9911796707
TMI Blog2024 (8) TMI 1282X X X X Extracts X X X X X X X X Extracts X X X X ..... Now coming 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 oppor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... all be 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. X X X X Extracts X X X X X X X X Extracts X X X X ..... capital of Shrenuj. 4. In 2016, the petitioner 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 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 ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BSE to consider the representation made by the appellant. It is not in dispute that neither the BSE nor the NSE have considered the representation made by the appellant. 3. In these circumstances, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and the same was sent to the 'omnibus system' of NSDL. 16. The petitioner on such backdrop, addressed an e-mail dated 5 May 2021 to the NSDL making a grievance that the action to freeze the petitioner's 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. Is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ndia. The affidavit states that the petitioner's demat accounts are frozen in pursuance of the Circulars dated 30 November 2015 and 26 October 2016 issued by SEBI which prescribe the 'Standard Operating Procedure', for suspension and revocation of trading of 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f shareholders are protected and transparency in necessary disclosures by listed entities is maintained. Such regulations also provides for the rights, obligations, duties etc. of the listed companies and the stock exchanges. It is hence contended that the issuance 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , then the remedy would lie before the Supreme Court pursuant to Section 15Z of the SEBI Act. 25. The relevant extracts from the SEBI's affidavit are required to be noted which read thus:- "36. …..(a) A promoter plays a vital role in raising capital for a company and, therefore, 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 promo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 16 issued under the Delisting Regulations 2009 also provides for coordination between the depository and the stock exchanges in order to ensure the compliances of the said regulations and initiate actions for non-compliance. 48. … … … ... As stated in the foregoing paragraphs, the Petitioner in his correspondences has admitted to being the promoter of the said Company since 1998 and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI/HO/CFD/CMD/CIR/P/2016/116 dated 26 October 2016 issued by SEBI with respect to Standard Operating Procedure (SOP) for non-compliance of SEBI (LODR) Regulations, in terms of Notice bearing reference number 20170303-14 dated 3 March 2017 issued by respondent No. 3/BSE. It is stated that the said notice also prescribed for freezing of the shareholding of promoter and promoter group of Shrenuj. 29. It is next stated that the petitioner 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 Compulso ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o be frozen as held in the petitioner's Demat Account, in accordance with the SEBI Circular dated 26 October 2016. It is stated that accordingly NSDL initiated an ISIN level freeze in respect of shares of ITC Limited, based on the directions received from NSE. It's stated that thereafter, on 9 July 2018, BSE informed NSDL that trading notices had been issued by BSE for compulsory delisting of certain companies from the trading platform of the exchange 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 pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tor promoter of Shrenuj and Company at the time of its incorporation in the year 1989. It is stated that as admittedly the Petitioner was named as a promoter of Shrenuj, in due compliance with the directions of the stock exchanges, NSDL had initiated a freeze on the demat accounts of the Petitioner. Submissions 37. On behalf of the petitioner, it is submitted that the impugned action of freezing the demat accounts of the petitioner could not have been taken 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... justify the impugned action referring to the provisions of the SEBI Act, SCR Act and the regulations framed thereunder as referred to in the reply affidavit. The arguments are not different from what has been contended in the reply affidavit, which we have referred to in detail in the foregoing paragraphs. Additionally, it is argued that Section 9(2) of the Securities Contracts (Regulation) Act, 1956 confers power on the recognized Stock Exchange to make bye-laws 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any has to submit, within 60 days from the end of the financial year, the Audited Financial Results for entire financial year along with the audited financial results in respect of the last quarter (balancing figure). On scrutiny of our records we observe that the company has not submitted to the Exchange the quarterly financial results for the period ended on December 2016. The company is advised to refer to Circular no. CIR/CFD/CMD/12/2015 dated November 30, 2015 issued by Securities Exchange 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 Re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... EXCHANGE IN ELECTRONIC MODE. In case of any further clarification in this matter please contact Mr. Mandar Chavan on Tel. No. 22728514/ Mr. Sambhaji Solat on 22728074/ Mr. Manish Raval on 22725025 or email at [email protected] Yours faithfully, Sambhaji Solat Associate Manager Listing Compliance Manish Raval Asst. Manager Listing Compliance Company is requested to remit the fine amount through electronic transfer to the designated bank-details given below; or through cheque favoring BSE Ltd. The company is required to submit 