2024 (5) TMI 798 - HC - SEBI

Validity of freezing the Demat Accounts of the petitioners by the Calcutta Stock Exchange (CSE) - 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 ( 2015 Regulations ) and the family of the petitioners control the management and affairs of the proforma respondent no. 5-Company. HELD THAT - In the present case, petitioner no. 1 has subsequently issued e-mails to the respondent no. 1, showing his willingness to deposit the fines. Although no such intention appears from the conduct of the petitioners to comply with the other formalities, which were amply clarified to the petitioners by the several e-mails, notice and publication made by the CSE, the fact remains that no separate notice was given to the petitioner no. 1/promoter before freezing the Demat Accounts where the petitioner no. 1 is a joint holder. Clause 5 of Annexure-I specifically distinguishes between the first notice, which is to be given to the listed entity itself, and the second notice which is to be given not to the listed entity but the promoter of the non-compliant entity. The said requirement having not been satisfied by the CSE/respondent no. 1, the impugned act of freezing the Demat Accounts of the petitioners was unlawful and not sustainable in the eye of law. It cannot be denied that the stages prior to the same have been duly complied with by respondent no. 1. Hence, the laches on the part of respondent no. 1 can be rectified if a notice as contemplated in Clause 5 of Annexure I is issued prior to freezing the Demat Accounts of the petitioner. Accordingly is allowed on contest, thereby setting aside the Notice dated January 1, 2024, insofar as the petitioners are concerned and the e-mails dated January 3, 2024 and January 5, 2024 issued by the respondent no. 1 and quashing the freezing of the Demat Accounts of the petitioners. Nothing in this order, however, shall preclude respondent no. 1 from proceeding afresh with issuance of a notice to the petitioner no. 1 and the other promoters/promoter group of the proforma respondent no. 5-Company individually under the second limb of Clause 5 of Annexure-I of the SEBI Circular dated January 22, 2020 to ensure compliance with the requirements and pay fines within ten days from the date of such notice. In the event the defaults are not made good by compliance with the requirements and payment of fine, the respondent no. 1 shall be at liberty to proceed as per the procedure laid down in Clause 6 of Annexure-I of the said Circular by intimating the depositories to freeze the entire shareholding of the promoters as well as other securities held in the Demat Accounts in case of failure of the non-compliant listed entity/proforma respondent no. 5-Company to comply with the requirements and pay the fine levied under the said Circular. In the said notices, the respondent no. 1 shall specify the exact amount of fine payable by the petitioners.

Summary

Issues Involved:
1. Legality of freezing the Demat Accounts of the petitioners by Calcutta Stock Exchange (CSE).
2. Compliance with SEBI Regulations and Circulars by CSE.
3. Requirement of notice to promoters before freezing accounts.

Summary:

1. Legality of Freezing the Demat Accounts:
The petitioners challenged the act of the respondent no. 1, the Calcutta Stock Exchange (CSE), in freezing their Demat Accounts. The petitioners argued that no notice was given to them as required by the SEBI Circular No. SEBI/HO/CFD/CMD/CIR/P/2020/12 dated January 22, 2020, before freezing their accounts. The court noted that the CSE failed to comply with the stipulation in Clause 5 of Annexure-I of the 2020 Circular, which mandates issuing notices to the promoter(s) of non-compliant entities to ensure compliance and pay fines within ten days from the date of the notice. Thus, the freezing of the Demat Accounts was deemed unlawful and not sustainable in the eye of law.

2. Compliance with SEBI Regulations and Circulars:
The court examined the provisions of Section 98 of the 2015 Regulations and Chapter V of SEBI (Delisting of Equity Shares) Regulations, 2021. It was found that the CSE did not follow the mandated procedures, including the formation of a panel for compulsory delisting and issuance of reasoned orders. The court highlighted that the CSE published notices on November 1, 2023, and December 1, 2023, listing the company as non-compliant, and subsequently directed the freezing of the Demat Accounts on January 1, 2024. However, the court found that the CSE did not issue the required notice to the promoters before freezing the accounts.

3. Requirement of Notice to Promoters:
The court emphasized that Clause 5 of Annexure-I of the 2020 Circular specifically requires a second notice to be given to the promoter(s) of the non-compliant entity, distinct from the first notice to the listed entity itself. The CSE's failure to issue this notice to the petitioners before freezing their Demat Accounts rendered the action unlawful. The court allowed the writ petition, setting aside the notice dated January 1, 2024, and quashing the freezing of the Demat Accounts of the petitioners. However, the court permitted the CSE to proceed afresh by issuing the required notice to the petitioners and other promoters, specifying the exact amount of fine payable, and following the procedure laid down in Clause 6 of Annexure-I of the 2020 Circular if the defaults are not rectified.

Conclusion:
The court concluded that the CSE's action of freezing the Demat Accounts of the petitioners was unlawful due to non-compliance with the notice requirements stipulated in the SEBI Circular. The court allowed the writ petition, set aside the impugned notice, and provided directions for the CSE to proceed afresh in accordance with the SEBI Circular. There was no order as to costs.