities Contracts (Regulation) Act, 1956 confers power on the
recognized Stock Exchange to make bye-laws for regulation and control of
contracts, which includes in clause (o) under sub-section (2) which
prescribes the power to levy and recover fees, fines and penalties. It is
submitted that what has been done by the impugned order is to levy a
penalty on the petitioner and hence, the action of the SEBI to have such
regulations, cannot be assailed.
43. On behalf of the other respondents, submissions are advanced
which is in fact the case of these respondents as urged in the reply
affidavits which we have noted hereinabove.
44. We have heard learned counsel for 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
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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 specific case of the petitioner appears to have gone
unchallenged. Shrenuj suffered losses. It had also defaulted in complying
with certain regulations as issued by the SEBI under the provisions of the
SEBI Act and regulations sometime in the year 2016, at which point of
time, status of the petitioner was nothing but merely of a shareholder of
the company. It would be appropriate to note the default of Shrenuj as
informed to Shrenuj by the Bombay Stock Exchange by its letter dated 2
March 2017 imposing a penalty/fine on Shrenuj for non-compliance of the
Regulation 33 of the SEBI (LODR) Regulations. Such non-compliance of
which is being held against the petitioner to freeze the petitioner's demat
accounts, so as to recover the penalty/fine from the petitioner. The said
letter reads thus:
"LIST/COMP/Reg.33-Dec-16/523236/834/2016-17
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sebi-wp-1590-21 24-8-24 final (2).odt
March 2, 2017
The Company Secretary/Compliance Officer
Shrenuj & Company Ltd.
405,
Dharam Palace, 100-103 N S Patkar Marg,
Mumbai-400007,
Maharashtra
Dear Sir/Madam,
Sub: Non-submission of Financial Results under Regulation 33 of the
SEBI (LODR) Regulations, 2015 for December 2016 Quarter.
Pursuant to Regulation 33 of the SEBI (LODR) Regulations, 2015 where
the companies required to furnish Quarterly Financial Result within 45
days of the end of that quarter to the Exchange & for the last quarter, the
company has to submit, within 60 days from the end of the financial year,
the Audited Financial Results for entire financial year along with the
audited financial results in respect of the last quarter (balancing figure).
On scrutiny of our records we observe that the company has not
submitted to the Exchange the quarterly financial results for the period
ended on December 2016.
The company is advised to refer to Circular no. CIR/CFD/CMD/12/2015
dated November 30, 2015 issued by Securities Exchange Board of India
(SEBI) with respect to non-compliance of certain listing regulations and
adopting Standard Operating Procedure for suspension and revocation of
trading of shares of listed entities or such non-compliances including levy
of financial penalties. The company is liable to pay Rs. 184000/- (penalty
inclusive of service tax) as on March 2, 2017. As per the provisions of the
circular the penalties will continue to be computed further as mentioned
below plus service tax as per applicable rates (currently @ 15%) till the
date of submission (including the date of submission):
Regulation Fine payable for 1st Fine payable subsequent
non-compliance and consecutive non-
compliance
Regulation 33 Rs.5,000 per day of Rs. 10,000 per day of
Non-submission of the non-compliance till non compliance till the
financial results within the date of date of compliance and
period prescribed under compliance and If if non-compliance
this regulation non-compliance continues for more than
continues for more 15 days, additional fine
than 15 days, of 0.1% of Paid Up
additional fine of capital of the entity or
0.1% of Paid Up Rs. 1 crore, whichever is
capital of the entity or less.
Rs. 1 crore, whichever
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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-submission of financial results, within 15 days of this letter,
would result the company being transferred to Z group and liable for
suspension of trading of its equity shares.
Additionally, the company is also advised to note that provisions of SEBI
circular no. SEBI/HO/CFD/CMD/CIR/P/2016/116 dated October 26,
2016 titled "Freezing of Promoter and Promoter group Demat accounts
for Noncompliance with certain provisions of SEBI (Listing Obligations
and Disclosure Requirements) Regulations, 2015" would be applicable
immediately with respect to nonpayment of fine.
A signed scanned copy of the financial results along with the covering
letter can be uploaded on the following link of Listing Center:
http://listing.bseIndia acom (for assistance in login and uploading on
listing centre the company can contact helpdesk on Tel. No. 022-
61363155 or email id: [email protected]).
The format of financial results can be downloaded from the website:
http://www.bseindia.com/
It may be noted that effective from December 1, 2015, those fillings that
are not filed with the Exchange through the Listing Centre are liable to be
considered as non-submission and consequent non-compliance with the
Regulations. In this regard companies are requested to refer Circular issued
by the Exchange on November 30, 2015 on MANDATORY FILING OF
INFORMATION WITH THE EXCHANGE IN ELECTRONIC
MODE.
In case of any further clarification in this matter please contact Mr.
Mandar Chavan on Tel. No. 22728514/ Mr. Sambhaji Solat on
22728074/ Mr. Manish Raval on 22725025 or email at
[email protected]
Yours faithfully,
Sambhaji Solat Manish Raval
Associate Manager Asst. Manager
Listing Compliance Listing Compliance
Company is requested to remit the fine amount through electronic transfer
to the designated bank-details given below; or through cheque favoring
BSE Ltd. The company is required to submit the cheque alongwith the
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covering letter (format given at Annexure below):
Bank Name Branch Name Account No. IFSC Code
HDFC Bank Fort, Mumbai 00600340005 HDFC000060
Annexure-1 (On the letterhead of the Company)
Listing Compliance, BSE Limited, Ground Floor,
P. J. Towers, Fort, Mumbai-400001.
Sub: Details of Payment of Penalties for Non-Compliance of regulation(s)
of SEBI (Listing Obligations and Disclosure Requirements) Regulations,
2015.
Remittance details:
Scrip Code Regulation Amount paid TDS Net Amount
number & deducted, if paid
Quarter any
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
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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 formation of the company and
once the company stood incorporated i.e. "a legal person born", according
to the petitioner, it would be subjective and issue of fact, as to what is the
role of the promoter, as such role would cease to exist, as the entire
management of the company, as per the provisions of the Companies Act,
2013 would stand vested with the Board of Directors. It is hence, the
petitioner's submission that the compliance of all the obligations under
the SEBI Act and the regulations made thereunder was the obligation of
the company as managed by its Board of Directors. Even assuming that
there was a default in complying with the regulations, the petitioner's case
is to the effect that such obligation can never be attributable to the
promoters like the petitioner, who was not concerned with the day-to-day
affairs of the company.
48. If this be the contention of the petitioner, we need to examine as to
how and in what manner for the defaults of the company, the petitioner,
who remained to be an ordinary shareholder and whose role as a promoter
having come to an end and/or had become extinct, could at all be liable,
for any defaults of the company for non-compliance of the SEBI
regulations. We examine this question by noting the relevant provisions
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which are sought to be applied in taking the impugned action against the
petitioner. The relevant provisions of the SEBI Act read thus:-
"SEBI Act
Section 11. Functions of Board.
(1) Subject to the provisions of this Act, it shall be the duty
of the Board to protect the interests of investors in securities
and to promote the development of, and to regulate the
securities market, by such measures as it thinks fit.
