TaxTMI 
TaxTMI 
2024 (8) TMI 1282
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....L) : 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 quite similar, which pertain to challenging the action of the Bombay Stock Exchange and the National Stock Exchange under the directives of the Securities and Exchange Board of India (SEBI) to freeze the Demat Accounts of the Petitioner. The first Petition No. 1590 of 2021 is filed by Dr. Pradeep Mehta and the second Petition (Writ Petition No. 2228 of 2021) is filed by his son Neil Pradeep Mehta. We proceed to adjudicate each of these Petition as under. Writ Petition No. 1590 of 2021 (Dr. Pradeep Mehta v/s. Union of India). 2. The challenge raised in the petition is to the freezing of the "demat account" of the petitioner by the respondent no. 6 - National Securities Depository Limited (for short "NSDL") under the regulations / orders of the Securities and Exchange Board of India (for short "SEBI") merely for the reason that at one time petitioner happened to be one of the promoters....
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....ed 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 affairs of Shrenuj or its functioning, directly or indirectly. He was never a part of its management or ever acted in any advisory capacity. He was classified as a 'Promoter' merely based on his relationship with the Chief Promoter of the Company, i.e. his father-in-law, about which he was unaware until June 2017, which he learnt only when his demat accounts were frozen by NSDL merely for the reason that he was one of the promoters of Shrenuj having initially subscribed to its shares . It is stated that the background for this being in March 2017, the petitioner, when received his monthly statement of accounts, found that some of his shares in his demat account maintained with the Stock Holding Corporation of India Limited (for short "SHCIL") were frozen. The case of the petitioner is that the NSDL by communications dated 23 March 2017 and 13 April 2....
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....UM 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 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/- 1240.42 3203210 5069 Yours faithfully, Amit Shinde Senior Manager Copy to: PRADEEP MEHTA, ANJALI MEHTA 4 SETHNA HOUSE 13 LABURNUM ROAD MUMBAI MUMBAI-100007" 7. The petitioner contends that even though the aforesaid letters were addressed to the SHCIL, and recorded that a copy of the s....
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....s 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 of the petitioner by its letter dated 15 May 2018, stating that it is not in a position to issue instructions to de-freeze the petitioner's securities except in accordance with the SEBI circulars and further advised the petitioner as a promoter to insist upon Shrenuj to comply with the applicable requirements at the earliest. 13. It is contended by the petitioner that on 2 June 2018....
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....arlier, 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 powers whatsoever to come out with any circular or notification that 'creates' offences. B. Issue a writ of mandamus or any other writ to quash the circulars issued by the Respondent No. 2 under the powers granted to itself under Regulation 98 of (LODR) and declare that the Respondent No. 2 has no powers whatsoever to come out with any ....
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....a 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 31 of the SEBI Act provides every regulation made by SEBI under the SEBI Act to be laid, as soon as after it is made, before each House of Parliament, while it is in session, for thirty days. If both Houses agree that a....
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....nded 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 is stated that under Regulation 24 of Chapter V of the Delisting Regulations 2009, the company, its whole-time directors, its promoters and the companies promoted by any of them are not allowed to directly o....
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....lder 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 Circular dated 30.11.2015, issued a notice dated 02.03.2017 [Exh. A, Pg. 35, Petition] to Shrenuj intimating them of the non-compliance of Regulation 33 of the LODR Regulations 201....
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....R 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 exchanges and freezing of the demat account of the prom....
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....count 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 stated that after having failed to secure....
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....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 promo....
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....en 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 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 a....
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....hange 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 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....
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....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 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 th....
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.... 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/NEFT ....
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....ct to the provisions of this Act, it shall be 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) promot....
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....ny listed public company or a public company (not being intermediaries referred to in section 12) which intends to get its securities listed on any recognised stock exchange where the 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 ....
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....t being intermediaries referred to in Section 12) which intends to get its securities listed on any recognised stock exchange where the 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: 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 ....
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....n sub-section (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 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 :- (....
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....equacy/ Accuracy of the disclosures (1) The recognised stock exchange(s) shall monitor compliance by the listed entity with provisions of these regulations. (2) The recognised stock exchange(s) shall also monitor adequacy/ accuracy of the disclosures made by listed entity with respect to provisions of these regulations. (3) The recognised stock exchange(s) shall submit a report to the Board, with respect to the obligations specified in sub-regulations (1) and (2), in the manner specified 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; ....
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....ime. 50. The relevant provisions of the Depositories Act, 1996 are also required to be extracted, which read thus: "2. Definitions.-(1) In this Act, unless the context otherwise requires, - (a) "beneficial owner" means a person whose name is recorded as such with a depository; (b) "Board" means the Securities and Exchange Board of India established under section 3 of the Securities and Exchange Board of India Act, 1992 (15 of 1992); (e) "depository" means a company formed and registered under the Companies Act, 1956 (1 of 1956) and which has been granted a certificate of registration under sub-section (1A) of section 12 of the Securities 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 cert....