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/NE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e the duty of the Board to protect the interests of investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. (2) Without prejudice to the generality of the foregoing provisions, the measures referred to therein may provide for-- (a) regulating the business in stock exchanges and any other securities markets; (b) registering and regulating the working of stock brokers, sub-brokers, share transfer agents, bankers to an issue, trustees of trust deeds, registrars to an issue, merchant bankers, underwriters, portfolio managers, investment 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 un ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Board has reasonable grounds to believe that such company has been indulging in insider trading or fraudulent and unfair trade practices relating to securities market. (3) Notwithstanding anything contained in any other law for the time being in force while exercising the powers under clause (i) or clause (ia) of sub-section (2) or sub-section (2A), the Board shall have the same powers as are vested in a civil court under the Code of Civil Procedure, 1908 (5 of 1908), while trying a suit, in respect of the following matters, namely:- (i) the discovery and production of books of account and other documents, at such place and such time as may be 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, b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s market: Provided further that the Board shall, either before or after passing such orders, give an opportunity of hearing to such intermediaries or persons concerned. (4A) Without prejudice to the provisions contained in sub-sections (1), (2), (2A), (3) and (4), section 11B and section 15-I, the Board may, by an order, for reasons to be recorded in writing, levy penalty under Sections 15A, 15B, 15C, 15D, 15E, 15EA, 15EB, 15F, 15G, 15H, 15HA and 15HB after holding an inquiry in the prescribed manner. (5) The amount disgorged, pursuant to a direction issued, under Section 11B of this Act or Section 12A of the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or Section 19 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, re ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify: Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter: Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under Section 15-T, whichever is earlier. … … … 15J. Factors to be taken into account by the adjudicating officer. While adjudging quantum of penalty under section 15-I, the adjudicating officer 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 t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by the Board. (4) The recognised stock exchange(s) shall put in place appropriate framework including adequate manpower and such infrastructure as may be required to comply with the provisions of this regulation. 98. Liability for contravention of the Act, rules or the regulations. (1) The listed entity or any other person thereof who contravenes any of the provisions of these regulations, shall, in addition to liability for action in terms of the securities laws, be liable for the following actions by the respective stock exchange(s), in the manner specified in circulars or guidelines issued by the Board: (a) imposition of fines; (b) suspension of trading; (c) freezing of promoter/promoter group holding of designated securities, as may be applicable, in coordination with depositories. (d) any other action as 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 recognis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Exchange Board of India Act, 1992 (15 of 1992); (k) "regulations" means the regulations made by the Board; ….. (2) Words and expressions used herein and not defined but defined in the Companies Act, 1956 (1 of 1956) or the Securities Contracts (Regulation) Act, 1956 (42 of 1956) or the Securities and Exchange Board of India Act, 1992 (15 of 1992), shall have the meanings respectively assigned to them in those Acts. 19. Power of Board to give directions in certain cases.--(1) Save as provided in this Act, if after making or causing to be made an enquiry or inspection, the Board is satisfied that it is necessary-- (i) in the interest of investors, or orderly development of securities market; or (ii) to prevent the affairs of any depository or participant being conducted in the manner detrimental to the interests of investors or securities market, it may issue such directions-- (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 directi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ction (1), he may impose such penalty as he thinks fit in accordance with the provisions of any of those sections. (3) The Board may call for and examine the record of any proceedings under this section and if it considers that the order passed by the adjudicating officer is erroneous to the extent it is not in the interests of the securities market, it may, after making or causing to be made such inquiry as it deems necessary, pass an order enhancing the quantum of penalty, if the circumstances of the case so justify: Provided that no such order shall be passed unless the person concerned has been given an opportunity of being heard in the matter: Provided further that nothing contained in this sub-section shall be applicable after an expiry of a period of three months from the date of the order passed by the adjudicating officer or disposal of the appeal under section 23A, whichever is earlier." 51. The provisions of the SEBI (Delisting 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 th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... shall be held liable by the respective stock exchange(s) for actions such as imposition of fines, suspension of trading, "freezing of promoter/promoter group holding", of designated securities, as may be applicable, in coordination with depositories or any other action as may be specified by the Board from time to time. Clause (2) of regulation 98 provides that 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. 