(2) Without prejudice to the generality of the foregoing
provisions, the measures referred to therein may provide for--
(a) regulating the business in stock exchanges and
any other securities markets;
(b) registering and regulating the working of stock
brokers, sub-brokers, share transfer agents, bankers to an issue,
trustees of trust deeds, registrars to an issue, merchant bankers,
underwriters, portfolio managers, investment advisers and
such other intermediaries who may be associated with
securities markets in any manner;
(ba) registering and regulating the working of the
depositories, participants, custodians of securities, foreign
institutional investors, credit rating agencies and such 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;
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(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 information from, or furnishing
information to, other authorities, whether in India or outside
India, having functions similar to those of the Board, in the
matters relating to the prevention or detection of violations in
respect of securities laws, subject to the provisions of other
laws for the time being in force in this regard:
Provided that the Board, for the purpose of furnishing
any information to any authority outside India, may enter into
an arrangement or agreement or understanding with such
authority with the prior approval of the Central Government;
(j) performing such functions and exercising such
powers under the provisions of the Securities Contracts
(Regulation) Act, 1956 (42 of 1956), as may be delegated to it
by the Central Government;
(k) levying fees or other charges for carrying out the
purposes of this section;
(l) conducting research for the above purposes;
(la) calling from or furnishing to any such agencies,
as may be specified by the Board, such information as may be
considered necessary by it for the efficient discharge of its
functions;
(m) performing such other functions as may be
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prescribed.
(2A) Without prejudice to the provisions contained in sub-
section (2), the Board may take measures to undertake
inspection of any book, or register, or other document or
record of any listed public company or a public company (not
being intermediaries referred to in section 12) which intends
to get its securities listed on any recognised stock exchange
where the Board has reasonable grounds to believe that such
company has been indulging in insider trading or fraudulent
and unfair trade practices relating to securities market.
(3) Notwithstanding anything contained in any other law
for the time being in force while exercising the powers under
clause (i) or clause (ia) of sub-section (2) or sub-section (2A),
the Board shall have the same powers as are vested in a civil
court under the Code of Civil Procedure, 1908 (5 of 1908),
while trying a suit, in respect of the following matters,
namely:-
(i) the discovery and production of books of
account and other documents, at such place and such time as
may be specified by the Board;
(ii) summoning and enforcing the attendance of
persons and examining them on oath;
(iii) inspection of any books, registers and other
documents of any person referred to in section 12, at any
place;
(iv) 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
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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 any of the provisions of this Act, or
the rules or the regulations made thereunder:
Provided that the Board shall, within ninety days of the said
attachment, obtain confirmation of the said attachment from
the Special Court, established under Section 26-A, having
jurisdiction and on such confirmation, such attachment shall
continue during the pendency of the aforesaid proceedings
and on conclusion of the said proceedings, the provisions of
Section 28-A shall apply:
Provided further that only property, bank account or accounts
or any transaction entered therein, so far as it relates to the
proceeds actually involved in violation of any of the provisions
of this Act, or the rules or the regulations made thereunder
shall be allowed to be attached.
(f) direct any intermediary or any person associated
with the securities market in any manner not to dispose of or
alienate an asset forming part of any transaction which is
under investigation:
Provided that the Board may, without prejudice to the
provisions contained in sub-section (2) or sub-section (2-A),
take any of the measures specified in clause ( d) or clause (e) or
clause (f), in respect of any listed public company or a public
company (not being intermediaries referred to in Section 12)
which intends to get its securities listed on any recognised
stock exchange where the Board has reasonable grounds to
believe that such company has been indulging in insider
trading or fraudulent and unfair trade practices relating to
securities market:
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Provided further that the Board shall, either before or
after passing such orders, give an opportunity of hearing to
such intermediaries or persons concerned.
(4A) Without prejudice to the provisions contained in sub-
sections (1), (2), (2A), (3) and (4), section 11B and section 15-
I, the Board may, by an order, for reasons to be recorded in
writing, levy penalty under Sections 15A, 15B, 15C, 15D,
15E, 15EA, 15EB, 15F, 15G, 15H, 15HA and 15HB after
holding an inquiry in the prescribed manner.
(5) The amount disgorged, pursuant to a direction issued,
under Section 11B of this Act or Section 12A of the Securities
Contracts (Regulation) Act, 1956 (42 of 1956) or Section 19
of the Depositories Act, 1996 (22 of 1996) or under a
settlement made under Section 15-JB or Section 23-JA of the
Securities Contracts (Regulation) Act, 1956 (42 of 1956) or
Section 19-IA of the Depositories 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 crore rupees, whichever is less;
(c ) to maintain books of account or records, fails to
maintain the same, he shall be liable to a penalty of one lakh
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rupees for each day during which such failure continues or one
crore rupees, whichever is less.
Section 15-I. Power to adjudicate.-- (1) For the purpose of
adjudging under Sections 15-A, 15-B, 15-C, 15-D, 15-E, 15-
EA, 15-EB, 15-F, 15-G, 15-H, 15-HA and 15-HB the Board
may appoint any officer not below the rank of a Division
Chief to be an adjudicating officer for holding an inquiry in
the prescribed manner after giving any person concerned a
reasonable opportunity of being heard for the purpose of
imposing any penalty.
(2) While holding an inquiry the adjudicating officer shall
have power to summon and enforce the attendance of any
person acquainted with the facts and circumstances of the case
to give evidence or to produce any document which, in the
opinion of the adjudicating officer, may be useful for or
relevant to the subject-matter of the inquiry and if, on such
inquiry, he is satisfied that the person has failed to comply
with the provisions of any of the sections specified in sub-
section (1), he may impose such penalty as he thinks fit in
accordance with the provisions of any of those sections.
(3) The Board may call for and examine the record of any
proceedings under this section and if it considers that the
order passed by the adjudicating officer is erroneous to the
extent it is not in the interests of the securities market, it may,
after making or causing to be made such inquiry as it deems
necessary, pass an order enhancing the quantum of penalty, if
the circumstances of the case so justify:
Provided that no such order shall be passed unless the
person concerned has been given an opportunity of being
heard in the matter:
Provided further that nothing contained in this sub-
section shall be applicable after an expiry of a period of three
months from the date of the order passed by the adjudicating
officer or disposal of the appeal under Section 15-T, whichever
is earlier.
.........
15J. Factors to be taken into account by the adjudicating
officer.
While adjudging quantum of penalty under section 15-I, the
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adjudicating officer shall have due regard to the following
factors, namely :--
(a) the amount of disproportionate gain or unfair advantage,
wherever quantifiable, made as a result 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 be disclosed by the companies under
Section 11-A;
(ca) the utilisation of the amount credited under sub-section
(5) of Section 11;
(cb) the fulfillment of other conditions relating to collective
investment scheme under sub-section (2-A) of Section 11-AA;
(d) the conditions subject to which certificate of registration is
to be issued, the amount of fee to be paid for certificate of
registration and the manner of suspension or cancellation of
certificate of registration under Section 12.
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(da) the terms determined by the Board for settlement of
proceedings under sub-section (2) and the procedure for
conducting of settlement proceedings under sub-section (3) of
Section 15-JB
(db) any other matter which is required to be, or may be,
specified by regulations or in respect of which provision is to
be made by regulations."
