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TMI Blog2024 (8) TMI 1282X X X X Extracts X X X X X X X X Extracts X X X X ..... ming to the impugned action of freezing of the demat accounts of the petitioner on the basis of SEBI Circular, it does not contemplate freezing of the demat account of the promoter in the manner as resorted qua the petitioner. Also the circular dated 26 October 2016, provided that at the first instance to freeze the entire shareholding of the promoter and the promoter group in the listed company which is held liable for non-compliance for two consecutive periods, and on a failure to comply with the notice issued by the concerned stock exchange as per paragraph 3 of Annexure II of Circular dated 30 November, 2015. It is significant that the second part of paragraph 2.2 of the Circular provides that in addition to the freezeing of shares in the non-compliant listed company, the holdings in the demat accounts of the promoter and promoter group in other securities shall be frozen to the extent of the liability which shall be calculated on a quarterly basis. In the present case, there is nothing placed on record that there is a semblance of compliance of paragraph 2.2 of the Circular even assuming that the same is applicable to the petitioner. No show cause notice or a prior opportunity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... free to deal with all his shares as held in the Demat accounts in question.The SEBI/BSE/NSE are directed to jointly pay to the petitioner cost of Rs.30 lakhs within a period of two weeks from today. - G. S. KULKARNI FIRDOSH P. POONIWALLA, JJ. For the Petitioner : Mr. Yeshwant Shenoy with Ms. Navneetha Krishnan, Krishnan T., Ms. Pooja Singh i/b. Nava Legal,. For the Union of India : Mr. Parag A. Vyas,. For the Respondent No. 2 (SEBI) : Mr. Suraj Choudhary with Mr. Omprakash Jha, Mr. Atul Agrawal i/b. The Law Point, For the Respondent No. 3 (BSE Ltd.) : Ms. Sarnaab Aswad i/b. Khaitan Co., For the Respondent No.4 (National Stock Exchange of India) : Mr. Pradeep Sancheti, Senior Advocate with Mr. Ranjeev Carvalho with Mr. Sachin Chandarana, Mr. Aagam Mehta, Mr. Amol Rasal i/b. Manilal Ambalal Co., For the Respondent No. 5 (CDSL) : s. Aparna Wagle i/b. Alliance Law,. For the Respondent No. 6 (NSDL) : Mr. Kunal Katariya with Mr. Pulkit Sukhramani, Ms. Vidhi Jhawar, Mr. Shourya J. Tanay, Mr. Deepank Annand i/b. JSA Advocates and Solicitors,. 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 quit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... titioner 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 had taken up the issue with the SEBI by submitting its reply dated 20 March 2017 addressed to the BSE and National Stock Exchange Ltd. (for short NSE ). 6. It is the petitioner s case that he had no control whatsoever in regard to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ated October 26, 2016. This is to inform you that in accordance with to the above SEBI circular and based on the emails received from NSE, 'Quantity level freeze' has been marked on following securities held in the Beneficial Owner (BO) account of Promoters/Promoter Group of the concerned non-compliant company as provided by NSE. Name of account holder Client ID DP ID ISIN Scrip Name Quantity PRADEEP MEHTA 17431870 IN301330 INE154A01025 ITC LIMITED EQ NEW FV RE.1/- 6235 Yours faithfully, Amit Shinde Senior Manager Copy to: PRADEEP MEHTA 4 SETHNA HOUSE 13 LABURNUM ROAD MUMBAI MUMBAI-100007 --------------------------------x-------------------------------- Exhibit E April 13, 2017 NSDL/SC/2017/ND/0095 Ms. Sheela Kothavle Divisional Manager Stock Holding Corporation of India Limited IN301330 Madam, Sub: SEBI Circular No. SEBI/HO/CFD/CMD/CIR/P/2016/116 dated October 26, 2016. This is to inform you that in accordance with to the above SEBI circular and based on the emails received from NSE, 'Quantity level freeze' has been marked on following securities held in the Beneficial Owner (BO) account of Promoters/Promoter Group of the concerned non-compliant company as provided ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cumstances, we dispose of the appeal by directing BSE NSE to dispose of the representation made by the appellant on 04.01.2018 within 4 weeks from today. 11. Pursuant to the order dated 18 April 2018 passed by the Tribunal, Respondent no. 4 - NSE replied to the said representation of the petitioner by its letter dated 11 May 2018 inter alia stating that in accordance with the SEBI circulars dated 30 November 2015 and 26 October 2016 which prescribed for Standard Operating Procedure (SOP), detailing the manner in which the Exchange shall deal with non-compliance by the listed companies, the Exchange suspended the trading in the securities of Shrenuj, as Shrenuj had defaulted in filing of its Financial Results with the BSE for the quarters ending on June 2016, September 2016 and December 2016. A fine of Rs. 25,10,815/- also came to be imposed on Shrenuj. Further, the Exchange, seven days before freezing the petitioner s shareholding, had issued a notice to Shrenuj informing of the freezing of the promoters shareholding and recording that it would defreeze the petitioner s shares upon receipt of the fine amount from Shrenuj. 12. Respondent no. 3/BSE replied to the said representation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... demat account and the securities held by him was wholly illegal. NSDL responded to such e-mail by its letter dated 1 June 2021, directing the petitioner to approach BSE and NSE for clarification in regard to the freezing of his account. The petitioner responded to such letter of NSDL by e-mail dated 8 June 2021 bringing to its attention the NSDL s notices issued earlier, which clearly stated that the demat accounts were suspended for debits . 17. Lastly, the petitioner, through his advocates addressed a detailed notice dated 7 June 2021 to respondent no. 2 SEBI setting out its grievances and requesting to immediately take steps to defreeze the petitioner s demat accounts and the securities held by him. There were exchange of letters between the parties, however, there was no response from the respondents. 