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....ay appoint any officer not below the rank of a Division Chief of the Securities and Exchange Board of India to be an adjudicating officer for holding an inquiry in the prescribed manner after giving any person concerned a reasonable opportunity of being heard for the purpose of imposing any penalty. (2) While holding an inquiry, the adjudicating officer shall have power to summon and enforce the attendance of any person acquainted with the facts and circumstances of the case to give evidence or to produce any document, which in the opinion of the adjudicating officer, may be useful for or relevant to the subject-matter of the inquiry and if, on such inquiry, he is satisfied that the person has failed to comply with the provisions of any of the sections specified in sub-section (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....
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....cognised stock exchanges shall comply with and monitor compliance with the provisions of these regulations and shall report to the Board any instance of non-compliance which comes to their notice." 52. On a plain reading of the relevant provisions of the SEBI Act as noted above, we do not find any explicit provisions that the SEBI would have a power to attach the demat account of the promoter much less qua the securities he would hold of companies other than the one of which he is a promoter. Further, none of the provisions postulate such drastic order to be passed against the promoter which is in the nature of a penalty without even a notice being furnished to him. Further, on a perusal of Regulation 98 (1) (c) & (d) of the SEBI (LODR) Regulations 2015, it clearly provides that listed entity or any other person thereof, who contravenes any of the provisions of the regulations, 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 fro....
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....) (c) in freezing the demat account of the petitioner. We may observe that in the circumstances in hand when a basic obligation under the Regulations itself is not conferred on the promoter of the nature petitioner is, there could not have been a corresponding duty and a consequent default, attributable for any action to be taken under Regulation 98. 56. As we are dealing with the freezing of the demat accounts of the promoter, it would be relevant to consider the definition of the word 'promoter' as defined under clause (za) of Regulation 2 of the Securities and Exchange Board of India (Issue of Capital and Disclosure Requirements) Regulations, 2009 which is extracted hereunder: "(za) "promoter" includes: (i) the person or persons who are in control of the issuer; (ii) the person or persons who are instrumental in the formulation of a plan or programme pursuant to which specified 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: ....
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.... Section 92(1)(e). It cannot take a recourse to what was the position when the company was formed, i.e., in the year 1989. It was necessary for the SEBI/NSDL to look into the last return as filed by the company which in the present case would be of the year 2014 to 2016 which is of the period just prior to the default by Shrenuj. By no stretch of imagination, the first promoters of the company who might have severed their interest with Shrenuj could be held to be liable for any subsequent defaults of Shrenuj. 60. We may also examine the role of promoter insofar as the company law is concerned. In such context, we may usefully refer to the views of the learned author A. Ramaiya in his celebrated work "Guide to the Companies Act" 18th Ed. Vol. 1, when on the role of the promoter, is described as under :- The term is not one of law but familiar to the business world. It points to a person who forms a company and gets it going. It indicates '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 term of the preliminary contracts and prospectus (if any)....
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....on his actual involvement in the formation of the company which is a question of fact. Further, the relationship between the promoter and the company, which is fiduciary, would stand terminated or discontinued when the Board of Directors take into their hands the affairs of the company and start governing the company. 62. We may refer to the decision of the Chancery Division in Lydney and Wigpool Iron Ore Co. Vs. Bird (L.R.)33 Ch.D. 85 which was a case in regard to the formation of a company and the allegations of a secret commission being received by a person alleged to be a promoter. While examining the correctness of the judgment rendered by the trial Court, in appeal it was held that whether a person is a promoter or not is a question of fact, and it would depend on the evidence, referring to the decision in Emma Silver Mining Company V. Grant. 11 Ch.D. 918. The Chancery Division considering the evidence on record held that a person against whom such allegations of misusing the position as 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 pro....
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....observed that 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. It was observed that 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 Court also discussed the difficulty as pointed out by the learned author of "Palmer's Company Precedents", to observe that each case must be decided according to the evidence. It was observed that a person who has not taken 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 as usually happens, would not make him a promoter. The following observations of the Chief Justice Leach are required to be noted which read thus: "I will first discuss the question whether the first respondent can be deemed to be a promoter. In Twycross v. Grant (1877)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 tak....
