CSE's demat account freezing order quashed for failing to issue separate notices to promoters under SEBI Circular

Calcutta HC set aside CSE's freezing of petitioners' demat accounts, finding the action unlawful due to procedural non-compliance. While petitioner no. 1 was part of the promoter group of a non-compliant listed entity, CSE failed to issue separate notice to promoters before freezing accounts as required under Clause 5 of Annexure-I of SEBI Circular dated January 22, 2020. The court quashed the freezing order but permitted CSE to proceed afresh by issuing proper individual notices to promoters specifying exact fine amounts, allowing subsequent freezing if compliance and payment requirements remain unmet.

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

Summary:

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

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

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

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

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