18. It is on such conspectus, the petitioner has filed the present petition. The reliefs, as prayed for in the petition are required to be noted which read thus:- A. Issue a writ of mandamus or any other writ to quash Regulation No. 97, 98 and 99 of the (LODR) Regulations issued by the Respondent No. 2 as being ultra vires the SEBI Act and declare that the Respondent No. 2 has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified securities, detailing the manner in which the exchanges shall deal with non-compliance or contravention of SEBI (LODR) Regulations, 2015, by listed companies. It is stated that SEBI was established to inter alia protect the interests of investors in securities and to promote the development of and to regulate the securities market. It is stated that under section 11 of the Securities and Exchange Board of India Act, 1992 (for short SEBI Act ), SEBI has wide powers to protect the interests of the investors in securities and to promote the development of and to regulate the securities market. These powers inter alia include the power to specify the requirements for listing and transfer of securities as provided under Section 11A of the SEBI Act. It is further stated that in terms of section 30 of the SEBI Act and section 31 of the Securities Contracts (Regulation) Act, 1956 (for short SCR Act ), SEBI has power to make regulations to carry out the purposes of the Act. It is next stated that SEBI thus exercises powers to protect the investors interests and make regulations consistent with the provisions of the SEBI Act and that similar to Section 31 of the SCR Act, Section 3 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce of impugned Circulars dated 30 November 2015 and 26 October 2016 is well within the powers of SEBI under Regulations 97, 98, 99 and 102 read with Regulation 101 (2) of SEBI (LODR) Regulations 2015. It is contended that the actions taken by respondent nos. 3 to 6 are in consonance with the SEBI (LODR) Regulations 2015 and the aforesaid circulars of SEBI. 22. It is next stated that respondent no. 3 and 4 issued directions to respondent no. 5 and 6 to freeze the demat account of the petitioner under the aforesaid statutory mechanism. It is also stated that the freezing of demat account of the petitioner is also a consequence of Compulsory Delisting of Shrenuj, under the provisions of the SEBI (Delisting of Equity Shares) Regulations, 2009 (for short Delisting Regulations 2009 ), as applicable at the relevant time, which have been replaced by SEBI (Delisting of Equity Shares) Regulations, 2021. The affidavit further states that Circular dated 7 September 2016 pertaining to Restrictions on Promoters and Whole-Time Directors of Compulsorily Delisted Companies Pending Fulfillment of Exit Offers to the Shareholders was issued in terms of Chapter V of the Delisting Regulations 2009. It i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... efore, the promoter who continues to flout the byelaws and rules of exchange, LODR regulations and SCRA has to be dealt appropriately to protect the interest of the investors/shareholder of the said company. Additionally, under Regulation 5 of the LODR Regulations 2015, the Promoters, directors, key managerial personnel or any other person dealing with the listed entity are obligated to fulfil the responsibility assigned to the listed entity under the said Regulations. In addition to this, the Impugned Circulars are also in conformity with Regulation 98 of the LODR Regulations 2015 which explicitly provide for freezing of promoter/promoter group holding of designated securities as may be applicable. (b).....In the instant case, several notices were issued to Shrenuj regarding its non-compliance with the LODR Regulations 2015 and the consequences flowing out of such non-compliance i.e. freezing of promoter shareholding was also duly informed to Shrenuj. An opportunity to rectify the non-compliance was also given by the Stock Exchanges which is abundantly clear from the documents produced on record by the Petitioner. Respondent No. 3, as per the SOP prescribed in the Impugned Circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as a promoter, he ought to have known the consequences of non-compliance of LODR Regulations, Delisting Regulations and the Circulars issued under the said Regulations, by the Company promoted by him. The freezing actions taken against him come as a direct consequence of the non-compliance with the LODR Regulations 2015 and the compulsory delisting carried out in accordance with the Delisting Regulations 2009. 54. . .....I say and submit that the freezing of accounts is in consonance with the LODR Regulations 2015 and the Delisting Regulations 2009 (now Delisting Regulations 2021), which were duly laid before the Parliament as per Section 31 of the SEBI Act and then brought into force. I further say and submit that the action of freezing of demat account is not a blanket provision applicable to all investors of a listed entity. (emphasis supplied) Reply Affidavit of BSE 26. A reply affidavit on behalf of respondent no. 3-BSE of Ms. Arpita Joshi, Manager is filed. The primary contention urged in the reply affidavit is in regard to the non-compliance of the SEBI (LODR) regulations by Shrenuj, which is stated to have resulted in its compulsorily delisting from the platform of stock ex ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er challenged the freezing of the Demat Account in an appeal filed before the Securities Appellate Tribunal, which was disposed of by an order dated 18 April, 2018 directing Respondent-BSE to dispose of the representation made by the Petitioner dated 4 January 2018, within 4 weeks therefrom. Accordingly, respondent no. 3-BSE disposed of the petitioner s representation by its communication dated 15 May 2018 inter alia recording that the petitioner was a promoter of Shrenuj, hence, the consequences of freezing of the demat account of Shrenuj applied to the petitioner. 