(emphasis supplied)
49. The relevant provisions of SEBI (LODR) Regulations, 2015 read
thus:
97. Monitoring of Compliance/Non Compliance &
Adequacy/ Accuracy of the disclosures
(1) The recognised stock exchange(s) shall monitor
compliance by the listed entity with provisions of these
regulations.
(2) The recognised stock exchange(s) shall also monitor
adequacy/ accuracy of the disclosures made by listed entity
with respect to provisions of these regulations.
(3) The recognised stock exchange(s) shall submit a report
to the Board, with respect to the obligations specified in sub-
regulations (1) and (2), in the manner specified by the Board.
(4) The recognised stock exchange(s) shall put in place
appropriate framework including adequate manpower and
such infrastructure as may be required to comply with the
provisions of this regulation.
98. Liability for contravention of the Act, rules or the
regulations.
(1) The listed entity or any other person thereof who
contravenes any of the provisions of these regulations, shall, in
addition to liability for action in terms of the securities laws,
be liable for the following actions by the respective stock
exchange(s), in the manner specified in circulars or guidelines
issued by the Board:
(a) imposition of fines;
(b) suspension of trading;
(c) freezing of promoter/promoter group holding of
designated securities, as may be applicable, in coordination
with depositories.
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(d) any other action as may be specified by the
Board from time to time
(2) The manner of revocation of actions 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 after due consideration of the interest of
the investors and the securities market and for the
development of the securities market, relax the strict
enforcement of any of the requirements of these regulations, if
an application is made by the Central Government in relation
to its strategic disinvestment in a listed entity.
[(2) For seeking relaxation under sub-regulation (1), an
application, giving details and the grounds on which such
relaxation has been sought, shall be filed with the Board.
[(3) The application referred to under sub-regulation (2)
shall be accompanied by a non-refundable fee of rupees one
lakh payable by way of direct credit into the bank account
through NEFT/ RTGS/ IMPS or online payment using the
SEBI Payment Gateway or any other mode as may be specified
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by the Board from time to time.
(emphasis supplied)
50. The relevant provisions of the Depositories Act, 1996 are also
required to be extracted, which read thus:
"2. Definitions.--(1) In this Act, unless the context otherwise requires,
--
(a) "beneficial owner" means a person whose name is recorded as such
with a depository;
(b) "Board" means the Securities and Exchange Board of India
established under section 3 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992);
(e) "depository" means a company formed and registered under the
Companies Act, 1956 (1 of 1956) and which has been granted a
certificate of registration under sub-section (1A) of section 12 of the
Securities and Exchange Board of India Act, 1992 (15 of 1992);
(k) "regulations" means the regulations made by the Board;
.....
(2) Words and expressions used herein and not defined but defined in
the Companies Act, 1956 (1 of 1956) or the Securities Contracts
(Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange
Board of India Act, 1992 (15 of 1992), shall have the meanings
respectively assigned to them in those Acts.
19. Power of Board to give directions in certain cases.--(1) Save as
provided in this Act, if after making or causing to be made an enquiry
or inspection, the Board is satisfied that it is necessary--
(i) in the interest of investors, or orderly development of securities
market; or
(ii) to prevent the affairs of any depository or participant being
conducted in the manner detrimental to the interests of investors or
securities market,
it may issue such directions--
(a) to any depository 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
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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 lakh rupees but which which may extend to one lakh rupees
for each day during which such failure continues subject to a maximum
of one crore rupees.
19G. Penalty for contravention where no separate penalty has been
provided.--Whoever fails to comply with any provision of this Act, the
rules or the regulations or bye-laws made or directions issued by the
Board thereunder for which no separate penalty has been provided,
shall be liable to a penalty which shall not be less than one lakh rupees
but which may extend to one crore rupees.
19H. Power to adjudicate.--(1) For the purpose of adjudging under
sections 19A, 19B, 19C, 19D, 19E, 19F, 19FA and 19G, the Board may
appoint any officer not below the rank of a Division Chief of the
Securities and Exchange Board of India to be an adjudicating officer for
holding an inquiry in the prescribed manner after giving any person
concerned a reasonable opportunity of being heard for the purpose of
imposing any penalty.
(2) While holding an inquiry, the adjudicating officer shall have power
to summon and enforce the attendance of any person acquainted with
the facts and circumstances of the case to give evidence or to produce
any document, which in the opinion of the adjudicating officer, may be
useful for or relevant to the subject-matter of the inquiry and if, on
such inquiry, he is satisfied that the person has failed to comply with
the provisions of any of the sections specified in sub-section (1), he
may impose such penalty as he thinks fit in accordance with the
provisions of any of those sections.
(3) The Board may call for and examine the record of any proceedings
under this section and if it considers that the order passed by the
adjudicating officer is erroneous to the extent it is not in the interests of
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the securities market, it may, after making or causing to be made such
inquiry as it deems necessary, pass an order enhancing the quantum of
penalty, if the circumstances of the case so justify:
Provided that no such order shall be passed unless the person
concerned has been given an opportunity of being heard in the matter:
Provided further that nothing contained in this sub-section shall be
applicable after an expiry of a period of three months from the date of
the order passed by the adjudicating officer or disposal of the appeal
under section 23A, whichever is earlier."
51. The provisions of the SEBI (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 delisted equity shares shall be determined by the
valuer having regard to the factors mentioned in regulation 15.
24. Consequences of compulsory delisting:
Where a company has been compulsorily delisted under this Chapter,
the company, its whole time directors, its promoters and the
companies which are promoted by any of them shall not directly or
indirectly access the securities market or seek listing for any equity
shares for a period of ten years from the date of such delisting.
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Recognised stock exchanges to monitor compliance.
29. The respective recognised stock exchanges shall comply with
and monitor compliance with the provisions of these regulations and
shall report to the Board any instance of non-compliance which comes
to their notice."
52. On a plain reading of the relevant provisions of the SEBI Act as
noted above, we do not find any explicit provisions that the 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
is a promoter. Further, none of the provisions postulate such drastic order
to be passed against the promoter which is in the nature of a penalty
without even a notice being furnished to him. Further, on a perusal of
Regulation 98(1)(c) & (d) of the SEBI (LODR) Regulations 2015, it
clearly provides that listed entity or any other person thereof, 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 may be applicable, in coordination with
depositories or any other action as may be specified by the Board from
time to time. Clause (2) of regulation 98 provides that the manner of
revocation of actions specified in clauses (b) and (c) of sub-regulation (1),
shall be as specified in circulars or guidelines issued by the Board.
53. We may observe that on a bare reading of the regulation 98(1), it
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can be seen that the action to freeze the holdings of the
promoter/promoter group can apply only to those holdings of the
promoter in the listed company that has violated the SEBI (LODR)
Regulations. Hence, the action of freezing other shareholdings of the
petitioner cannot be justified. The same is ex facie illegal, unjust and
completely arbitrary.