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....dum and Articles of Association. There is no suggestion that the first respondent had anything to do with the selection of the Directors or the settlement of any contract, except the contract under which his firm was to act as brokers. After the Company had been formed and had started business the first respondent's firm induced certain people to subscribe for shares, but it is not alleged that they did anything before the Company was launched. The minimum subscription was fixed at 500 shares and the signatories to the Memorandum of Association themselves subscribed for 1200 shares. In the Memorandum of Association the only persons referred to as promoters are V.K. Lakshmana Mudaliar and J.W. Samuel. It comes to this. The Court is asked to hold the first respondent to be a promoter because his signature appears at the foot of the Memorandum and he took 100 shares of the 1200 initially subscribed. This is a contention which I am unable to accept. The law requires that there shall be seven signatories to the Memorandum of Association of a 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....
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....rs to the Shareholders 1. In terms of section 21A of the Securities Contracts (Regulation) Act, 1956 (SCR Act) read with rule 21 of the Securities Contracts (Regulation) Rules, 1957 and Chapter V of Securities and Exchange Board of India (Delisting of Equity Shares) Regulations, 2009 ("Delisting Regulations"), a recognised stock exchange may compulsorily delist the equity shares of a listed company on certain grounds. 2. In terms of Regulation 24 of the Delisting Regulations, the company which has been compulsorily delisted, its whole-time directors, its promoters and the companies promoted by any such person, shall not directly or indirectly access the securities markets for a period of ten years from the date of compulsory delisting. 3. Sub-regulation (3) of regulation 23 of the Delisting Regulations provides that pursuant to compulsory delisting of a company, the promoter shall acquire delisted equity shares from the public shareholders, subject to their option of retaining their equity shares, by paying them the fair value, as determined by the independent valuer appointed by the concerned recognised stock exchange. 4. In addition to the rest....
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..../2016/116 To All the Recognized Stock Exchanges All Depositories Dear Sir/Madam, Sub: Freezing of Promoter and Promoter group Demat accounts for Non-compliance with certain provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 1. SEBI, vide Circular No. CIR/CFD/CMD/12/2015 dated November 30, 2015, had prescribed the uniform fine structure for non-compliance with certain provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 ("Listing Regulations") and Standard Operating Procedure for suspension and revocation of trading of specified securities. 2. It has been observed that some of the non-compliant listed entities have not paid the fines levied by the recognized stock exchange(s). In order to ensure effective enforcement, it has been decided in consultation with recognized stock exchanges to freeze the holdings of their promoters and promoter group entities in the manner specified below: 2.1. Where a non-compliant listed entity fails to pay fine levied as per the notice issued by the concerned recognized stock exchange in terms of paragraph 4 of A....
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.... available on SEBI website at www.sebi.gov.in under the categories "Legal Framework" and "Continuous Disclosure Requirements". Yours faithfully, Prasanta Mahapatra General Manager Compliance and Monitoring Division Corporation Finance Department [email protected]" (emphasis supplied) 67. Thus, even under the aforesaid Circular dated 7 September 2016 does not contemplate freezing of the demat account of the promoter in the manner as resorted qua the petitioner. Further also the circular dated 26 October 2016, in paragraph 2.2, it is 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 sec....
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....ed 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 of a company other than of the defaulting company of which he is a promoter or any other office bearer. Even assuming that there is some power in the Regulations, the Regulations cannot override the substantive provisions of law and/or have any provision which itself is not recognized by the substantive law i.e. SEBI Act. The position in respect of a circular would be still worse, as the circular cannot provide anything which is not provided in the substantive law and the regulations. 71. For all these reasons, to generally and/or casually freeze the securities of the promoters in a company other than the defaulter company, is an action in the teeth of the provisions of the SEBI Act as also illegal, arbitrary and unreasonable, violative of Articles 14, 21 and 300A of the Constitution. Circulars cannot have an overriding effect on the statutory provision under which it is issued and cannot be implemented in defiance of principles of....
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....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. These provisions also become significant as it is a contention as urged on behalf of SEBI that the petitioner's demat account is freezed as a penalty for non-compliance of the regulations by the company. It is also SEBI's contention that it is of no consequence whether the petitioner is part of the management of Shrenuj as the same is not the criteria for actions prescribed under the impugned circulars and the SEBI (LODR) Regulations, for non-compliance. In this context, as noted above, learned Counsel for the petitioner has vehemently argued that there are gross irregularities of the SEBI when he argues it to be a kind of scam, that the SEBI is acting in breach of the provisions of section 15JA of the SEBI act, inasmuch as the amounts realised by way of penalties under the Act are not being credited to the Consolidated Fund of India and in fact such amounts are received as income of t....
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....e 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 was argued, based on rulings relating to natural justice, that unless civil consequences ensued, hearing was not necessary. A civil right being adversely affected is a sine qua non for the invocation of the audi alteram partem rule. This submission was supported by observations in Ram Gopal [Ram Gopal Chaturvedi v. State of M.P., (1969) 2 SCC 240 : (1970) 1 SCR 472], Col. Sinha [Union of India v. Col. J.N. Sinha, (1970) 2 SCC 458 : (1971) 1 SCR 791]. Of course, we agree that if only spiritual censure is the penalty, temporal laws may not take cognizance of such consequences since human law operates in the material field although its vitality vicariously depends on its morality. But what is a civil consequence, let us ask ourselves, by-passing verbal booby-traps? 'Civil consequences' undoubtedly cover infraction of not merely property or personal rights but of ....
