Apex Court Sets Aside Bombay HC Order Penalising SEBI, BSE, NSE For Illegally Freezing Accounts

The Supreme Court on Monday set aside a Bombay High Court order, which penalised the Securities and Exchange Board of India, the National Stock Exchange, and the Bombay Stock Exchange for illegally freezing demat accounts of two Mumbai residents.

The high court had imposed a fine of Rs 80 lakh on the market regulator and the two exchanges.

A three-judge bench led by the Chief Justice of India, DY Chandrachud, remarked that the high court erred in setting aside the freezing orders without hearing the market regulator and the stock exchanges.

In August, the Bombay High Court imposed a fine on the market bodies for an alleged illegal freezing of demat accounts of a father-son duo.

A division bench, comprising Justices GS Kulkarni and Firdosh Pooniwalla, declared that the actions taken by these regulatory bodies were invalid due to severe procedural errors and violations of constitutional rights.

The high court's verdict came on a plea by Pradeep Mehta, a senior citizen and a gynaecologist, and his son Neil Mehta, an angel investor based in Singapore.

In 2014, Neil Mehta opened a non-resident ordinary account and a demat account with HDFC Bank Ltd. For logistical convenience, HDFC Bank had suggested adding Pradeep Mehta as a second holder on the demat account.

In July 2018, Neil Mehta discovered that his Demat account had been frozen without any prior notice or intimation. On inquiry, he received communication from the National Securities Depository Ltd., which indicated that the account had been frozen based on a SEBI circular linked to the permanent account numbers of promoters of companies that had been compulsorily delisted.

The regulators' action was part of a crackdown on Shrenuj & Co. Pradeep Mehta's investments included shares in Shrenuj, a company he had invested in through shares purchased in 1989 and 1993. Despite his minimal involvement with Shrenuj, his demat account was frozen. Neil Mehta's investments in Shrenuj, which included a substantial number of shares due to stock splits and bonus issues, were similarly affected.

The father and son argued that the freezing of their accounts was unjustified and improperly executed, given their limited and indirect connection to the company's alleged issues. The high court criticised SEBI, BSE and the NSE for their "high-handed" and "reckless" actions, emphasising a lack of due diligence and a disregard for basic principles of natural justice.

The bench said the authorities had failed to provide Neil Mehta with an opportunity to contest the action or receive a fair hearing before freezing his account. It was observed that the freezing of the demat accounts had led to significant losses for Neil Mehta, including missed trading opportunities and difficulties in managing his property.

The court directed SEBI, BSE and the NSE to jointly pay Rs 80 lakh in compensation to the father-son duo—Rs 50 lakh to Neil Mehta and Rs 30 lakh to Pradeep Mehta.