Harhit Kadhi & Anr. vs Sebi

children. The relief claimed is the same and, therefore, all the three

appeals are being decided together.

2. There is a delay in the filing of the appeals. The ground urged

is, that the appellants demat accounts have been frozen by Central

Depository Services (India) Ltd. Respondent No. 4 on the

instructions given by BSE Ltd. (hereinafter referred to as „BSE‟) for

non-compliance of Regulation 33 of the Securities and Exchange

Board of India (Listing Obligations and Disclosure Requirements)

Regulations, 2015 (hereinafter referred to as „LODR Regulations‟)

by the company known as Subway Finance and Investment. It was

contended that the appellants were informed by the Director of the

company that the compliance of Regulation 33 of the LODR

Regulations has been made and freezing of the demat account would

be lifted inspite of which the same has not been defreezed. In this

regard, the appellants have made a written request to the stock 5

exchange which have fallen on deaf ears and consequently, the

present appeals have been filed for setting aside the freezing of the

demat accounts. For the reasons stated in their application and on the

facts stated aforesaid, we are of the opinion that sufficient cause has

been shown. Consequently, the delay is condoned and the

application is allowed.

3. The appellants have prayed for the quashing of the circulars

dated November 30, 2015 and October 20, 2016 issued by Securities

and Exchange Board of India (hereinafter referred to as „SEBI‟) and

have also prayed that the demat accounts may be defreezed.

4. The facts leading to the filing of the present appeals is, that the

appellant Bhupendra Kadhi in Appeal No. 135 of 2020 is a promoter

of Subway Finance and Investment which is a listed company and

has a stake to the extent of 2% of the shareholding in the said

company. The appellant Manisha Kadhi in Appeal No. 137 of 2020

is the wife of Bhupendra Kadhi and is also a promoter in the said

company having 2% shareholding. Both the husband and the wife

contend that they are only promoters to the extent of 2% each and are

not involved in the day to day functioning of the company nor are

they involved in the decision making process. 6

5. The appellants Harshit Kadhi and Heer Kadhi in Appeal No.

136 of 2020 are son and daughter of the appellant Bhupendra Kadhi.

These appellants contend that they are not the promoters in the

company Subway Finance and Investment nor are they involved in

the decision making process or day to day functioning in the working

of the said company. These two appellants hold a demat account

alongwith their father.

6. It transpires that the company did not comply with the requisite

disclosure under Regulation 33 of the LODR Regulations.

Regulation 33 of the LODR Regulations requires that audit reports of

the company are required to be uploaded on the platform of the stock

exchange on a quarterly basis after being approved by the Board of

Directors of the company.

7. It transpires that the company failed to submit the quarterly

results of their audit reports for two consecutive quarters i.e.

September 2018 and December 2018. It further transpires that BSE

in terms of SEBI circular dated May 3, 2018 issued notices dated

November 30, 2018, March 5, 2019, March 12, 2019 and March 22,

2019 requiring the company to comply with Regulation 33 of the 7

LODR Regulations and pay the fine as per the circular failing which

steps would be taken for suspension of the shares of the company and

other action that is available to the stock exchange. In spite of these

notices, the company failed to comply with Regulation 33 of the

LODR Regulations, as a result BSE vide letter dated April 16, 2019

directed suspension of trading of the shares in the company with

effect from May 8, 2019 for non-compliance of Regulation 33 of the

LODR Regulations for two consecutive quarters i.e. September 2018

and December 2018. BSE further directed freezing of the entire

shareholding of the promoter and promoter group of the company as

well as all other securities held by the promoter and promoter group

in the demat account of the promoter and promoter group with effect

from April 16, 2019.

8. The appellants contend that they approached the company and

the director informed them that necessary compliance would be made

and their accounts would be defreezed. It was urged that necessary

compliance by the company was made on April 30, 2019 inspite of

which their accounts have not been defreezed. Letters in this regard

were written by the appellants to the stock exchange which fell on

deaf ears and the accordingly, the present appeals have been filed. 8

9. The Tribunal while entertaining the appeal had directed the

parties by its order dated January 20, 2020 to come prepared with all

the material on the subject in issue, based on which a compilation of

documents, affidavit and written submissions have been filed by

SEBI as well as by BSE.

10. We have heard Mr. Chanchal Choudhary, the learned counsel

for the appellants and Mr. Kevic Setalvad, the learned senior counsel

with Mr. Abhiraj Arora, Mr. Vivek Shah, Ms. Misbah Dada

Mr. Sagar Divekar, Mr. Abhimanyu Mhapankar Mr. Areez Gazdar,

the learned counsel for the respondents and with the consent of the

parties the appeals are being disposed of at the admission stage itself.

