After finding procedural errors, the Supreme Court set aside the Rs80 lakh penalty imposed by the Bombay High Court (HC) on Securities and Exchange Board of India (SEBI), Bombay Stock Exchange Ltd (BSE) and National Stock Exchange Ltd (NSE) for freezing of demat accounts of two investors. The apex court directed Bombay HC to rehear the case.
During the hearing, a three-judge bench led by chief justice DY Chandrachud found that the HC had erred in passing the judgement. The apex court noted that the HC issued a final judgement on the matter while it was still reserved for interim relief, and the penalty was imposed without hearing other parties involved, including SEBI, NSE and BSE.
The bench directed Bombay HC to rehear the case and pass a fresh judgement after considering all parties involved.
Last month, terming the freezing of demat accounts of two investors as 'a classic example of high-handed action and a reckless action’, the Bombay HC imposed a Rs80 lakh penalty on SEBI, NSE and BSE.
In an order passed on Monday, the Bombay HC division bench of justice GS Kulkarni and justice Firdosh P Pooniwalla said, "It is not only painful but extremely shocking that such actions can nonetheless be defended by the respondents (SEBI, BSE and NSE) considering the gross facts and circumstances of the case which would stare at them. There is not a semblance of reason for such action to be taken against the petitioner. We may also observe that the actions and conduct 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 contrary 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 (NRI). 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," the HC says.
Dr Pradeep Mehta and his son Neil, an NRI, challenged the freezing of their demat accounts by BSE and NSE following directions from SEBI.
In the order, the HC says, "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… In these circumstances, although we are not inclined to grant an amount of Rs2 crore as compensation or cost in favour of the petitioner, we are inclined to award an amount of Rs30 lakh to be paid to Dr Mehta by BSE, NSE and SEBI, which shall be jointly paid."
Neil, the NRI son of Dr Mehta, based in Singapore also challenged the freezing of his demat account. He invested in shares and securities of Indian companies through his demat account, with his father as a second holder.
The HC says, "On the face of it, it is evident that Neil Mehta in no manner whatsoever, much less in the capacity as a 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 Mehta, happened to be the second holder in his demat account, as detected by BSE and NSE so as to consider his demat account to be relevant for any penalty and fine payable by Shrenuj."
While allowing Neil Mehta to deal with all his shares in his demat account, the Bombay HC directed BSE, NSE and SEBI to pay Rs50 lakh jointly within two weeks.
