Bombay HC stays termination of CDSL Depository Participant who met Rs 3 crore net worth requirement within granted compliance time

The Bombay HC stayed the termination of petitioner as CDSL Depository Participant for failing to meet Rs. 3 crores net worth requirement under SEBI-2018 Regulations amended in 2022. The court found merit in petitioner's contention that CDSL created legitimate expectation by granting compliance time until April 24, 2023, which petitioner met by submitting Net Worth Certificate on April 20, 2023. CDSL's subsequent termination after accepting the certificate was deemed inappropriate. The court noted SEBI's uncertainty regarding compliance consequences and emphasized that instant termination for turnover non-compliance, affecting 700 participants, required careful examination. The termination order dated November 10, 2023 and appellate confirmation dated January 8, 2024 were stayed pending final hearing.

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Issues Involved:
The issues involved in this case are the termination of the petitioner as a Depository Participant by Central Depository Services (India) Ltd. (CDSL) based on the Securities and Exchange Board of India (Depositories and Participants) Regulations, 2018, specifically the amendment to Regulation 35 regarding the net worth requirement for stock brokers.

Details of the Judgment:

Issue 1 - Termination of Depository Participant Status:
The petitioners challenged the termination of their status as a Depository Participant by CDSL, citing compliance issues with the net worth requirement under the 2018 Regulations. CDSL claimed that despite repeated notices, the petitioners failed to meet the turnover requirement of Rs. 3 crores, leading to the termination.

Issue 2 - Compliance and Arbitrary Action:
The petitioners contended that they had complied with the turnover requirement by submitting a "Net worth Certificate" from a Chartered Accountant certifying a turnover exceeding Rs. 3 crores. They argued that the termination was arbitrary and disproportionate, as they had fulfilled the necessary compliance within the stipulated timeline provided by CDSL.

Issue 3 - Regulatory Interpretation and Due Process:
The High Court observed that CDSL itself was uncertain about the consequences of non-compliance with SEBI regulations and had sought clarification from SEBI. The Court noted that the petitioners had a legitimate expectation of compliance based on CDSL's communication, creating confusion regarding the termination decision and the subsequent show cause notice issued by CDSL.

Conclusion:
The Court found merit in the petitioners' contentions and stayed the termination order pending final disposal of the petition. Additionally, interim relief was granted to allow the petitioners to continue their operations as a Depository Participant without restrictions. The Court directed the respondents to recall any emails sent to the petitioners' clients and allowed for further pleadings and applications as necessary in the case.

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