53. We may observe that on a bare reading of the regulation 98(1), it can be seen that the action to freeze the holdings of the promoter/promoter group can apply only to those holdings of the promoter in the listed company that has violated the SEBI (LODR) Regulations. Hence, the action of freezing other shareholdings of the petitioner cannot be justified. The same is ex facie illegal, unjust and completely arbitrary. 54. We may also observe that the SEBI'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 n ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d securities are offered to public; (iii) the person or persons named in the offer document as promoters: Provided that a director or officer of the issuer or a person, if acting as such merely in his professional capacity, shall not be deemed as a promoter: Provided further that a financial institution, scheduled bank, foreign portfolio investor other than Category III foreign portfolio investor and mutual fund shall not be deemed to be a promoter merely by virtue of the fact that ten per cent. or more of the equity share capital of the issuer is held by such person; Provided further that such financial institution, scheduled bank and foreign portfolio investor other than Category III foreign portfolio investor shall be treated as promoter for the subsidiaries or companies promoted by them or for the mutual fund sponsored by them." 57. It would also be necessary to examine the definition of "promoter" as defined in the Companies Act, 2013, which read thus: 2 (69) "promoter" means a person -- (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 com ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r the formation of the company, has the Memorandum and Articles prepared, executed and registered, and finds the first directors, settles the term of the preliminary contracts and prospectus (if any) and makes arrangement for advertising and circulating the prospectus and placing the capital, is emphatically a promoter in the fullest sense'. He controls the formation and future of the company, and it is this control which lies at the root of the fiduciary relation of the promoter to the company. Nor is he less a promoter if all or most of these activities are performed nominally by a company which he controls. ……. The question whether a person is or is not a promoter is a question of fact, depending upon what he really did in connection with the formation of the company. [Lydney and Wigpool Iron Ore Co. v. Bird, (1886) 33 Ch D 85] ……. A person cannot become a promoter merely because he signed the memorandum as a subscriber for one or more shares.[Official Liquidator v. VeluMudaliar, (1938) 8 Com Cases 7 : AIR 1938 Mad 192] ….But persons who act in a professional capacity such as counsels, solicitors, accountants, engineers or other technic ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a promoter was made (namely J. Bird in the said case) was in fact not the promoter of the company but was an agent of one M/s. Allaway who was a party desirous to prevent a sale of the property which had applied through its Solicitors one Bird & Co., who were iron merchants in the city of London, to render them the assistance of which J. Bird was one of the partners and who had suggested several schemes and one of the schemes being formation of a company to purchase the property. The observations of Lindley, L.J. which are of signifcance in the context of the role of the promoter qua a company read thus: "Moreover, to say that James Bird was a promoter of the company and therefore liable to account to it, is calculated to mislead; for the word 'promoter' is ambiguous, and it is necessary to ascertain in each case what the so-called promoter really did before his legal liabilities can be accurately ascertained, and that in every case it is better to look at the facts and ascertain and describe them as they are." (emphasis supplied) 63. We are of the opinion that the above principles would necessarily apply when any action under the SEBI Act or Regulations framed thereunder is b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... )2 C.P.D. 469, Cockburn C.J. defined the word "promoter" as being one who undertakes to form a Company with reference to a given project, and to set it going, and to take the necessary steps to accomplish that purpose. Other definitions have been given by the learned Judges from time to time, but it is impossible to define accurately what is meant by the word "promoter". The difficulty is discussed at length by the learned author of Palmer's Company Precedents at pages 103 to 109. After referring to a number of the more prominent cases, the learned author observes at page 106: "It is obvious, therefore, that a person who originates the scheme for the formation of the Company, has the memorandum and articles prepared, executed and registered, and finds the first directors, settles the terms (if any), and makes arrangements for advertising and circulating the prospectus and placing the capital, is emphatically a promoter in the fullest sense. He controls the formation and future of the Company, and it is this control which lies at the root of the fiduciary relation of the promoter to the Company. Nor is he the less a promoter if all or most of these activities are performed nom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... public Company. A person who has taken no part in the formation or promotion of the Company may be asked to sign the Memorandum as a subscriber for one or more shares, and this usually happens. It was mentioned in the course of the argument that the money subscribed by the first respondent for his 100 shares was utilised in defraying part of the