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
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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 Board of
Directors. None of the respondents have showed any active role of the
petitioner in the capacity of the promoter, in the management of the
company and any role and obligation factually fastened on the petitioner
in the various compliance which are required to be undertaken under the
SEBI (LODR) Regulations, at the time of the freezing of his demat
accounts. It is, therefore, difficult to accept that the listing obligations as
postulated under the SEBI (LODR) Regulations were at all applicable qua
the petitioner, so as to apply Regulation 98(1)(c) in freezing the demat
account of the petitioner. We may observe that in the circumstances in
hand when a basic obligation under the Regulations itself is not conferred
on the promoter of the nature petitioner is, there could not have been a
corresponding duty and a consequent default, attributable for any action
to be taken under Regulation 98.
56. As we are dealing with the freezing of the demat accounts of the
promoter, it would be relevant to consider the definition of the word
'promoter' as defined under clause (za) of Regulation 2 of the Securities
and Exchange Board of India (Issue of Capital and Disclosure
Requirements) Regulations, 2009 which is extracted hereunder:
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"(za) "promoter" includes:
(i) the person or persons who are in control of the issuer;
(ii) the person or persons who are instrumental in the
formulation of a plan or programme pursuant to which
specified securities are offered to public;
(iii) the person or persons named in the offer document as
promoters:
Provided that a director or officer of the issuer or a person, if acting
as such merely in his professional capacity, shall not be deemed as a
promoter:
Provided further that a financial institution, scheduled bank,
foreign portfolio investor other than Category III foreign portfolio
investor and mutual fund shall not be deemed to be a promoter
merely by virtue of the fact that ten per cent. or more of the equity
share capital of the issuer is held by such person;
Provided further that such financial institution, scheduled bank and
foreign portfolio investor other than Category III foreign portfolio
investor shall be treated as promoter for the subsidiaries or
companies promoted by them or for the mutual fund sponsored by
them."
57. It would also be necessary to examine the definition of "promoter"
as defined in the Companies 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)
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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. Proviso to section 2(69) (supra) ordains that the provisions
of sub-clause (c) shall not apply to a person who is acting merely in a
professional capacity.
59. Section 92 of the Companies Act provides for filing of the annual
return. Thus, assuming that the SEBI/BES/NSE intends to justify its
action to take the petitioner as the promoter, it has to look into the last
annual return filed by Shrenuj and its declaration qua the promoters as per
the requirement of Section 92(1)(e). It cannot take a recourse to what was
the position when the company was formed, i.e., in the year 1989. It was
necessary for the SEBI/NSDL to look into the last return as filed by the
company which in the present case would be of the year 2014 to 2016
which is of the period just prior to the default by Shrenuj. By no stretch of
imagination, the first promoters of the company who might have severed
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their interest with Shrenuj could be held to be liable for any subsequent
defaults of Shrenuj.
60. We may also examine the role of promoter insofar as the company
law is concerned. In such context, we may usefully refer to the views of
the learned author A. Ramaiya in his celebrated work "Guide to the
Companies Act" 18th Ed. Vol. 1, when on the role of the promoter, is
described as under :-
The term is not one of law but familiar to the business world. It
points to a person who forms a company and gets it going. It
indicates 'a person who originates the scheme for the formation
of the company, has the Memorandum and Articles prepared,
executed and registered, and finds the first directors, settles the
term of the preliminary contracts and prospectus (if any) and
makes arrangement for advertising and circulating the prospectus
and placing the capital, is emphatically a promoter in the fullest
sense'. He controls the formation and future 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 less a promoter if all or
most of these activities are performed nominally by a company
which he controls.
.......
The question whether a person is or is not a promoter is a
question of fact, depending upon what he really did in
connection with the formation of the company. [ Lydney and
Wigpool Iron Ore Co. v. Bird, (1886) 33 Ch D 85]
.......
A person cannot become a promoter merely because he signed
the memorandum as a subscriber 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.
.......
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... 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 to get it
going, that is who initiates the scheme for the formation of the company,
gets the Memorandum and Articles prepared, executed, and registered,
finds the first directors, settles the term of the preliminary contracts and
prospectus, and arranges for advertising and circulating the prospectus and
placing the capital. The determination of a person's status as a promoter is
contingent upon his actual involvement in the formation of the company
which is a question of fact. Further, the relationship between the promoter
and the company, which is fiduciary, would stand terminated or
discontinued when the Board of Directors take into their hands the affairs
of the company and start governing the company.
62. We may refer to the decision of the Chancery Division in Lydney
and Wigpool Iron Ore Co. Vs. Bird 1 which was a case in regard to the
1 (L.R.)33 Ch.D. 85
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formation of a company and the allegations of a secret commission being
received by a person alleged to be a promoter. While examining the
correctness of the judgment rendered by the trial Court, in appeal it was
held that whether a person is a promoter or not is a question of fact, and it
would depend on the evidence, referring to the decision in Emma Silver
Mining Company V. Grant.2 The Chancery Division considering the
evidence on record held that a person against whom such allegations of
misusing the position as a promoter was made (namely J. Bird in the said
case) was in fact not the promoter of the company but was an agent of one
M/s. Allaway who was a party desirous to prevent a sale of the property
which had applied through its Solicitors one Bird & Co., who were iron
merchants in the city of London, to render them the assistance of which J.
Bird was one of the partners and who had suggested several schemes and
one of the schemes being formation of a company to purchase the
property. The observations of Lindley, L.J. which are of signifcance in the
context of the role of the promoter qua a company read thus:
"Moreover, to say that James Bird was a promoter of the company
and therefore liable to account to it, is calculated to mislead; for the
word 'promoter' is ambiguous, and it is necessary to ascertain in each
case what the so-called promoter really did before his legal liabilities
can be accurately ascertained, and that in every case it is better to
look at the facts and ascertain and describe them as they are."
(emphasis supplied)
2 11 Ch.D. 918
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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 arbitrary and illegal.
64. In C. Thiruvenkatachariar, Official Liquidator of the National Live
Stock Registration Bank Ltd. (in liquidation) vs. A.T. Velu Mudaliar and
Anr.3, one of the questions which the Court was considering was whether
the first respondent - A.T. Velu Mudaliar can be deemed to be a promoter.
3 AIR 1938 Mad 192
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Referring to the decision in Twycross V. Grant4, the Court observed that
Cockburn C. J. defined the word "promoter" as being one who undertakes
to form a Company with reference to a given project, and to set it going,
and to take the necessary steps to accomplish that purpose. It was observed
that other definitions have been given by the learned Judges from time to
time, but it is impossible to define accurately what is meant by the word
"promoter". The Court also discussed the difficulty as pointed out by the
learned author of "Palmer's Company Precedents", to observe that each
case must be decided according to the evidence. It was observed that a
person who has not taken part in the formation or promotion of the
company may be asked to sign the Memorandum as a subscriber for one
or more shares, and as usually happens, would not make him a promoter.
