The Bombay High Court has recently ruled that the freezing of demat accounts by the Bombay Stock Exchange (BSE), the National Stock Exchange (NSE), and the Securities and Exchange Board of India (SEBI) was illegal.
In Writ Petition No. 1590 of 2021, the petitioner, Pradeep Mehta, a senior citizen and medical professional, challenged the freezing of his demat accounts. The freezing was executed in connection with alleged non-compliance by Shrenuj and Company Limited, a company in which the petitioner held shares since 1989. Despite being listed as a promoter at the time of the company’s formation, the petitioner had no involvement in its management or operations for many years prior to the freezing action. The court found that the action taken against the petitioner was not only procedurally flawed but also substantively unjustified. The court noted that the demat accounts were frozen without notice or opportunity for a hearing, in clear violation of the principles of natural justice. The court’s analysis focused on Sections 11, 15-A, 15-I, 15-J, 15-JA, and 30 of the SEBI Act, as well as the relevant provisions of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 including but not limited to Regulation 97, 98, 99 and 102. It concluded that SEBI, BSE, and NSE lacked explicit authority to freeze the demat accounts of a promoter in a manner that extended beyond shares in the company violating the regulations. Moreover, the Court opined that BSE/NSE and SEBI clearly failed to discharge their duties and to act in accordance with law to deprive petitioner of his shares in the demat account held by him which certainly was an infringement of petitioner’s rights guaranteed under Articles 14, 21 and 300-A of the Constitution of India.
Similarly, in another Writ Petition No. 2228 of 2021, Neil Pradeep Mehta contested the freezing of his demat account, which was associated with his father’s account. The court determined that the freezing of the petitioner’s account herein was equally unwarranted. The court observed that the petitioner, being merely a joint account holder and not a promoter of Shrenuj, should not have been penalized. The court highlighted that the petitioner was an NRI with no involvement in the management of Shrenuj and found that the freezing action was executed without due consideration and violated principles of procedural fairness.
The Bombay High Court awarded Rs 80 lakhs in costs, to be jointly paid by BSE, NSE, and SEBI, to the petitioners. The Court observed that the case was a gross example of high-handed and reckless action in freezing the petitioner’s demat account. The authorities showed a clear lack of consideration, disregarding basic principles of natural justice, such as providing a fair opportunity to the petitioner to respond, a hearing, and a proper order. This conduct was not in line with the rule of law.
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