expenses of forming the Company. That may be, but it was a matter which concerned the directors. The application of the money which the first respondent paid for his shares was a matter over which he had no control, and the fact that the money was utilised in paying the expenses of formation, cannot make him a promoter. The agreement with the respondents was an agreement which conscientious directors ought never to have entered into and in doing so the directors deliberately exceeded their powers. But this, of course, has nothing to do with the question whether the first respondent is to be deemed to be a person who took part in the formation and promotion of the Company. For the reasons indicated it must he held that the Official Liquidator was not entitled to take out a summons against the first respondent on the ground that he was a prom ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... concerned recognised stock exchange. 4. In addition to the restriction imposed under Regulation 24 of the Delisting Regulations, in order to ensure effective enforcement of exit option to the public shareholders in case of compulsory delisting and taking into account the interests of investors, it is felt necessary to strengthen the regulatory mechanism in this regard. Accordingly, it is hereby directed that in case of such companies whose fair value is positive: - a. such a company and the depositories shall not effect transfer, by way of sale, pledge, etc., of any of the equity shares and corporate benefits like dividend, rights, bonus shares, split, etc. shall be frozen, for all the equity shares, held by the promoters / promoter group till the promoters of such company provide an exit option to the public shareholders in compliance with sub-regulation (3) of regulation 23 of the Delisting Regulations, as certified by the concerned recognized stock exchange; b. the promoters and whole-time directors of the compulsorily delisted company shall also not be eligible to become directors of any listed company till the exit option as stated at 4.a. above is provided. 5. For the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the concerned recognized stock exchange shall, upon expiry of the period indicated in the notice issued by it, freeze holdings in other securities in the demat accounts of promoter and promoter group to the extent of liability which shall be calculated on a quarterly basis. 2.2. In case of non-compliance for two consecutive periods, and failure to comply with the notice issued by the concerned recognized stock exchange as per paragraph 3 of Annexure II of the aforesaid circular, as per the current practice, the concerned recognized stock exchange shall forthwith intimate the depositories to freeze the entire shareholding of the promoter and promoter group in such listed entity. In addition to the freeze of shares in the non-compliant listed entity, the holdings in the demat accounts of promoter and promoter group in other securities shall also be frozen to the extent of liability which shall be calculated on a quarterly basis. 2.3. While freezing the holdings as per paragraphs 2.1 and 2.2 above, the recognized stock exchange shall have discretion in determining which of the securities and holdings of which promoter or promoter group entity are to be frozen. 3. The depositori ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... laced 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. 68. We may also observe that there can be no two opinions, that an action to freeze the petitioner's Demat account is an action entailing drastic civil consequences. The shares, subject matter of such account, are the property of the petitioner. Any coercive action in respect of one's property is required to be taken in accordance with law and after complying with the basic principles of natural justice. No show cause notice or a prior opportunity of a hearing was granted to the petitioner before the letters dated 23 March 2017 and 13 April 2017 were addressed to the SHCIL by NDSL, freezing not only the petitioner's shares in Shrenuj but also the other shareholding of the petitioner in ITC Limited. For such reason also, the impugned action on the part of NSDL is required to be held to be brazenly illegal, unreasonable and arbitrary. 69. This apart, insofar as applicability of the Circular 26 October 2016 is concerned, in our opinion, this circular cannot make a provision when it provides in paragraph 2.2 that in addition to the free ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eply affidavit filed on behalf of SEBI, is regarded inter alia to be in the nature of a penalty/fine, as also seen from the letter dated 2 March 2017 (supra), addressed by the BSE to Shrenuj, and it is for defalut of Shrenuj, the petitioner is being penalised by the impugned action. Insofar as the applicability of the principles of law is concerned, it would not make much difference as to whether what is sought to be recovered from the petitioner is penalty or fine. The reason for this being that a penalty would include fine. A categorical stand is taken on behalf of the SEBI/BSE that a penalty / fine being imposed on Shrenuj is sought to be recovered by the impugned action of the freezing of the petitioner's demat account. It would be appropriate to note the jurisprudential meaning attributed to the terms 'penalty' and 'fine' and in the present context. We may usefully refer to the following extract from Advanced Law Lexicon of P. Ramanatha Aiyar, 3rd Edition, when the learned author distinguished fine from penalty. "DISTINGUISHED FROM "penalty". In its broadest sense "penalty" includes fines, as well as all other kinds of punishment. (Esselink v. Campbell, 4 lowa. 296 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... realised by way of penalties under the Act shall be credited to the Consolidated Fund of India, as to whether strict adherence to the same and to similar provisions in the other relevant statutes are being complied by the SEBI or not is to be looked into by the concerned Ministry of the Government of India considering the overarching revenue interest of the Central Government. 