The following observations of the Chief Justice Leach are required to be
noted which read thus:
" I will first discuss the question whether the first respondent can be
deemed to be a promoter. InTwycross v. Grant (1877)2 C.P.D. 469,
Cockburn C.J. defined the word "promoter" as being one who
undertakes to form a Company with reference to a given project, and
to set it going, and to take the necessary steps to accomplish that
purpose. Other definitions have been given by the learned Judges
from time to time, but it is impossible to define accurately what is
meant by the word "promoter". The difficulty is discussed at length by
the learned author of Palmer's Company Precedents at pages 103 to
109. After referring to a number of the more prominent cases, the
learned author observes at page 106:
" It is obvious, therefore, that a person who originates
the scheme for the formation of the Company, has the
memorandum and articles prepared, executed and
registered, and finds the first directors, settles the
4 (1877)2 C.P.D. 469
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terms (if any), and makes arrangements for advertising
and circulating the prospectus and placing the capital,
is emphatically a promoter in the fullest sense. He
controls the formation and future 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 subscribed for 100 shares. There is no evidence
showing that he took any part in discussing the formation of the
Company or in taking any steps to bring the Company into being,
apart from the fact that he signed the Memorandum of Association
and paid for 100 shares. It is not even suggested that he had anything
to do with the drawing up of the Memorandum and Articles of
Association. There is no suggestion that the first respondent had
anything to do with the selection of the Directors or the settlement
of any contract, except the contract under which his firm was to act
as brokers. After the Company had been formed and had started
business the first respondent's firm induced certain people to
subscribe for shares, but it is not alleged that they did anything
before the Company was launched. The minimum subscription was
fixed at 500 shares and the signatories to the Memorandum of
Association themselves subscribed for 1200 shares . In the
Memorandum of Association the only persons referred to as
promoters are V.K. Lakshmana Mudaliar and J.W. Samuel. It comes
to this. The Court is asked to hold the first respondent to be a
promoter because his signature appears at the foot of the
Memorandum and he took 100 shares of the 1200 initially
subscribed. This is a contention which I am unable to accept. The
law requires that there shall be seven signatories to the
Memorandum of Association of a public Company. A person who
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has taken no part in the formation or promotion of the Company
may be asked to sign the Memorandum as a subscriber for one or
more shares, and this usually happens. It was mentioned in the
course of the argument that the money subscribed by the first
respondent for his 100 shares was utilised in defraying part of the
expenses of forming the Company. That may be, but it was a matter
which concerned the directors. The application of the money which
the first respondent paid for his shares was a matter over which he
had no control, and the fact that the money was utilised in paying
the expenses of formation, cannot make him a promoter. The
agreement with the respondents was an agreement which
conscientious directors ought never to have entered into and in
doing so the directors deliberately exceeded their powers. But this, of
course, has nothing to do with the question whether the first
respondent is to be deemed to be a person who took part in the
formation 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
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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/2016/81 September 07, 2016
To
All Listed Entities
All Registered Registrar & Share Transfer Agents
All Depositories
All Recognised Stock Exchanges
Dear Sir/Madam,
Sub: Restrictions on Promoters and Whole - Time Directors of
Compulsorily Delisted Companies Pending Fulfillment of Exit
Offers to the Shareholders
1. In terms of section 21A of the Securities Contracts (Regulation)
Act, 1956 (SCR Act) read with rule 21 of the Securities Contracts
(Regulation) Rules, 1957 and Chapter V of Securities and
Exchange Board of India (Delisting of Equity Shares) Regulations,
2009 ("Delisting Regulations"), a recognised stock exchange may
compulsorily delist the equity shares of a listed company on
certain grounds.
2. In terms of Regulation 24 of the Delisting Regulations, the
company which has been compulsorily delisted, its whole-time
directors, its promoters and the companies promoted by any such
person, shall not directly or indirectly access the securities markets
for a period of ten years from the date of compulsory delisting.
3. Sub-regulation (3) of regulation 23 of the Delisting
Regulations provides that pursuant to compulsory delisting of a
company, the promoter shall acquire delisted equity shares from
the public shareholders, subject to their option of retaining their
equity shares, by paying them the fair value, as dete rmined by the
independent valuer appointed by the concerned recognised stock
exchange.
4. In addition to the restriction imposed under Regulation 24 of
the Delisting Regulations, in order to ensure effective
enforcement of exit option to the public shareholders in case of
compulsory delisting and taking into account the interests of
investors, it is felt necessary to strengthen the regulatory
mechanism in this regard. Accordingly, it is hereby directed that in
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case of such companies whose fair value is positive: -
a. such a company and the depositories shall not effect
transfer, by way of sale, pledge, etc., of any of the equity
shares and corporate benefits like dividend, rights, bonus
shares, split, etc. shall be frozen, for all the equity shares,
held by the promoters / promoter group till the promoters
of such company provide an exit option to the public
shareholders in compliance with sub-regulation (3) of
regulation 23 of the Delisting Regulations, as certified by
the concerned recognized stock exchange;
b. the promoters 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 Manager
Division of Corporate Restructuring
Corporation Finance Department
+91-22-26449373
[email protected]"
(emphasis supplied)
----------------------------**************------------------------
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"CIRCULAR
SEBI/HO/CFD/CMD/CIR/P/2016/116 October 26, 2016
To
All the Recognized Stock Exchanges
All Depositories
Dear Sir/Madam,
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 Requirements) Regulations, 2015
("Listing Regulations") and Standard Operating Procedure for
suspension and revocation of trading of specified securities.
2. It has been observed that some of the non-compliant listed
entities have not paid the fines levied by the recognized stock
exchange(s). In order to ensure effective enforcement, it has been
decided in consultation with recognized stock exchanges to freeze
the holdings of their promoters and promoter group entities in
the manner specified below:
2.1. Where a non-compliant listed entity fails to pay fine
levied as per the notice issued by the concerned
recognized stock exchange in terms of paragraph 4 of
Annexure I of the aforesaid circular, the concerned
recognized stock exchange shall, upon expiry of the
period indicated in the notice issued by it, freeze
holdings in other securities in the demat accounts of
promoter and promoter group to the extent of liability
which shall be calculated on a quarterly basis.
2.2. In case of non-compliance for two consecutive
periods, and failure to comply with the notice issued by
the concerned recognized stock exchange as per
paragraph 3 of Annexure II of the aforesaid circular, as
per the current practice, the concerned recognized stock
exchange shall forthwith intimate the depositories to
freeze the entire shareholding of the promoter and
promoter group in such listed entity. 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
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the extent of liability which shall be calculated on a
quarterly basis.
2.3. While freezing the holdings as per paragraphs 2.1
and 2.2 above, 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 (Listing Obligations and Disclosure Requirements)
Regulations, 2015.
9. This circular is available on SEBI website at www.sebi.gov.in
under the categories "Legal Framework" and "Continuous
Disclosure Requirements".
Yours faithfully,
Prasanta Mahapatra
General Manager
Compliance and Monitoring Division
Corporation Finance Department
[email protected]"
(emphasis supplied)
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67. Thus, even under the aforesaid Circular dated 7 September 2016
does not contemplate freezing of the demat account of the prmoter in the
manner as resorted qua the petitioner. Further also the circular dated 26
October 2016, in paragraph 2.2, it is 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.
68. We may also observe that there can be no two opinions, that an
action to freeze the petitioner's Demat account is an action entailing
drastic civil consequences. The shares, subject matter of such account, are
the property of the petitioner. Any coercive action in respect of one's
property is required to be taken in accordance with law and after
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complying with the basic principles of natural justice. 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.