30. It is next stated that Respondent No. 3 is duty bound to implement the SEBI circular dated 7 September 2016 providing for Restrictions on Promoters and Whole-Time Directors of Compulsorily Delisted Companies Pending Fulfillment of Exit Offers to the Shareholders , as a consequence of which the Demat account of the petitioner was freezed with effect from July, 2018 as the petitioner was admittedly classified as the promoter of Shrenuj. It is next stated that before freezing of the demat account, the petitioner never raised any objection of being classified under the promoter category qua the said company. It is state ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e w.e.f. 4 July 2018. BSE also shared a list of such companies along with details of promoters, including PAN number of such companies and directed NSDL to freeze all demat accounts of such promoters as per the SEBI Circular dated 7 September 2016. Accordingly, based on PANs of promoter/promoter group of compulsorily delisted companies as received from BSE, the Petitioner s account was marked as Suspended for Debit until further instructions from BSE/ SEBI and the same was communicated to the Petitioner vide letters dated 8 August 2018. 34. It is next stated that NSDL also received an email communication dated 7 August 2018 from NSE forwarding a list of companies which had been compulsorily delisted w.e.f. 8 August 2018. NSE also provided details of promoters of such delisted companies and directed NSDL to freeze all demat accounts of such promoters in accordance with SEBI Circular dated 7 September 2016. It is hence stated that NSDL acted on the instructions of NSE and BSE and implemented a freeze on the demat accounts of promoters of companies, that have been compulsorily delisted in which Shrenuj was one such company and the Petitioner (having PAN AHXPM0093R), was disclosed as a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n by the NSDL at the behest of BSE/NSE and the SEBI, as the same is in contravention of Section 11 of the Securities and Exchange Board of India Act, 1992. It is submitted that Section 11 of the SEBI Act provides for functions of the Board, and more particularly Section 11(4)(e) which provides that the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take the measures to attach, for a period not exceeding ninety days , bank accounts or other property of any intermediary or any person associated with the securities market in any manner involved in violation of any of the provisions of the SEBI Act, or the rules or the regulations made thereunder. It is submitted that such substantive power as conferred on SEBI would not contemplate such action as impugned namely to freeze the demat account of the petitioner, even assuming that the petitioner could be held liable for the acts of the company (to which the petitioner is actually not). 38. It is submitted that no notice was issued to the petitioner before freezing of his demat accounts, which not only affected the shares held by the petitioner in Shrenuj, but also the sha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... for regulation and control of contracts, which includes in clause (o) under sub-section (2) which prescribes the power to levy and recover fees, fines and penalties. It is submitted that what has been done by the impugned order is to levy a penalty on the petitioner and hence, the action of the SEBI to have such regulations, cannot be assailed. 43. On behalf of the other respondents, submissions are advanced which is in fact the case of these respondents as urged in the reply affidavits which we have noted hereinabove. 44. We have heard learned counsel for the parties. With their assistance, we have perused the record and the relevant provisions of the law as involved. Reasons and Conclusion:- 45. At the outset, we may observe that this is a classic case wherein the demat accounts held by the petitioner with NSDL are freezed in July, 2018, at the behest of BSE / NSE under the directives of the SEBI on account of an alleged default of Shrenuj in compliance of the SEBI (LODR) Regulations. Such action against the petitioner is taken only for the reason that, when such company was formed in the year 1989, the petitioner was one of the promoters of the company. The impugned action is ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change Board of India (SEBI) with respect to non-compliance of certain listing regulations and adopting Standard Operating Procedure for suspension and revocation of trading of shares of listed entities or such non-compliances including levy of financial penalties. The company is liable to pay Rs. 184000/- (penalty inclusive of service tax) as on March 2, 2017. As per the provisions of the circular the penalties will continue to be computed further as mentioned below plus service tax as per applicable rates (currently @ 15%) till the date of submission (including the date of submission): Regulation Fine payable for 1st non-compliance Fine payable subsequent and consecutive non-compliance Regulation 33 Non-submission of the financial results within period prescribed under this regulation Rs.5,000 per day of non-compliance till the date of compliance and If non-compliance continues for more than 15 days, additional fine of 0.1% of Paid Up capital of the entity or Rs. 1 crore, whichever is less. Rs. 10,000 per day of Non-compliance till the date of compliance and if non-compliance continues for more than 15 days, additional fine of 0.1% of Paid Up capital of the entity or Rs. 1 crore, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ubmit the cheque alongwith the covering letter (format given at Annexure below): Bank Name Branch Name Account No. IFSC Code HDFC Bank Ltd. Fort, Mumbai 00600340005156 HDFC000060 Annexure-1 (On the letterhead of the Company) Listing Compliance, BSE Limited, Ground Floor, P. J. Towers, Fort, Mumbai-400001. Sub: Details of Payment of Penalties for Non-Compliance of regulation(s) of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015. Remittance details: Scrip Code Regulation number Quarter Amount paid TDS deducted, if any Net Amount paid Remitted by : Cheque/DD No. Date UTR No. for RTGS/NEFT Compliance Officer/Company Secretary 1. Please mention the Regulation No., Quarter, and amount of TDS deducted on the reverse side of the Cheque/Demand Draft. 