The Bombay High Court has imposed a joint penalty of Rs 80 lakh on the Securities and Exchange Board of India (Sebi), the country's capital market regulator, and stock exchanges BSE and NSE over the "illegal and invalid" freezing of certain demat accounts. Directing the three entities - Sebi, BSE, and NSE - to jointly pay the sum within two weeks, the court allowed the petitioners to deal with their shares freely as held in the demat accounts in question.

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Rejecting Sebi and BSE's pleas for a stay of the order, the court said: "Considering the facts of the case, instantly we have no hesitation in rejecting such request."

What is the case about?

The demat accounts were of one Pradeep Mehta, a Mumbai resident, and his non-resident son, Neil Mehta. As per the order, both were erroneously classified as promoters. 

In two separate petitions, The father-son duo challenged action by BSE and NSE under the directives of the regulator to freeze their demat accounts. 

In an order against Shrenuj & Company Ltd, a company in which Neil’s father-in-law was the chief promoter, their accounts were frozen for alleged violations of Sebi norms. 

"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 court held. 

"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," it added. 

Neil, an NRI based in Singapore whose wife is also based in Singapore, has invested in shares and securities of Indian companies, and accordingly, has held the demat account in question with his father as a second holder to be so included for logistic purposes. "It is evident that the petitioner in no manner 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," it said. 

'Classic example of high-handed action... reckless action'

"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," read the court order. 

"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 and circumstances of the case which would stare at them," added the 90-page court order. 

"There is not a semblance of reason for such action to be taken against the petitioner. We may also observe that the actions and conduct of the BSE / NSE and SEBI as the law mandates is to protect the interest of the investors," the court held.