Bombay High Court slaps ₹80 lakh costs on SEBI, NSE, BSE for illegal freezing of demat accounts

The Bombay High Court, on Monday imposed cost of ₹80 lakh on the Securities and Exchange Board of India (SEBI), the Bombay Stock Exchange (BSE), and the National Stock Exchange (NSE) for the unlawful freezing of demat accounts belonging to Dr. Pradeep Mehta and his son, Neil Pradeep Mehta. [Dr Pradeep Mehta v. Union of India and Ors].A bench of Justices GS Kulkarni and Firdosh P Pooniwalla declared the actions against the father-son duo as "illegal and invalid" on grounds of severe procedural flaws and violations of constitutional rights.The bench while ordering the de-freezing observed, “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. 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.”.Dr. Pradeep Mehta, a medical practitioner, and his son Neil Pradeep Mehta had their demat accounts frozen following SEBI’s directives aimed at promoters of Shrenuj & Company Limited, a company that had been declared non-compliant. Dr. Mehta’s demat accounts were frozen by the National Securities Depository Limited (NSDL) in March and April 2017. The freezing was based on SEBI Circulars mandating such actions against promoters of companies that failed to comply with regulatory requirements.The company's non-compliance stemmed from its failure to submit financial results for the quarter ended December 2016, as required under SEBI’s Listing Obligations and Disclosure Requirements (LODR) Regulations. This non-compliance led to a fine imposed by BSE and further regulatory actions..Dr. Mehta challenged the freezing of his accounts on the grounds that he had no role in Shrenuj’s management, was a minority shareholder, and had no influence over the company’s operations. Neil Pradeep Mehta, who resides in Singapore, was similarly affected despite being a minor at the time of his father's involvement with Shrenuj..The court's judgement, delivered by Justice GS Kulkarni and Justice Firdosh P Pooniwalla underscored that the regulatory actions taken against the petitioners were excessive and violated their constitutional rights. “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 of 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,” the Court said..The judgment also highlighted the severe impact on the petitioners, particularly Dr. Mehta, who had invested in these shares as part of his retirement plan. “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. 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,” the Court noted..Subsequently, the Court ordered SEBI, BSE, and NSE to jointly pay ₹80 lakh in compensation to the petitioners—₹50 lakh to Neil Pradeep Mehta and ₹30 lakh to Dr. Pradeep Mehta.In fact, not imposing costs under these circumstances would amount to putting a premium on such illegality of these respondents, the Court opined.Additionally, the Court directed the immediate unfreezing of all shares held by the petitioners in their demat accounts..Advocates Yeshwant Shenoy, Navneetha Krishnan, Krishnan T, Pooja Singh appeared for the petitioner.Advocate Parag A Vyas appeared for Union of India.Advocate Suraj Choudhary with advocates Omprakash Jha and Atul Agrawal appeared for SEBI. Advocate Sarnaab Aswad of Khaitan & Co represented BSE Ltd. Senior Advocate Pradeep Sancheti along with advocate Ranjeev Carvalho, and advocates Sachin Chandarana, Aagam Mehta and Amol Rasal of Manilal Ambalal & Co appeared for National Stock Exchange of India.Advocate Aparna Wagle of Alliance Law represented Central Depository Service (India) Limited.Advocates Kunal Katariya, Pulkit Sukhramani, Vidhi Jhawar, Shourya J Tanay, Deepank Annand of JSA Advocates and Solicitors appeared for NSDL. .[Read Judgment]