2. In case of payment through RTGS/NEFT, you are requested to send a soft copy of this annexure to be revocation@bseindia. (emphasis supplied) 46. It is clear from the reading of the aforesaid communication addressed by BSE to Shrenuj that a penalty/fine is to be recovered from Shrenuj. However, while doing so, BSE has also put Shrenuj to notice of the Freezing of Promoter and Promoter Group Demat accounts for non-compl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ment advisers and such other intermediaries who may be associated with securities markets in any manner; (ba) registering and regulating the working of the depositories, participants, custodians of securities, foreign institutional investors, credit rating agencies and such other intermediaries as the Board may, by notification, specify in this behalf; (c) registering and regulating the working of venture capital funds and collective investment schemes, including mutual funds; (d) promoting and regulating self-regulatory organisations; (e) prohibiting fraudulent and unfair trade practices relating to securities markets; (f) promoting investors education and training of intermediaries of securities markets; (g) prohibiting insider trading in securities; (h) regulating substantial acquisition of shares and take-over of companies; (i) calling for information from, undertaking inspection, conducting inquiries and audits of the stock exchanges, mutual funds, other persons associated with the securities market, intermediaries and self-regulatory organisations in the securities market; [(ia) calling for information and records from any person including any bank or any other authority or b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... specified by the Board; (ii) summoning and enforcing the attendance of persons and examining them on oath; (iii) inspection of any books, registers and other documents of any person referred to in section 12, at any place; (iv) inspection of any book, or register or other document or record of the company referred to in sub-section (2A); (v) issuing commissions for the examination of witnesses or documents. (4) Without prejudice to the provisions contained in sub-sections (1), (2), (2A) and (3) and section 11B, the Board may, by an order, for reasons to be recorded in writing, in the interests of investors or securities market, take any of the following measures, either pending investigation or inquiry or on completion of such investigation or inquiry, namely: (a) suspend the trading of any security in a recognised stock exchange; (b) restrain persons from accessing the securities market and prohibit any person associated with securities market to buy, sell or deal in securities; (c) suspend any office-bearer of any stock exchange or self-regulatory organisation from holding such position; (d) impound and retain the proceeds or securities in respect of any transaction which is und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9 of the Depositories Act, 1996 (22 of 1996) or under a settlement made under Section 15-JB or Section 23-JA of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or Section 19-IA of the Depositories Act, 1996 (22 of 1996), as the case may be, shall be credited to the Investor Protection and Education Fund established by the Board and such amount shall be utilised by the Board in accordance with the regulations made under this Act. Section 15-A. Penalty for failure to furnish information, return, etc. If any person, who is required under this Act or any rules or regulations made thereunder, (a) to furnish any document, return or report to the Board, fails to furnish the same or who furnishes or files false, incorrect or incomplete information, return, report, books or other documents, he shall be liable to a penalty, of one lakh rupees for each day during which such failure continues or one crore rupees, whichever is less; (b) to file any return or furnish any information, books or other documents within the time specified therefor in the regulations, fails to file return or furnish the same within the time specified therefor in the regulations or who furnishes or files f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er shall have due regard to the following factors, namely : (a) the amount of disproportionate gain or unfair advantage, wherever quantifiable, made as a result of the default; (b) the amount of loss caused to an investor or group of investors as a result of the default; (c) the repetitive nature of the default. 15JA. Crediting sums realised by way of penalties to Consolidated Fund of India. All sums realised by way of penalties under this Act shall be credited to the Consolidated Fund of India. .. .. .. Section 30. Power to make regulations (1) The Board may, by notification, make regulations consistent with this Act and the rules made thereunder to carry out the purposes of this Act. (2) In particular, and without prejudice to the generality of the foregoing power, such regulations may provide for all or any of the following matters, namely: (a) the times and places of meetings of the Board and the procedure to be followed at such meetings under sub-section (1) of Section 7 including the quorum necessary for the transaction of business; (b) the term and other conditions of service of officers and employees of the Board under sub-section (2) of Section 9; (c) the matters relating ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s may be specified by the Board from time to time (2) The manner of revocation of actions specified in clauses (b) and (c) of sub-regulation (1), shall be as specified in circulars or guidelines issued by the Board. 99. Failure to pay fine. If listed entity fails to pay any fine imposed on it within such period as specified from time to time, by the recognised stock exchange(s), after a notice in writing has been served on it, the stock exchange may initiate action. 