69. This apart, insofar 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
-------------------------
sebi-wp-1590-21 24-8-24 final (2).odt
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 to freeze the demat account is required to be traced in the
substantive law, namely, under the SEBI Act. We are not shown any
specific power as conferred on the SEBI under the SEBI Act which would
confer any authority to freeze the demat account of the promoter qua the
shares held by him of a company other than of the defaulting company of
which he is a promoter or any other office bearer. Even assuming that
there is some power in the Regulations, the Regulations cannot override
the substantive provisions of law and/or have any provision which itself is
not recognized by the substantive law i.e. SEBI Act. The position in
respect of a circular would be still worse, as the circular cannot provide
anything which is not provided in the substantive law and the regulations.
71. 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.
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72. There is another facet which also needs to be commented that the
freezing of the petitioner's demat account as set out in the reply affidavit
filed on behalf of SEBI, is regarded inter alia to be in the nature of a
penalty/fine, as also seen from the letter dated 2 March 2017 (supra),
addressed by the BSE to Shrenuj, and it is for defalut of Shrenuj, the
petitioner is being penalised by the impugned action. Insofar as the
applicability of the principles of law is concerned, it would not make much
difference as to whether what is sought to be recovered from the petitioner
is penalty or fine. The reason for this being that a penalty would include
fine. A categorical stand is taken on behalf of the SEBI/BSE that a
penalty / fine being imposed on Shrenuj is sought to be recovered by the
impugned action of the freezing of the petitioner's demat account. It
would be appropriate to note the jurisprudential meaning attributed to the
terms 'penalty' and 'fine' and in the present context. We may usefully refer
to the following extract from Advanced Law Lexicon of P. Ramanatha
Aiyar, 3rd Edition, when the learned author distinguished 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"
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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.5, 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. and the amount of penalty it prescribes at
different amounts as set out in clause (a), (b) and (c). However, for
imposing of such penalty, the provisions of Section 15-I of the SEBI Act
stand attracted for an adjudication by an adjudicating officer, by a
procedure under Section 15-I and 15-J of the SEBI Act.
75. These provisions also become significant as it is a contention as
urged on behalf of SEBI that the petitioner's demat account is freezed as a
penalty for non-compliance of the regulations by the company. It is also
SEBI's contention that it is of no consequence whether the petitioner is
part of the management of Shrenuj as the same is not the criteria for
5 (1996) 2 SCC 471
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actions prescribed under the impugned circulars and the SEBI (LODR)
Regulations, for non-compliance. In this context, as noted above, learned
Counsel for the petitioner has vehemently argued that there are gross
irregularities of the SEBI when he argues it to be a kind of scam, that the
SEBI is acting in breach of the provisions of section 15JA of the SEBI act,
inasmuch as the amounts realised by way of penalties under the Act are
not being credited to the Consolidated Fund of India and in fact such
amounts are received as income of the SEBI on which GST and TDS is
being deducted. If this be so, and if the provisions of the section 15JA of
the SEBI Act mandate that the sums realised by way of penalties under the
Act shall be credited to the Consolidated Fund of India, as to whether
strict adherence to the same and to similar provisions in the other relevant
statutes are being complied by the SEBI or not is to be looked into by the
concerned Ministry of the Government of India considering the
overarching revenue interest of the Central Government.
76. If that be so, any action to impose/levy a penalty can be resorted
after following due procedure in law as the nature of the action itself is a
penalty. It is well settled that a penalty cannot be imposed, unless the
procedure known to law is followed, namely, issuance of show cause
notice, inviting reply on show cause notice and thereafter an opportunity
of hearing being accorded and a final decision is taken, if law permits in
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sebi-wp-1590-21 24-8-24 final (2).odt
case of penalty. The present case has wholly discarded any of such norms
of legitimacy which is required to be followed in passing an order to freeze
the demat account of the petitioner. If it is in the nature of penalty or even
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. The Supreme Court in Mohinder Singh Gill & Anr. vs. The
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Chief Election Commissioner, New Delhi & Ors. 6 held that 'civil
consequences' cover infraction of not merely property or personal rights
but of civil liberties, material deprivations, and non-pecuniary damages.
The relevant observations read thus:
"66. It was argued, based on rulings relating to natural jus-
tice, that unless civil consequences ensued, hearing was not nec-
essary. A civil right being adversely affected is a sine qua non for
the invocation of the audi alteram partem rule. This submission
was supported by observations in Ram Gopal [Ram Gopal
Chaturvedi v. State of M.P., (1969) 2 SCC 240 : (1970) 1 SCR
472], Col. Sinha [Union of India v. Col. J.N. Sinha, (1970) 2
SCC 458 : (1971) 1 SCR 791] . Of course, we agree that if only
spiritual censure is the penalty, temporal laws may not take cog-
nizance of such consequences since human law operates in the
material field although its vitality vicariously depends on its
morality. But what is a civil consequence, let us ask ourselves, by-
passing verbal booby-traps? 'Civil consequences' undoubtedly
cover infraction of not merely property or personal rights but of
civil liberties, material deprivations and non-pecuniary damages.
In its comprehensive connotation, everything that affects a citi-
zen in his civil life inflicts a civil consequence. "Civil" is defined
by Black (Law Dictionary, 4th Edn.) at p. 311:
"Ordinarily, pertaining or appropriate to a member of a civitas
of free political community; natural or proper to a citizen.
Also, relating to the community, or to the policy and govern-
ment of the citizens and subjects of a state.
The word is derived from the Latin civilis, a citizen .... In law,
it has various significations.
***
'Civil Rights' are such as belong to every citizen of the State or
country, or, in a wider sense, to all its inhabitants, and are not
connected with the organisation or administration of Govern-
ment. They include the rights of property, marriage, protec-
tion by the laws, freedom of contract, trial by jury etc.... Or, as
otherwise defined, civil rights are rights appertaining to a per-
son in virtue of his citizenship in a State or community. Rights
capable of being enforced or redressed in a civil action. Also a
term applied to certain rights secured to citizens of the United
States by the thirteenth and fourteenth amendments to the
Constitution, and by various acts of Congress made in pur-
suance thereof.
6 AIR 1978 SC 851.
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(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 Gov-
ernment, 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 citi-
zenry, 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 returned
and until then it is incipient, inchoate and intangible for legal as-
sertion -- in the twilight zone of expectancy, as it were. This too,
in our view, is logicid sophistry. Our system of "ordered" rights
cannot disclaim cognizance of orderly processes as the right
means to a right end. Our jurisprudence is not so jejune as to ig-
nore the concern with means as with the end, with the journey as
with the destination. Every candidate, to put it cryptically, has an
interest or right to fair and free and legally run election. To draw
lots and decide who wins, if announced as the electoral method-
ology, affects his right, apart from his luckless rejection at the
end. A vested interest in the prescribed process is a processual
right, actionable if breached, the Constitution permitting. What
is inchoate, viewed from the end, may be complete, viewed mid-
stream. It is a subtle fallacy to confuse between the two. Victory is
still an expectation; qua mado is a right to the statutory proce-
dure. The appellant has a right to have the election conducted
not according to humour or hubris but according to law and jus-
tice. And so natural justice cannot be stumped out on this score.