76. If that be so, any action to impose/levy a penalty can be resorted after following due procedure in law as the nature of the action itself is a penalty. It is well settled that a penalty cannot be imposed, unless the procedure known to law is followed, namely, issuance of show cause notice, inviting reply on show cause notice and thereafter an opportunity of hearing being accorded and a final decision is taken, if law permits in case of penalty. The present case has wholly discarded any of such norms of legitimacy which is required to be followed in passing an order to freeze the demat account of the petitioner. If it is in the nature of penalty or even a fine, a procedure known to law is required to be followed. Even otherwise, if there were some other powers (there appear to be none) nonetheless it wa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licts a civil consequence. "Civil" is defined by Black (Law Dictionary, 4th Edn.) at p. 311: "Ordinarily, pertaining or appropriate to a member of a civitas of free political community; natural or proper to a citizen. Also, relating to the community, or to the policy and government of the citizens and subjects of a state. The word is derived from the Latin civilis, a citizen In law, it has various significations. * * * 'Civil Rights' are such as belong to every citizen of the State or country, or, in a wider sense, to all its inhabitants, and are not connected with the organisation or administration of Government. They include the rights of property, marriage, protection by the laws, freedom of contract, trial by jury etc. Or, as otherwise defined, civil rights are rights appertaining to a person in virtue of his citizenship in a State or community. Rights capable of being enforced or redressed in a civil action. Also a term applied to certain rights secured to citizens of the United States by the thirteenth and fourteenth amendments to the Constitution, and by various acts of Congress made in pursuance thereof. (p. 1487, Black's Legal Dictionary) The interest of a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring has been given although the appellant retorts that a vacuous meeting where nothing was disclosed and he was summarily told off would be strange electoral justice. We express no opinion on the factum or adequacy of the hearing but hold that where a candidate has reached the end of the battle and the whole poll is upset, he has a right to notice and to be heard, the quantum and quality being conditioned by the concatenation of circumstances." 79. Referring to the aforesaid decision, the Supreme Court in State Bank of India & Ors. vs. Rajesh Agarwal & Ors. (2023) 6 SCC 1., on challenge to Master Directions on Fraud issued by Reserve Bank of India, the Supreme Court observed thus: "32. ………It is now a settled principle of law that the rule of audi alteram partem applies to administrative actions, apart from judicial and quasi-judicial functions. It is also a settled position in administrative law that it is mandatory to provide for an opportunity of being heard when an administrative action results in civil consequences to a person or entity. 33. In State of Orissa v. Dr (Miss) Binapani Dei, a two-judge bench of this Court held that every authority which h ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ences in the following terms: "14. Concept of natural justice has undergone a great deal of change in recent years. Rules of natural justice are not rules embodied always expressly in a statute or in rules framed thereunder. They may be implied from the nature of the duty to be performed under a statute. What particular rule of natural justice should be implied and what its context should be in a given case must depend to a great extent on the fact and circumstances of that case, the framework of the statute under which the enquiry is held. The old distinction between a judicial act and an administrative act has withered away. Even an administrative order which involves civil consequences must be consistent with the rules of natural justice. The expression "civil consequences" encompasses infraction of not merely property or personal rights but of civil liberties, material deprivations and non-pecuniary damages. In its wide umbrella comes everything that affects a citizen in his civil life." There is a consistent pattern of judicial thought that civil consequences entail infractions not merely of property or personal rights, but also of civil liberties, material deprivations, a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trictly adhering to the provisions of law which we have noted hereinabove. The recovery can also be in terms of what has been provided under Section 19F which necessarily attracts the provisions of Section 19H in regard to adjudication. Thus, looked from any angle, the impugned action of freezing the petitioner's demat account is grossly illegal, arbitrary and unconstitutional. 