102. Power to relax strict enforcement of the regulations. (1) The Board may in the interest of investors and securities market and for the development of the securities market, relax the strict enforcement of any requirement of these regulations, if the Board is satisfied that: (a) any provision of Act(s), Rule(s), regulation(s) under which the listed entity is established or is governed by, is required to be given precedence to; or (b) the requirement may cause undue hardship to investors; or (c) the disclosure requirement is not relevant for a particular industry or class of listed entities; or (d) the requirement is technical in nature; or (e) the non-compliance is caused due to factors affecting a class of entities ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ons (a) to any depository or participant or any person associated with the securities market; or (b) to any issuer, as may be appropriate in the interest of investors or the securities market. Explanation . For the removal of doubts, it is hereby declared that power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention. (2) Without prejudice to the provisions contained in sub-section (1) and section 19H, the Board may, by order, for reason to be recorded in writing, levy penalty under sections 19A, 19B, 19D, 19E, 19F, 19FA and 19G after holding an inquiry in the prescribed manner. . .. . 19F. Penalty for failure to comply with directions issued by Board under section 19 of the Act. If any person fails to comply with the directions issued by the Board under section 19, within the time specified by it, he shall be liable to a penalty which shall not be less than o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing of Equity shares) Regulations 2009 also need to be noted which reads thus :- 23. Rights of public shareholders in case of a compulsory delisting: (1) Where equity shares of a company are delisted by a recognised stock exchange under this Chapter, the recognised stock exchange shall appoint an independent valuer or valuers who shall determine the fair value of the delisted equity shares. (2) The recognised stock exchange shall form a panel of expert valuers from whom the valuer or valuers shall be appointed for purposes of sub-regulation (1). (3) The promoter of the company shall acquire delisted equity shares from the public shareholders by paying them the value determined by the valuer, subject to their option of retaining their shares. Explanation : For the purposes of sub-regulation (1), - (a) valuer means a chartered accountant within the meaning of clause (b) of section 2 of the Chartered Accountants Act, 1949 (38 of 1949), who has undergone peer review as specified by the Institute of Chartered Accountants of India constituted under that Act, or a merchant banker appointed to determine the value of the delisted equity shares; (b) value of the delisted equity shares shall ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... I s contention referring to Regulation 98 of the SEBI (LODR) Regulations, being applicable so as to justify the freezing of the petitioner s demat account also cannot be accepted. This for the reason that we are not shown any primary obligation as fixed on the promoters and that too at a stage after almost 29 years of the formation of the company (Shrenuj), that the promoter nonetheless, would have certain obligations to be discharged under the Act and/or the Regulations. In our opinion, unless such basic obligation is statutorily fastened on the promoter, Regulation 98 cannot be applied in vacuum and moreso considering the facts and circumstances of the present case. 55. The object of SEBI (LODR) Regulation primarily concerns the listing obligations and a disclosure requirement to be complied by a company. In the present case, the company was formed in the year 1989, and after all statutory compliances, it was listed on the Bombay Stock Exchange. We are not shown any material that the petitioner did not cease to have any role, after the company was formed and/or till it defaulted under the said Regulation although it was managed by the Board of Directors. None of the respondents h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (a) who has been named as such in a prospectus or is identified by the company in the annual return referred to in section 92; or (b) who has control over the affairs of the company, directly or indirectly whether as a shareholder, director or otherwise; or (c) in accordance with whose advice, directions or instructions the Board of Directors of the company is accustomed to act: Provided that nothing in sub-clause (c) shall apply to a person who is acting merely in a professional capacity; (emphasis supplied) 58. Thus, clause (a) of Section 2 (69) of the Companies Act, 2013 refers to a de jure position, where a person is expressly named in a prospectus or is identified by the company as a promoter in the annual return referred to in Section 92. Clause (b) and (c) describes a de facto position where a promoter is a person who has control over the affairs of the company, directly or indirectly, whether as a shareholder, director or otherwise; clause (c) provides that the Board of Directors of the company is accustomed to act in accordance with the advice, directions or instructions of such person. Proviso to section 2 (69) (supra) ordains that the provisions of sub-clause (c) shall n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... But persons who act in a professional capacity such as counsels, solicitors, accountants, engineers or other technicians, will not become promoters by reason of so acting, unless they exceed their professional function and do anything or take any interest in promoting the company. . The relationship between the promoter and the company that he has floated must be deemed to be a fiduciary relationship from the day the work of floating the company started CIT v. Bijli Cotton Mills Ltd., (1953) 23 Com Cases 114, 120 : AIR 1953 All 232 and continued upto the time that the directors take into their hands what remains to be done in the way of forming the company, Twycross v. Grant, (1877) 2 CPD 469, 541 (CA) and when there is no question open between the promoter and the company Eden v. Rids Dales Rly. Lamp Lighting Co. Ltd, (1889) 23 QBD 368 (CA). . The status of a promoter is generally terminated when the Board of directors has been formed and they start governing the company. (emphasis supplied) 61. Thus, the promoter is a person who forms a company to get it going, that is who initiates the scheme for the formation of the