In the region of public law locus standi and person aggrieved,
right and interest have a broader import. But, in the present case,
the Election Commission contends that a hearing has been given
although the appellant retorts that a vacuous meeting where
nothing was disclosed and he was summarily told off would be
strange electoral justice. We express no opinion on the factum or
adequacy of the hearing but hold that where a candidate has
reached the end of the battle and the whole poll is upset, he has a
right to notice and to be heard, the quantum and quality being
conditioned by the concatenation of circumstances."
79. Referring to the aforesaid decision, the Supreme Court in State
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Bank of India & Ors. vs. Rajesh Agarwal & Ors.7 on challenge to Master
Directions on Fraud issued by Reserve Bank of India, the Supreme Court
observed thus:
"32. .........It is now a settled principle of law that the rule of
audi alteram partem applies to administrative actions, apart from
judicial and quasi-judicial functions. It is also a settled position in
administrative law that it is mandatory to provide for an
opportunity of being heard when an administrative action results
in civil consequences 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 a nullity. That is a basic concept of the rule of law and
importance thereof transcends the significance of a decision in
any particular case."
34. In Maneka Gandhi v. Union of India, a seven-judge bench of
this court held that any person prejudicially affected by a decision
of the authority entailing civil consequences must be given an
opportunity of being heard. This has been reiterated in a catena
of decisions of this Court. In view of the settled position of law,
the next question that arises before us is the scope and definition
of the phrase 'civil consequences'.
35. In Mohinder Singh Gill v. Chief Election Commissioner,
New Delhi, a Constitution Bench of this Court held that 'civil
consequences' cover infraction of not merely property or personal
7 (2023) 6 SCC 1.
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rights but of civil liberties, material deprivations, and non-
pecuniary damages. In that case, the Court held that denial of a
democratic right to cast a vote inflicts civil consequences. In D K
Yadav v. J M A Industries, a three-judge bench of this Court
observed that "everything that affects a citizen in his civil life
inflicts a civil consequence."
36. In Canara Bank v. V K Awasthy, a two-judge bench of this
Court succinctly summarized the history, scope, and application
of the principles of natural justice to administrative actions
involving civil consequences in the following terms:
"14. Concept of natural justice has undergone a great deal of
change in recent years. Rules of natural justice are not rules
embodied always expressly in a statute or in rules framed
thereunder. They may be implied from the nature of the duty
to be performed under a statute. What particular rule of
natural justice should be implied and what its context should
be in a given case must depend to a great extent on the fact
and circumstances of that case, the framework of the statute
under which the enquiry is held. The old distinction between
a judicial act and an administrative act has withered away.
Even an administrative order which involves civil
consequences must be consistent with the rules of natural
justice. The expression "civil consequences" encompasses
infraction of not merely property or personal rights but of civil
liberties, material deprivations and non-pecuniary damages. In
its wide umbrella comes everything that affects a citizen in his
civil life."
There is a consistent pattern of judicial thought that 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
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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. Section 19F provides for penalty for failure to comply with
directions issued by Board under Section 19 of the Act. Section 19G
provides for penalty for contravention where no separate penalty has been
provided. However, what is significant is that for a penalty to be imposed
under the provisions of Section 19F and 19G, a power to adjudicate under
Section 19H has been conferred on the Adjudicating Officer as provided
for under Section 19H of the Depositories Act. Section 19-I provides for
factors to be taken into account while adjudging quantum of penalty.
Section 19-IB provides for recovery of amounts if a person fails to pay
penalty imposed under the Act or fails to comply with the directions of
disgorgement order issued under Section 19 or fails to pay any fees due to
the Board and the manner the same can be executed. Section 19J provides
for crediting sums realised by way of penalties to Consolidated Fund of
India. All these provisions appear to have been completely overlooked in
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resorting to the impugned action as taken against the petitioner. Thus,
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.
81. However, what actually pains us is when the statutory complexion
of what could be the respective powers to be exercised by the depositories,
by the Stock Exchange(s) and ultimately by the SEBI are within the well
defined spheres as envisaged by the respective statutes, which we have
noted hereinabove, the SEBI as also the Stock Exchanges nonetheless have
justified the actions being taken against the petitioner, when the same are
not supported under the framework of any of laws as we have noted
hereinabove. The petitioner who is a senior citizen for no fault of his, has
severely suffered since the year 2017 as his entire shareholdings as
maintained in the demat account could 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
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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, listing of securities and for penalties and
procedure. Section 9 which provides for power of recognized stock
exchanges to make bye-laws, is relied on behalf of the respondents
and more particularly Section 9(2)(o), which provides that the
stock exchange would be empowered to make bye-laws in regard to
levy and recovery of fees, fines and penalties. The power to levy
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penalty is required to be exercised by following the due process of
law which is explicit in the provisions of section 23-I, namely, to
adjudicate issues under section 23-A to 23-H. It is difficult to
accept that such powers as conferred under SCR Act can at all be
found to be relevant in the context of the present proceedings
authorizing the Stock Exchanges to freeze the demat account of the
petitioner on the ground that he was the promoter.
(ii) In the context of SEBI Act as noted above, we do not find
that any of the powers read with the regulations, which we have
discussed hereinabove confer any jurisdiction on the Stock
Exchanges to recover any amounts by way of penalty or fine from
the promoter without examining as to whether the person becomes
liable to discharge any of the obligations of a promoter in a given
case and more particularly, in the light of the provisions of Section
92 of the Companies Act providing for annual returns and
appropriate disclosure in respect of the existing and recognized
promoters the fact situation postulates.
(iii) The SEBI (Delisting of E quity Shares) Regulations, 2009 are
also referred on behalf of the respondents to justify the action
under Chapter V providing for "Compulsory Delisting". The
reply affidavit has referred to Regulation 23, which deals with
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"Rights of public shareholders in case of a compulsory delisting".
We have noted Regulation 23(3) as relied by the respondents,
which provides that 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. Certainly, no obligation of this nature
appears to have been crystallized in a manner known to law qua the
petitioner. Thus, such obligation cannot be fastened on the
petitioner by an action of freezing the petitioner's demat accounts.
If such an obligation is to be enforced, there are several facts which
would be required to be taken into consideration to determine 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
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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
recovered was a permissible penalty.
83. Thus 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.
84. 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.
85. The petitioner is a senior citizen. Considering the nature of the
illegality foisted on him, the petitioner has made a prayer (prayer clause F)
for a direction to respondent nos. 3 and 4 to pay compensation of Rs.1
crore each, i.e., totaling to Rs.2 crores to be paid to the petitioner for
freezing of his demat account illegally and for preventing him from
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trading in shares, in view of our aforesaid discussion. We see a valid
justification for the petitioner to make such prayer. The petitioner has
certainly suffered such illegality and for a long period of six years, which
has prevented him from operating his demat account and dealing with the
shares held by him other than of Shrenuj. The petitioner has categorically
averred that looking at his age, the funds were to be utilized by him for his
retirement. We would not expect any person to suffer in such manner and
that too in a high-handed and arbitrary manner as in the present case. As
noted hereinabove, we are of the clear opinion that BSE/NSE as also SEBI
has clearly failed to discharge their duties and to act in accordance with law
so as to deprive the petitioner of his shares in the demat account held by
him which certainly, in our opinion, is an infringement of petitioner's
right guaranteed under Articles 14, 21 and 300A of the Constitution. Any
casual approach to such infringement certainly would not be an acceptable
approach and in fact would strengthen the hands of these authorities to
repeat such illegalities. In fact if we fail to impose costs, it would amount
to putting a premium on such illegality of these respondents. In these
circumstances, although we are not inclined to grant an amount of Rs.2
crores as compensation / cost in favour of the petitioner, we are inclined to
award an amount of Rs.30 lakhs to be paid to the petitioner by
BSE/NSE/SEBI, which shall be jointly paid. This also for the reason that
breach of constitutional rights as noted by us is certainly a serious affair
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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 communciations 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 event, the Government of India is of the
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opinion that such funds which need to be deposited in the
Consolidated Fund of India, it is for the Government of India to
take appropriate action. We leave such issue to be considered by the
Government of India at the appropriate level.
