Supreme Court sets aside Bombay High Court’s ₹80 lakh penalty on Sebi, NSE, and BSE

In a relief for India’s markets regulator and the country’s two primary stock exchanges, the Supreme Court has quashed a joint penalty of ₹80 lakh imposed on them last month by the Bombay High Court .

The penalty was related to the erroneous freezing of demat accounts belonging to two Mumbai residents who were mistakenly classified as promoters.

A three-judge Supreme Court bench led by Chief Justice DY Chandrachud found that the Bombay High Court had erred in passing its judgement. The Supreme Court noted that the High Court had issued a final judgement on the matter while it was still reserved for interim relief, and that the penalty had been imposed without hearing the market bodies involved.

The Supreme Court directed the Bombay High Court to rehear the case and pass a fresh judgement after considering all parties involved.

The Securities and Exchange Board of India, the National Stock Exchange of India, and BSE had approached the Supreme Court challenging the Bombay High Court’s 26 August order, which had imposed a joint ₹80 lakh penalty on them for freezing the demat accounts of Dr. Pradeep Mehta and Neil Pradeep Mehta. 

The freezing of their accounts was based on directives aimed at promoters of Shrenuj & Company Ltd, a company that had failed to submit financial results and comply with Sebi’s Listing Obligations and Disclosure Requirements Regulations.

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The case has brought to the forefront the question of whether Sebi should penalise the promoters of a listed company for compliance lapses by freezing their demat accounts.

Legal experts have indicated to Mint earlier that Sebi may need to revisit its regulations regarding the freezing of demat accounts for alleged violations, ensuring that such actions are based on clear and substantiated grounds, balancing effective enforcement with procedural fairness.

The High Court’s ruling

The case involved Dr. Pradeep Mehta, a medical practitioner, and his son Neil Pradeep Mehta. Their demat accounts were frozen in March and April 2017 based on Sebi circulars that were targeted at the promoters of Shrenuj. The freezing also affected their shares in ITC Ltd, in addition to their holdings in Shrenuj.

Dr. Mehta challenged the freezing of his accounts, arguing that he had no role in the management of Shrenuj and was a minority shareholder. He also claimed that his son, Neil, who was a minor and residing in Singapore at the time, was unfairly affected.

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The Bombay High Court had in its order noted the severe impact on the petitioners, who had invested in these shares. The court also directed the immediate unfreezing of all shares held by the Mehtas in their demat accounts.

The Bombay High Court had deemed the freezing of demat accounts illegal, emphasising that such actions without due consideration could lead to serious prejudice and undermine the rights guaranteed under Articles 14, 21, and 300A of the Constitution. 

The High Court also criticised the market regulator for infringing on the petitioners’ rights and for not conducting their actions in accordance with the law.

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