company, gets the Memorandum and Articles prepared, executed, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion under the SEBI Act or Regulations framed thereunder is being taken against any promoter. This would necessarily involve robust evidence to be available and considered in regard to the role of the promoter not only qua the company but also whether any active role of the promoter exists qua the shareholders at large and whether the fiduciary capacity in which the promoter is required to discharge his role in formation of a company, would still bind him for various compliances, under the SEBI Regulations or it would be the liability of the company managed by the Board of Directors for achieving all the compliances, which are necessary to protect the interest of the investors who subscribe to the shares of a company. If there is no consideration and examination of such essential attributes before taking any action against the promoters, it would certainly lead to a serious prejudice and / or even a gross absurdity, rendering any action of penalty or freezing of any demat account of a promoter, as in the present case to be grossly arbitrary and illegal. 64. In C. Thiruvenkatachariar, Official Liquidator of the National Live Stock Registration Bank Ltd. (in liquidation) vs. A.T. Vel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... l or most of these activities are performed nominally by a Company which he controls. But a person who has done much less than this takes a much less prominent part may bring himself within the meaning of the term and may be held liable as a promoter. Each case must be decided according to the evidence. If it is clear that the persons charged were merely servants or agents of the promoters or servants or agents of the Company, they cannot be classified as promoters, and in this connection the learned author makes mention of brokers, bankers and solicitors. Of course, brokers, bankers and solicitors could put themselves in the position of being promoters, but in order to do so they would have to travel outside their ordinary spheres. Now, what are the facts here? As I have indicated the question of promotion only applies to the first respondent. It is said that he must be deemed to have taken part in the formation of the Company and to be a promoter because he signed the Memorandum and Articles of Association and subscribed for 100 shares. There is no evidence showing that he took any part in discussing the formation of the Company or in taking any steps to bring the Company into be ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pondent on the ground that he was a promoter. (emphasis supplied) 65. Thus, applying such settled position in the context of the present case, the petitioner, a practicing gyneacologist, did not exceed his professional position, to take interest in the formation of Shrenuj or to promote or manage its day-to-day affairs. Also, after the incorporation of the company and constitution of the Board of Directors, the status and role of the petitioner as a promoter had come to an end. Hence, the obligation of non-submission of Financial Results and non-compliance with the provisions of SEBI (LODR) Regulations could not have been fastened and imposed on the petitioner. 66. Now coming to the impugned action of freezing of the demat accounts of the petitioner on the basis of SEBI Circular No. SEBI/HO/CFD/DCR/CIR/P/2016/81 dated 07 September 2016 and SEBI/HO/CFD/CMD/CIR/P/2016/116 dated 26 October 2016, in the context in hand, it may be necessary to extract these circulars, which reads thus: CIRCULAR SEBI/HO/CFD/DCR/CIR/P/2016/81 September 07, 2016 To All Listed Entities All Registered Registrar Share Transfer Agents All Depositories All Recognised Stock Exchanges Dear Sir/Madam, Sub: Restric ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or the aforesaid purposes, compulsorily delisted company means a company whose equity shares are delisted by the recognised stock exchange under Chapter V of the Delisting Regulations. 6. The concerned recognised stock exchanges and depositories shall co-ordinate with each other for ensuring compliance of these requirements. SEBI may also take any other appropriate action(s) against the promoters/promoter group and directors of the compulsorily delisted company for non-compliance with sub-regulation (3) of regulation 23 of the Delisting Regulations. 7. This circular is issued in exercise of powers conferred under section 11 (1) of the Securities and Exchange Board of India Act, 1992 to protect the interests of investors in securities and to promote the development of, and to regulate the securities markets. 8. A copy of this circular is available on SEBI website at www.sebi.gov.in under the category Legal Framework/Circulars. Yours faithfully, Amit Tandon Deputy General Manager Division of Corporate Restructuring Corporation Finance Department +91-22-26449373 [email protected] (emphasis supplied) ************** CIRCULAR October 26, 2016 SEBI/HO/CFD/CMD/CIR/P/2016/116 To All the Rec ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h information pertaining to holdings in the demat accounts of promoter and promoter group of such listed entities. 4. All provisions of Circular No. CIR/CFD/CMD/12/2015 dated November 30, 2015 shall continue to be applicable. 5. The stock exchanges and depositories shall implement the circular in coordination with one another. 6. The Stock Exchanges are advised to bring the provisions of this circular to the notice of listed entities and also to disseminate the same on their websites. 7. This circular shall come into force with immediate effect. The circular shall be applicable to all fines outstanding on or after the date of this circular levied in accordance with Circular No. CIR/CFD/CMD/12/2015 dated November 30, 2015 and Circular No. CIR/CFD/POLICYCELL/13/2013 dated November 18, 2013. 8. This circular is issued under regulations 97, 98, 99 and 102 read with regulation 101 (2) of Securities and Exchange Board of India (Listing Obligations and Disclosure Requirements) Regulations, 2015. 