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....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 means as with the end, with the journey as with the destination. Every candidate, to put it cryptically, has an interest or right to fair and free and legally run election. To draw lots and decide who wins, if announced as the electoral methodology, affects his right, apart from his luckless rejection at the end. A vested interest in the prescribed process is a processual right, actionable if breached, the Constitution permitting. What is inchoate, viewed from the end, may be complete, viewed mid-stream. It is a subtle fallacy to confuse between the two. Victory is still an expectation; qua mado is a right to the statutory procedure. The appellant has a right to have the election conducted not according to humour or hubris but according to law and justice. And so natural justice cannot be stump....
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....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 been reiterated in a catena of decisions of this Court. In view of the settled position of law, the next question that arises before us is the scope and definition of the phrase 'civil consequences'. 35. In Mohinder Singh Gill v. Chief Election Commissioner, New Delhi, a Constitution Bench of this Court held that 'civil consequences' cover infraction of not merely property or personal rights but of civil liberties, material deprivations, and non-pecuniary damages. In that case, the Court held that denial of a democratic right to cast a vote inflicts civil consequences. In D K Yadav v. J M A Industries, a three-judge bench of this Court observed that "everything that affects a citizen in his civil life inflicts a civil consequence." ....
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....sions 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 Officer as provided for under Section 19H of the Depositories Act. Section 19-I provides for factors to be taken into account while adjudging quantum of penalty. Section 19-IB provides for recovery of amounts if a person fails to pay penalty imposed under the Act or fails to comply with the directions of disgorgement order issued under Section 19 or fails to pay any fees due to the Board and the manner the same can be executed. Section 19J provides for crediting sums realised by way of penalties to Consolidated Fund of India. All these provisions appear to have been completely overlooked in resorting to the impugned action as taken against the petitioner. Thus, even recovery of the a....
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....cted 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 exercised by following the due process of law which is explicit in the provisions of section 23-I, namely, to adjudicate issues under section 23-A to 23-H. It is difficult to accept that such powers as conferred under SCR Act can at all be found to be relevant in the context of the present proceedings authorizing the Stock Exchanges to freeze the demat account of the petitioner on the ground that he was the promoter. (ii) In the context of SEBI Act as noted above, we do not find that any of the powers read with the regulations, which we have discussed hereinabove confer any jurisdiction on the Stock Exchanges to recover any amounts by way of penalty or fine from th....
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....uj). 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 natural justice and brazenly illegal. 85. The petitioner is a senior citizen. Considering the nature of the illegality foisted on him, the petitioner has made a prayer (prayer clause F) for a direction to respondent nos. 3 and 4 to pay compensation of Rs. 1 crore each, i.e., totaling to Rs.2 crores to be paid to the petitioner for freezing of his demat account illegally and for preventing him from trading in shares, in view of our aforesaid discussion. We see a valid justification for the petitioner to make such prayer. The petitioner has certainly suffered such illegality and for a long period of six years, which has prevent....
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....9J 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 regulations. (vi) The petition stands allowed in the aforesaid terms. 87. At this stage, learned counsel for respondent no. 4 seeks stay of the aforesaid order as passed by us. Considering the glaring and gross facts of the case, we reject the prayer to stay our order. Writ Petition No. 2228 of 2021 (Neil Pradeep Mehta vs. UOI & Ors.) 88. In this petition, the petitioner is the son of Dr. Pradeep Mehta, the petitioner in the aforesaid Writ Petition, whose petition has been allowed in terms of our aforesaid judgment/order. 89. In our opinion, ....
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....er 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 petitioner by an e-mail dated 24 October 2019 stating that since the petitioner is a joint holder with Mr. Pradeep Mehta (promoter of Shrenuj and Company which was compulsorily delisted from the Exchange w.e.f. 4 July 2018), hence, his request for defreezing of his demat account cannot be accepted. On the said reply being received by the petitioner from BSE, the petitioner addressed a detailed letter dated 21 April 2021 to the SEBI stating that he was never a promoter or director in the delisted entity and the....
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....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 authorities, who are statutorily governed in resorting to take such drastic action. This apart, even the elementary principles of natural justice of a fair opportunity of calling upon the petitioner to show cause, a hearing and appropriate order to be passed have been thrown to the winds. This is certainly not the manner or method in which the rule of law would mandate these respondents to act. 101. The petitioner has suffered at the hands of respondents for these many years. He ha....