(v) Having regard to our discussion and conclusion, we keep
open all issues of law on the challenge raised by the petitioner to the
legality of the statutory regulations.
(vi) The petition stands allowed in the aforesaid terms.
87. At this stage, learned counsel for respondent no. 4 seeks stay of the
aforesaid order as passed by us. Considering the glaring and gross facts of
the case, we reject the prayer to stay our order.
Writ Petition No. 2228 of 2021 (Neil Pradeep Mehta vs. UOI & Ors.)
88. In this petition, the petitioner is the son of Dr. Pradeep Mehta, the
petitioner in the aforesaid Writ Petition, whose petition has been allowed
in terms of our aforesaid judgment/order.
89. In our opinion, this is a gross case and more particularly considering
that the petitioner in this petition was not the promoter of Shrenuj and
merely for the reason that he held a demat account along with his father
Dr. Pradeep Mehta, who was the second holder. The demat account of the
petitioner has been freezed by the impugned order.
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90. The relevant facts in relation to this petition need to be noted:
The petitioner is a non-resident Indian currently residing in
Singapore. He is also an angel investor investing in promising start-ups in
India. In 2014, petitioner opened a NRO account and a demat account
through HDFC Bank Ltd. and for logistical reasons of a local address and
mobile number, the bank suggested adding the petitioner's father - Dr.
Pradeep Mehta as a second holder to his Demat account.
91. It is the petitioner's case that in July 2018, the petitioner found that
his demat account was frozen without any notice or intimation to him. On
inquiring with HDFC Bank, the petitioner was handed over letters dated
10 July 2018 and 8 August 2018 addressed by respondent no. 5 - NSDL
to HDFC Bank informing the Bank to freeze the demat account of the
petitioner in which it was stated that in accordance with SEBI Circular No.
SEBI/HO/CFD/DCR/CIR/P/2016/81 dated 7 September 2016 and based
on the PANs of Promoters/Promoter Group of compulsorily delisted
companies as received from BSE, the mentioned 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
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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 number for sending OTPs, having a local
address for communication, etc. and as the petitioner's wife is also a NRI,
he was constrained to add his father as a second holder. He stated that all
the investments made by the petitioner in shares of the Indian Companies
as held in his demat account are from his funds repatriated from overseas.
The petitioner stated that he was unable to trade on his demat account was
freezed.
94. BSE replied to such letter of the petitioner by an e-mail dated 24
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October 2019 stating that since the petitioner is a joint holder with Mr.
Pradeep Mehta (promoter of Shrenuj and Company which was
compulsorily delisted from the Exchange w.e.f. 4 July 2018), hence, his
request for defreezing of his demat account cannot be accepted. On the
said reply being received by the petitioner from BSE, the petitioner
addressed a detailed letter dated 21 April 2021 to the SEBI stating that he
was never a promoter or director in the delisted entity and the fact that
freezing power itself is illegal and goes against the basic statute of
Companies Act. The petitioner also addressed a letter dated 18 May 2021
to the respondent no. 1 pointing out that the arbitrary and illegal acts of
the Securities Regulator and the service providers is also causing loss to the
Government of India and diverting investments coming to India.
95. The petitioner has contended that his father is a practicing
gynecologist with about 40 years of practice and even if he was to be
branded as a 'promoter' of Shrenuj, merely because of his investments into
his father in law's company as a shareholder, his father was never a
promoter or director of the listed entity. It is in these circumstances, the
petitioner had prayed for defreezing of his demat account.
96. We may observe that surprisingly the stand of the respondents -
SEBI, BSE and NSE is not different from what is taken in the aforesaid
writ petition of his father Dr. Mehta. In fact, the reply affidavits are
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identical to the first petition.
97. We have heard learned counsel for the parties. We have also
perused the record on this petition. There is much substance in the
contentions as urged on behalf of the petitioner that the impugned action
in the present case crosses all boundaries of legitimacy, reasonableness,
fairness, being the principles the statutory bodies like SEBI, BSE and NSE
are required to adher being governed 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
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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 Shrenuj, merely for the reason his father Dr.
Pradeep Mehta happened to be the second holder in his demat account, as
detected by the BSE/NSE so as to consider the petitioner's demat account
to be relevant for any penalty and fine payable by Shrenuj.
100. In our opinion, the present case is more gross and is a classic
example of high-handed action and a reckless action to freeze the demat
account of the petitioner. There is patent non-application of mind by any
of these authorities, who are statutorily governed in resorting to take such
drastic action. This apart, even the elementary principles of natural justice
of a fair opportunity of calling upon the petitioner to show cause, a
hearing and appropriate order to be passed have been thrown to the winds.
This is certainly not the manner or method in which the rule of law would
mandate these respondents to act.
101. The petitioner has suffered at the hands of respondents for these
many years. He has lost valuable trading opportunities and to deal with
his property as entitled to him under Article 300A of the Constitution of
India. It is not only painful but extremely shocking that such actions can
nonetheless be defended by the respondents considering the gross facts
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and circumstances of the case which would stare at them. There is not a
semblance of reason for such action to be taken against the petitioner. We
may also observe that the actions and cundect of the BSE / NSE and SEBI
as the law mandates is to protect the interest of the investors. In the
present case these statutory bodies have totally acted contratry to such
norms. In fact the impugned actions of these respondents when taken
against a person like the petitioner is also likely to shake the confidence of
investors who are non residents Indian. This is certainly not what can be
expected from the conduct of these entities. The duty to safeguard the
investor's sentiments and confidence is paramount which stand breached
in every possible manner in the present case.
102. We may observe that all our reasons as set out in the aforesaid
judgment more particularly on law become applicable in the facts of the
present case.
103. In the light of the above discussion and on the reasoning as
contained in our aforesaid judgment in the case of Dr. Pradeep Mehta
(petitioner's father), we are inclined to unhesitantly allow this petition,
however, considering the severity and the gross illegality of the actions we
will be failing in our duty as a writ Court if we do not impose a substantive
costs to be awarded in favour of the petitioner. We accordingly allow the
writ petition by the following order:
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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.50 lakhs within a period of two weeks from
today.
(iv) The petition stands allowed in the aforesaid terms.
104. Learned counsel for the SEBI and BSE have prayed for stay of the
order. Considering the facts of the case, instantly we have no hesitation in
rejecting such request.
(FIRDOSH P. POONIWALLA, J.) (G. S. KULKARNI, J.)
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