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IN THE HIGH COURT AT CALCUTTA
SABYASACHI BHATTACHARYYA, J.
Mihir Mohan Pyne and Another – Petitioners
Versus
The Calcutta Stock Exchange Limited and Others – Respondents
WPO No. 176 of 2024
Decided On : 15-05-2024
Regulation - Freezing of Demat Accounts - SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015; SEBI (Delisting of Equity Shares) Regulations, 2021 - The court found that the freezing of Demat Accounts was unlawful due to non-compliance with procedural requirements outlined in the SEBI Circular.
Fact of the Case:
The petitioners, part of the promoter group of a listed company, challenged the freezing of their Demat Accounts by the Calcutta Stock Exchange due to alleged non-compliance with listing regulations.
Finding of the Court:
The court determined that the freezing of the Demat Accounts was unlawful as the required notice to the promoters was not issued prior to the action, despite other procedural steps being followed.
Issues: Whether the freezing of the petitioners' Demat Accounts was lawful given the procedural requirements set forth in the SEBI regulations and circulars.
Ratio Decidendi: The court held that the failure to issue a notice to the promoters before freezing the Demat Accounts constituted a violation of the procedural requirements, rendering the action unlawful.
Result: The court allowed the writ petition, setting aside the notice to freeze the Demat Accounts.
Key Points: - The court held that the freezing of the Demat Accounts was unlawful because the required notice to the promoters was not issued prior to the action (!) . - Annexure-I of the SEBI Circular dated January 22, 2020 prescribes a two-step notice process: first to the non-compliant entity, then to the promoters within ten days for compliance, before freezing (!) (!) (!) . - The decision sets aside the January 1, 2024 freezing notices and related emails, while allowing the respondent to issue a second-limb notice to promoters to ensure compliance and potential fines (!) (!) (!) . - The case confirms that procedural compliance and a reasoned procedure are required, even where non-compliance by a listed entity is established (!) (!) . - The Circular 2020 and Regulations empower the CSE to act against promoter/promoter group holdings in coordination with depositories, but only after proper notices are issued (!) (!) . - The court notes that no delisting had commenced and thus no panel under Section 32 of the 2021 Regulations was required at the time (!) . - The petitioners’ promoters’ holdings being joint accounts were encompassed under the freezing power when applicable per Regulations 98 and 98(1)(c) (!) . - The judgment leaves open the possibility of fresh action if the second-limb notices are issued and fines paid within ten days (!) (!) . - The decision states there will be no costs order in this petition (!) .
JUDGMENT :
SABYASACHI BHATTACHARYYA, J.
1. The petitioner no. 1 is one of the directors of the proforma respondent no. 5-Company that is Camperdown Pressing Co. Ltd and the petitioner no. 2 is his wife. Admittedly, the petitioner no. 1 forms a part of the “promoter group” as defined under regulation 2(1)(w) of the Securities and Exchange Board of India (SEBI) (Listing Obligations and Disclosure Requirements) Regulations, 2015 (for short, “the 2015 Regulations”) and the family of the petitioners control the management and affairs of the proforma respondent no. 5-Company.
2. The present writ petition has been preferred against the act of the respondent no. 1, the Calcutta Stock Exchange (CSE) in freezing the Demat Accounts of the petitioners.
3. Learned counsel appearing for the petitioners takes the court through the provisions of Section 98 of the 2015 Regulations, Chapter V of SEBI (Delisting of Equity Shares) Regulations, 2021 (hereinafter referred to as the “2021 Regulations’’) and Circular No. SEBI/HO/CFD/CMD/CIR/P/2020/12 dated January 22, 2020.
4. It is argued that the petitioner is a listed entity under Section 2(1)(p) of the 2015 Regulations.
5. Section 98 of the same provides the actions to be taken by the respective stock exchanges in the manner specified in circulars or guidelines issued by the Board if a listed entity of any other person thereof contravenes the provisions of the Regulations. Under Clause 1(c), freezing of promoter/promoter group holding of designated securities, as may be applicable, in coordination with depositories, is also contemplated.
6. It is argued that a perusal of the said provisions and the listing agreement of the proforma respondent no. 5-Company dated February 19, 1968 will show that the designated securities of the company were 4300 ordinary shares. The Circular of 2020, issued in aid of the 2015 Regulations, lays down the action to be adopted in case of non-compliance with the Listing Regulations. Annexure-I thereof, at Clauses 5 and 6, mandates certain steps, including issuance of notice upon the non-compliant entity within thirty days of the due date of submission of information and, upon continuance of non-compliance, issuance of notice upon the promoter(s) seeking compliance within ten days thereof. Only upon expiry of the stipulated period, the depositories can be intimated to freeze the entire shareholding and Demat Accounts of the promoters.
7. No such notice, it is argued, was given at least to petitioner no. 1, nor was the guidelines as mandated in the Circular of 2020 complied with.
8. Again, Section 32 of Chapter V of the 2021 Regulations mandates the procedure for compulsory delisting of equity shares of a company which mandates a reasoned order to be passed by a panel constituted by the Stock Exchange as per the said Regulations. It is argued that no such panel has been shown to have been constituted in the present case. Moreover, in paragraph no. 9 at page 15 of the affidavit-in-opposition, the CSE asserts that no delisting of the designated securities of the proforma respondent no. 5-Company has been done. Hence, it is argued that the respondent acted in clear deviation of the 2021 Regulations.
9. The issuance of the impugned notice in respect of freezing of the Demat Accounts of the petitioners is thus illegal.
10. Learned counsel for the respondent no. 1/CSE controverts the arguments of the petitioners. It is argued that, in view of the violation and defaults/non-compliances of the 2015 Regulations by the proforma respondent no. 5-Company, the CSE issued the first notice on November 9, 2023 annexed at page 24 of the affidavit-in-opposition, calling upon the company to comply with the requisite listing obligations and disclosure requirements, failing which, it was indicated, the CSE would be constrained to initiate appropriate proceedings in terms of Section 32 of the 2021 Regulations.
11. Due to persistent refusal/failure of the company and its directors/promoters to take approp
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