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2024 Supreme(Online)(SEBI) 40
SECURITIES AND EXCHANGE BOARD OF INDIA
G. S. Kulkarni, Firdosh P. Pooniwalla, JJ
Dr. Pradeep Mehta – Appellant
Versus
Union of India – Respondent
Writ Petition No. 1590 of 2021 | Writ Petition No. 2228 of 2021
For the Respondents:Mr. Parag A. Vyas, Mr. Suraj Choudhary, Mr. Omprakash Jha, Mr. Atul Agrawal i/b. The Law Point, Ms. Sarnaab Aswad i/b. Khaitan & Co., Mr. Pradeep Sancheti, Mr. Ranjeev Carvalho, Mr. Sachin Chandarana, Mr. Aagam Mehta, Mr. Amol Rasal i/b. Manilal Ambalal & Co., Ms. Aparna Wagle i/b. Alliance Law, Mr. Kunal Katariya, Mr. Pulkit Sukhramani, Ms. Vidhi Jhawar, Mr. Shourya J. Tanay, Mr. Deepank Annand i/b. JSA Advocates and Solicitors
The freezing of a promoter's demat account requires statutory basis and adherence to due process; actions taken without notice are legally invalid.
Headnote:(A) Constitution of India - Articles 14, 21, 300A - Securities and Exchange Board of India Act, 1992 - Sections 11, 11A, and 30 - Writ petitions challenging the freezing of demat accounts are upheld; action deemed illegal and arbitrary without due process of law. The petitioner, a promoter solely by historical association, demonstrated no active involvement in the company's management. SEBI’s actions were governed by circulars without statutory backing and violated principles of natural justice, as no notice was provided prior to account freezing. The court ruled that such measures could not be taken against a promoter without demonstrating continued responsibility for corporate compliance. Consequently, respondents ordered to pay Rs.30 lakhs as compensation for unjust actions affecting the petitioner's civil rights. (Paras 1, 45, 84)
| Table of Content |
|---|
| 1. challenge against freezing demat accounts (Para 1 , 2 , 3 , 4) |
| 2. non-compliance leading to penalties (Para 5 , 8 , 18) |
| 3. argument of procedural infringement by sebi (Para 6 , 10 , 26 , 28) |
| 4. respondents' basis for actions impacting demat accounts (Para 12 , 17 , 20 , 21) |
| 5. court's observations on legality of actions (Para 45 , 54 , 70) |
| 6. final ruling and consequences of illegal actions (Para 84 , 102) |
| 7. conclusion and monetary relief awarded (Para 86 , 104) |
JUDGMENT:
(Per G. S. Kulkarni, J.)
1. These are two petitions filed under Article 226 of the Constitution of India. The reliefs prayed for are quite similar, which pertain to challenging the action of the Bombay Stock Exchange and the National Stock Exchange under the directives of the Securities and Exchange Board of India (SEBI) to freeze the Demat Accounts of the Petitioner. The first Petition No.1590 of 2021 is filed by Dr. Pradeep Mehta and the second Petition (Writ Petition No.2228 of 2021) is filed by his son Neil Pradeep Mehta. We proceed to adjudicate each of these Petition as under. Writ Petition No.1590 of 2021 (Dr. Pradeep Mehta v/s. Union of India).
2. The challenge raised in the petition is to the freezing of the “demat account” of the petitioner by the respondent no. 6 – National Securities Depository Limited (for short “NSDL”) under the regulations / orders of the Securities and Exchange Board of India (for short “SEBI”) merely for the reason that at one time petitioner happened to be one of the promoters of a company. The case of the petitioner is that 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 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 ha