81. However, what actually pains us is when the statutory complexion of what could be the respective powers to be exercised by the depositories, by the Stock Exchange(s) and ultimately by the SEBI are within the well defined spheres as envisaged by the respective statutes, which we have noted hereinabove, the SEBI as also the Stock Exchanges nonetheless have justified the actions being taken against the petitioner, when the same are not supported under the framework of any of laws as we have noted hereinabove. The petitioner who is a senior citizen for no fault of his, has severely suffered since the year 2017 as his entire shareholdings as maintained in the demat account could not be utilized by him which itself is a valuable property under Section 300A of the Constitution. The petitioner was illegally dep ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... opriate disclosure in respect of the existing and recognized promoters the fact situation postulates. (iii) The SEBI (Delisting of Equity Shares) Regulations, 2009 are also referred on behalf of the respondents to justify the action under Chapter V providing for "Compulsory Delisting". The reply affidavit has referred to Regulation 23, which deals with "Rights of public shareholders in case of a compulsory delisting". We have noted Regulation 23(3) as relied by the respondents, which provides that 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. Certainly, no obligation of this nature appears to have been crystallized in a manner known to law qua the petitioner. Thus, such obligation cannot be fastened on the petitioner by an action of freezing the petitioner's demat accounts. If such an obligation is to be enforced, there are several facts which would be required to be taken into consideration to determine the role of the person whether he is the promoter at the relevant time considering the relevant facts and in the real sense as the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at too in a high-handed and arbitrary manner as in the present case. As noted hereinabove, we are of the clear opinion that BSE/NSE as also SEBI has clearly failed to discharge their duties and to act in accordance with law so as to deprive the petitioner of his shares in the demat account held by him which certainly, in our opinion, is an infringement of petitioner's right guaranteed under Articles 14, 21 and 300A of the Constitution. Any casual approach to such infringement certainly would not be an acceptable approach and in fact would strengthen the hands of these authorities to repeat such illegalities. In fact if we fail to impose costs, it would amount to putting a premium on such illegality of these respondents. In these circumstances, although we are not inclined to grant an amount of Rs.2 crores as compensation / cost in favour of the petitioner, we are inclined to award an amount of Rs.30 lakhs to be paid to the petitioner by BSE/NSE/SEBI, which shall be jointly paid. This also for the reason that breach of constitutional rights as noted by us is certainly a serious affair and cannot be permitted to happen in the manner respondents in the present case have resorted in su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts in relation to this petition need to be noted: The petitioner is a non-resident Indian currently residing in Singapore. He is also an angel investor investing in promising start-ups in India. In 2014, petitioner opened a NRO account and a demat account through HDFC Bank Ltd. and for logistical reasons of a local address and mobile number, the bank suggested adding the petitioner's father - Dr. Pradeep Mehta as a second holder to his Demat account. 91. It is the petitioner's case that in July 2018, the petitioner found that his demat account was frozen without any notice or intimation to him. On inquiring with HDFC Bank, the petitioner was handed over letters dated 10 July 2018 and 8 August 2018 addressed by respondent no. 5 - NSDL to HDFC Bank informing the Bank to freeze the demat account of the petitioner in which it was stated that in accordance with SEBI Circular No. SEBI/HO/CFD/DCR/CIR/P/2016/81 dated 7 September 2016 and based on the PANs of Promoters/Promoter Group of compulsorily delisted companies as received from BSE, the mentioned Beneficial Owner account has been 'Suspended for Debits' till further instructions in received from BSE/SEBI. Such communication is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng to India. 95. The petitioner has contended that his father is a practicing gynecologist with about 40 years of practice and even if he was to be branded as a 'promoter' of Shrenuj, merely because of his investments into his father in law's company as a shareholder, his father was never a promoter or director of the listed entity. It is in these circumstances, the petitioner had prayed for defreezing of his demat account. 96. We may observe that surprisingly the stand of the respondents - SEBI, BSE and NSE is not different from what is taken in the aforesaid writ petition of his father Dr. Mehta. In fact, the reply affidavits are identical to the first petition. 97. We have heard learned counsel for the parties. We have also perused the record on this petition. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ch action to be taken against the petitioner. We may also observe that the actions and cundect of the BSE / NSE and SEBI as the law mandates is to protect the interest of the investors. In the present case these statutory bodies have totally acted contratry to such norms. In fact the impugned actions of these respondents when taken against a person like the petitioner is also likely to shake the confidence of investors who are non residents Indian. This is certainly not what can be expected from the conduct of these entities. The duty to safeguard the investor's sentiments and confidence is paramount which stand breached in every possible manner in the present case. 102. We may observe that all our reasons as set out in the aforesaid judgment more particularly on law become applicable in the facts of the present case. 103. In the light of the above discussion and on the reasoning as contained in our aforesaid judgment in the case of Dr. Pradeep Mehta (petitioner's father), we are inclined to unhesitantly allow this petition, however, considering the severity and the gross illegality of the actions we will be failing in our duty as a writ Court if we do not impose a substantive co ..... X X X X Extracts X X X X X X X X Extracts X X X X
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