9. This circular is available on SEBI website at www.sebi.gov.in under the categories Legal Framework and Continuous Disclosure Requirements . Yours faithfully, Prasanta Mahapatra General Manager ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... omoter group in other securities shall also be frozen to the extent of liability which shall be calculated on a quarterly basis. This would be contrary to the statutory requirements as the provisions we have noted hereinabove mandate and the basic requirement of Article 300A of the Constitution of India in the absence of any role of the promoter in the compliances as required to be discharged by a company. 70. The circular can only be recognized if it is validly issued, when the law would permit issuance of a circular qua its contents. The SEBI (LODR) Regulations do not confer any power with SEBI to issue a circular to freeze the demat account and shareholdings of the promoters which he would possess in respect of the shares held by him of companies other than the defaulting company of which he was a promoter. For any such action to be recognized under the Circular dated 26 October 2016, such power to freeze the demat account is required to be traced in the substantive law, namely, under the SEBI Act. We are not shown any specific power as conferred on the SEBI under the SEBI Act which would confer any authority to freeze the demat account of the promoter qua the shares held by him ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and interests in his property. (Esselink v. Campbell, 4 lowa, 296, 300,)1 73. In the above context, we may also refer to the decision of the Supreme Court in Director of Enforecement Vs. M.C.T.M. Corporation Pvt. Ltd. Ors. (1996) 2 SCC 471, wherein it has been held that the expression penalty is a word of wide significance. Sometimes, it means recovery of an amount as a penal measure even in civil proceedings. An exaction, which is not compensatory in character, is also termed as a penalty . 74. As freezing of the petitioner s account for recovery of the amounts levied as penalty / fine is being resorted, the arguments as advanced on behalf of the petitioner of due adherence to the provisions of Section 15-A, 15-I and 15-J also become imperative. It cannot be overlooked that section 15A of the SEBI Act provides for a penalty for failure to furnish information, return, etc. and the amount of penalty it prescribes at different amounts as set out in clause (a), (b) and (c). However, for imposing of such penalty, the provisions of Section 15-I of the SEBI Act stand attracted for an adjudication by an adjudicating officer, by a procedure under Section 15-I and 15-J of the SEBI Act. 75. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... emat account of the petitioner. 77. 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 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. 78. The action of freezing the petitioner s demat accounts is extremely coercive potentially attracting civil consequences. Such position in law is well settled. The Supreme Court in Mohinder Singh Gill Anr. vs. The Chief Election Commissioner, New Delhi Ors. AIR 1978 SC 851., held that civil consequences cover infraction of not merely property or personal rights but of civil liberties, material deprivations, and non-pecuniary damages. The relevant observations read thus: 66. It ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... little pencil-marking, assenting or dissenting, called his vote. A democratic right, if denied, inflicts civil consequences. Likewise, the little man's right, in a representative system of Government, to rise to Prime Ministership or Presidentship by use of the right to be candidate, cannot be wished away by calling it of no civil moment. It civics mean anything to a self-governing citizenry, if participatory democracy is not to be scuttled by the law, we shall not be captivated by catchwords. The straight forward conclusion is that every Indian has a right to elect and be elected and this is a constitutional as distinguished from a common law right and is entitled to cognizance by courts subject to statutory regulation. We may also notice the further refinement urged that a right accrues to a candidate only when he is declared returned and until then it is incipient, inchoate and intangible for legal assertion in the twilight zone of expectancy, as it were. This too, in our view, is logic id sophistry. Our system of ordered rights cannot disclaim cognizance of orderly processes as the right means to a right end. Our jurisprudence is not so jejune as to ignore the concern with ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of natural justice: 9. [ ] The rule that a party to whose prejudice an order is intended to be passed is entitled to a hearing applies alike to judicial tribunals and bodies of persons invested with authority to adjudicate upon matters involving civil consequences. It is one of the fundamental rules of our constitutional set-up that every citizen is protected against exercise of arbitrary authority by the State or its officers. Duty to act judicially would therefore arise from the very nature of the function intended to be performed: it need not be shown to be super-added. If there is power to decide and determine to the prejudice of a person, duty to act judicially is implicit in the exercise of such power. If the essentials of justice be ignored and an order to the prejudice of a person is made, the order is a nullity. That is a basic concept of the rule of law and importance thereof transcends the significance of a decision in any particular case. 34. In Maneka Gandhi v. Union of India, a seven-judge bench of this court held that any person prejudicially affected by a decision of the authority entailing civil consequences must be given an opportunity of being heard. This has bee ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 1996, it also cannot be overlooked that a communication dated 23 March 2017 addressed by NSDL to SHCIL clearly records that the freezing of the petitioner s demat account is in pursuance of the SEBI circulars and based on the e-mail received from the Stock Exchanges (BSE and NSE) dated 10 January 2017 and as marked to the Beneficial Owner (BO) account, based on listing of company of promoters / promoters group on the non-compliance company Shrenuj as provided by the Stock Exchange. Thus, the depository is taking an action at the behest of the Stock Exchanges and in compliance of the requirements of the SEBI under the provisions of the SEBI Act and SEBI (LODR) Regulations. The provisions of Section 19 of the Depositories Act confers power on the SEBI to give directions in certain cases. Section 19F provides for penalty for failure to comply with directions issued by Board under Section 19 of the Act. Section 19G provides for penalty for contravention where no separate penalty has been provided. However, what is significant is that for a penalty to be imposed under the provisions of Section 19F and 19G, a power to adjudicate under Section 19H has been conferred on the Adjudicating Of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tter, we would be failing in our duty if we take a casual view of the matter and let the proceedings pass without any deterrent, failing which we shall be failing in our duty. We are therefore inclined to make an appropriate order imposing costs. 82. Having noted the provisions of SEBI Act, SCR Act, SEBI (LODR) Regulations, 2015, the Depositories Act, 1996 and the SEBI (Delisting of Equity Shares) Regulations, 2009, the following consequences of applicability of the various provisions would be evident: i) That the SCR Act, 1956 is enacted to prevent undesirable transactions in securities by regulating the business of dealing therein and by providing for matters connected therewith. It inter alia makes provisions for recognition of stock exchanges, contracts and options in securities, listing of securities and for penalties and procedure. Section 9 which provides for power of recognized stock exchanges to make bye-laws, is relied on behalf of the respondents and more particularly Section 9 (2) (o), which provides that the stock exchange would be empowered to make bye-laws in regard to levy and recovery of fees, fines and penalties. The power to levy penalty is required to be exercis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed to an extent to take such draconian action of freezing the demat accounts of the petitioner and more particularly to recover any peanlty/fine payable by the company (Shrenuj). A determination of the petitioner s role whether in the real sense the law would mandate he continues to be a promoter, was required to be determined. (v) In the context of the Depositories Act, 1996 as observed by us in paragraph 80, none of the provisions would support the contentions of the respondents that a power is conferred to freeze the demat accounts of the petitioner, so as to recover the amounts due and payable by the defaulter company (Shrenuj). A lawful procedure to impose any penalty and/or fine is certainly not adhered by the respondent even assuming that what is sought to be recovered was a permissible penalty. 83. Thus looked from any angle, 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. 84. 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 natur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... bit C ), 13 April, 2017(Exhibit D E ) ,8 August 2018 (Exhibit L ) is declared to be illegal and invalid; (ii) The petitioner shall be free to deal with all his shares as held in the Demat accounts in question. (iii) The SEBI/BSE/NSE are directed to jointly pay to the petitioner cost of Rs.30 lakhs within a period of two weeks from today. (iv) In regard to the petitioner s contention on the amounts of penalty/fine not being deposited in the Consolidated Fund of India, inter alia considering the provisions of Section 15JA of SEBI Act, Section 23K of the SCR Act and Section 19J of the Depositories Act, it is for the appropriate Ministry of Government of India to look into these issues and in the context of the observations as made by us hereinabove. In the event, the Government of India is of the opinion that such funds which need to be deposited in the Consolidated Fund of India, it is for the Government of India to take appropriate action. We leave such issue to be considered by the Government of India at the appropriate level. (v) Having regard to our discussion and conclusion, we keep open all issues of law on the challenge raised by the petitioner to the legality of the statutory ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e advocate of the petitioner stating that NSDL vide letters dated 10 July 2018 and 8 August 2018 informed the Depository Participant HDFC Bank Ltd. with copy of the same endorsed to the petitioner that the Beneficial Owner (BO) account of the petitioner has been Suspended for Debits in accordance with SEBI Circular No. SEBI/HO/CFD/DCR/CIR/P/2016/81 dated 7 September 2016 and based on Promoters/Promoter Group of compulsorily delisted companies i.e., Shrenuj received from BSE and NSE. 93. Thereafter, the petitioner addressed another letter dated 15 October 2019 to respondent no. 3 BSE stating that HDFC Bank had asked the petitioner to have a resident Indian as a joint holder for logistic reasons such as having local telephone number for sending OTPs, having a local address for communication, etc. and as the petitioner s wife is also a NRI, he was constrained to add his father as a second holder. He stated that all the investments made by the petitioner in shares of the Indian Companies as held in his demat account are from his funds repatriated from overseas. The petitioner stated that he was unable to trade on his demat account was freezed. 94. BSE replied to such letter of the peti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, when his father Dr. Pradeep Mehta was styled as one of the promoters of Shrenuj. 98. The petitioner is a Non-Resident Indian (NRI) based in Singapore. His wife is also based in Singapore. The petitioner has invested in shares and securities of Indian Companies, and accordingly, the petitioner has held the demat account in question with his father as a second holder to be so included for logistic purpose. 99. On the face of it, 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. 100. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X
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