HC orders Sebi, NSE, BSE to pay Rs 80 lakh for illegal demat a/c freezing

Court termed freezing a classic example of "high-handed and reckless" action

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The Bombay High Court has imposed a penalty of Rs 80 lakh on the Securities and Exchange Board of India (Sebi), the National Stock Exchange (NSE), and the BSE for the illegal freezing of demat accounts of a Mumbai resident and his non-resident son who were erroneously classified as promoters.

This marks a rare instance of a court or a tribunal imposing a penalty on a market regulator.

The matter pertains to a 2017 Sebi order, following which the demat accounts of Pradeep Mehta and his son Neil Mehta were frozen.

The order was against Shrenuj & Company for alleged violations of Sebi norms, where Neil’s father-in-law was the chief promoter.

The father-son duo had filed a petition for relief with the Bombay High Court. They submitted that they were neither involved in the functioning of the company nor were they ever a part of the management, even in an advisory capacity. 

“It is evident that the petitioner in no manner whatsoever 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,” said the court order dated August 26.

The court declared the Sebi order illegal and invalid, and allowed Mehta and his son to “deal” with all their shares held in the demat accounts. 

It has directed Sebi and the exchanges NSE and BSE to pay Rs 50 lakh to the son and Rs 30 lakh to his father within two weeks.

“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. There is patent non-application of mind by any of these authorities, who are statutorily governed in resorting to taking such drastic action,” the court said.