Bombay HC slams SEBI, BSE, NSE for ‘reckless’ freezing of father and son’s demat accounts; Imposes Rs. 80 lakh compensation cost on authorities

The petitioners had challenged the freezing of their demat accounts by National Securities Depository Limited (NSDL) under the regulations/orders of the Securities and Exchange Board of India (SEBI) through letters of March and April, 2017 and August, 2018.

The father, through advocate Yeshwant Shenoy argued that the action was taken merely because he happened to be one of the promoters of a company called Shrenuj & Company Limited at one point, floated by his father-in-law in 1989. Mehta argued that such action of NSDL at the behest of the Bombay Stock Exchange (BSE) was wholly illegal under the relevant statutory provisions.

On March 2, 2017, the BSE issued a letter to the company for non-submission of Financial Results under SEBI Listing Obligations and Disclosure Requirements- LODR) regulations.

Mehta argued that he had no direct or indirect control of the company’s affairs and was classified as ‘Promoter’ merely based on his relationship with the Chief promoter, about which he was unaware of until June, 2017.

He stated that no notice or hearing was given to him before freezing his shares.

“We would not expect any person to suffer in such a manner and that too in a high-handed and arbitrary manner as in the present case. 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,” the bench noted while deciding on the father’s petition and imposed a joint cost of Rs. 30 lakh on authorities.

The bench observed that the petitioner’s son was in no manner concerned with the firm and the action could not be taken against him merely because his father was a second holder of his demat account.

“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,” the bench noted. It added that even the principle of natural justice of fair opportunity to hear the petitioner was not followed by the authorities and same was against the mandate of the law.

The court added that the son suffered at the hands of respondent authorities for many years and lost valuable trading opportunities, and to deal with his property (as movable) as entitled to him under the Constitution.”

“It is not only painful but extremely shocking that such actions can nonetheless be defended by the respondents considering the gross facts,” the bench noted and imposed Rs. 50 lakh joint cost in the son’s plea and said the petitioners shall be free to deal with their shares in said demat accounts.