SEBI's Misstep Leads To Landmark Bombay High Court Ruling: A Case Of Regulatory Adventurism

⁤In 2018, Neil Mehta and his father, Pradeep Mehta, found themselves at the center of SEBI action as their demat account was frozen overnight. ⁤⁤The freeze came without any prior warning or explanation. ⁤

⁤It was later found that the account was locked due to a SEBI 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.

Neil had initially opened the account in 2014 with HDFC Bank Ltd., where, for convenience, his father, Pradeep Mehta, was added as a joint holder.

Fast forward to the present, and the Bombay High Court has directed the markets regulator, NSE, and BSE to pay the father-son duo Rs 80 lakh for wrongfully freezing the account. The court found that these regulatory bodies had grievously erred by freezing Neil Mehta's account without allowing him to contest the decision or hear his side of the story.

This case could be seen as an example of regulatory adventurism, as per Ketan Mukhija, partner at Burgeon Law.

In simple words, an extreme or bold form of judicial intervention is called regulatory adventurism. This would include a regulator acting beyond its powers, giving severe directions without a proper procedure, etc.

It is important to note that usually the decisions of the Securities and Exchange Board of India are appealable before the Securities Appellate Tribunal. However, if the fundamental rights of people are affected by the actions of SEBI, a speedy relief can be sought from the high court through a writ petition.

As per experts that NDTV Profit spoke to, SEBI has given several powers to stock exchanges, which is even beyond the SEBI Act and Securities Contracts Regulations Act. 

For example, the enforcement of Minimum Public Shareholding compliance, which should fall under SEBI's jurisdiction, is instead handled by stock exchanges, lacking a clear procedure for upholding natural justice, said Abhiraj Arora, partner at Saraf and Partners.

SEBI’s delegation of authority to Stock Exchanges for overseeing investment advisors and research analysts may exceed the provisions in place, he said.

The regulator’s settlement process also lacks transparency regarding how settlement amounts are calculated, causing issues for intermediaries forced into costly settlements, according to Arora.

This recent Bombay High Court judgment serves as a reminder that regulatory bodies, despite their crucial role, are not beyond judicial scrutiny and must operate within legal boundaries, as per Abiha Zaidi, a Supreme Court practitioner and partner at Saaz Partners.