11. The learned counsel for the appellants contended that the

circulars dated November 30, 2015 and October 20, 2016 which have

been issued in terms of Regulations 97 and 98 of the LODR

Regulations is arbitrary as it overrides the provisions of the

Regulations and, therefore, the said circulars are arbitrary and are

required to be quashed. It was contended that the appellants are only

promoters in the company having a small stake of 2% each and are

not responsible for the management of the day to day affairs of the

company. It was contended that if the company has failed to comply 9

with any provisions of the LODR Regulations, then the company and

its Board of Directors should be penalized rather than penalizing the

promoters and the promoter group of the company. It was, thus,

contended that the circular is arbitrary and is liable to be quashed. It

was also contended that the reasons for freezing their demat accounts

was non-furnishing of the audit results of the two consecutive

quarters i.e. September 2018 and December 2018 of the company. It

was contended that the company had subsequently complied and

deposited the fees on April 30, 2019 and thus, there was no reason

for not defreezing their demat accounts. It was urged that the action

of the respondent in not defreezing the demat accounts was wholly

arbitrary and illegal.

12. The respondent SEBI contended that the circulars so issued by

them which is under challenge in the present appeals have already

been superseded by the circular dated May 3, 2018 and, therefore, the

question of judging the veracity and legality of the said circulars at

this stage does not arise especially when the circular dated May 3,

2018 is not under challenge. It was further contended that the

validity of the circulars cannot be questioned in an appeal before the

Tribunal nor does the Tribunal has the jurisdiction to test the validity

of the circular and that the legality and validity of the circular could 10

only be challenged in a writ jurisdiction under Article 226 of the

Constitution of India before an appropriate High Court.

13. It was also contended by the learned senior counsel that a

promoter plays a vital role in raising capital for a company and,

therefore, the role of promoter is subject to greater scrutiny

irrespective of shareholding and its position in the management. It

was submitted that the circulars issued are in conformity with

Regulation 98 of the LODR Regulations which provides for freezing

of promoter / promoter group holding of designated securities as may

be applicable. It was also contended that freezing of the promoter

holding is a temporary measure intended to nudge the companies to

ensure compliance of the disclosure requirements. It was further

contended that freezing the demat account of the directors would

adversely impact various categories of the directors such as

independent director, nominee director, etc. considering that the

tenure of the director in only for a fixed term unlike the promoters.

14. On the issue of freezing the accounts of the children of the

promoters, it was urged that the promoter group includes "child"

under Regulation 2(1)(pp) of Securities and Exchange Board of India

(Issue of Capital and Disclosure Requirements) Regulations, 2018. It 11

was contended that the two children Harshit and Heer in Appeal No.

136 of 2020 would be presumed to act together with their parents

while acting as a promoter group in a listed company and therefore,

based on the PAN number of the appellant Bhupendra Kadhi their

accounts were also frozen validly.

15. Having heard the learned counsel for the parties at some

length, we are of the opinion that in view of the decision of the

Hon‟ble Supreme Court in National Securities Depository Ltd. vs.

Securities and Exchange Board of India [(2017) 5 SCC 517], it is

no longer open for this Tribunal to question the veracity and / or

legality of a circular issued by SEBI. The validity and legality of

such a circular could only be challenged by a party in a writ

jurisdiction under Article 226 of the Constitution of India. Thus, the

prayer of the appellants for quashing of the circular dated November

30, 2015 and October 20, 2016 which in any case is superseded by

the circular dated May 3, 2018 does not arise.

16. In so far as the contention of the appellants Bhupendra Kadhi

and his wife Manisha Kadhi that they are promoters to the extent of

2% of the entire holding of the company and are not involved in the

day to day management and, therefore, their accounts should not 12

have been frozen is erroneous and cannot be accepted. We are of the

opinion that a promoter plays a vital role in the raising of the capital

for a company and, therefore, the role of a promoter is subject to

greater scrutiny irrespective of his shareholding and his position in

the management of the company. It is immaterial that the appellants

are not actively involved in the management of the company.

Regulation 98 of the LODR Regulations read with the circular dated

May 3, 2018 allows the stock exchange to freeze the demat accounts

of the promoters and promoter group for non-compliance of the

LODR Regulations.

17. On the question whether SEBI could direct the depository to

freeze the joint demat account where one of the account holder is not

a promoter of the company, we are unable to deal with this issue on

account of lack of material and arguments raised before us. We

however find that the demat accounts of the appellants were frozen

because the company failed to comply with Regulation 33 of the

LODR Regulations for two consecutive quarters i.e. September 2018

and December 2018. The said accounts were frozen with effect from

April 16, 2019. The Tribunal has been informed that the company

complied with the Regulation 33 of the LODR Regulations on April

30, 2019. Thus, in our opinion, there was no reason for the 13

respondents to continue with the freezing of the demat accounts of

the appellants. In this regard, the learned counsel for the respondent

BSE submitted that the company has defaulted under other

provisions of the LODR Regulations and consequently, till such time

compliances of the other provisions of the Regulations is not made

by the company, the freezing of the demat accounts of the appellants

would continue. In our opinion, action of BSE in continuing with the

freezing of the demat accounts of the appellants for other violation of

the LODR Regulations committed by the company which happened

thereafter is arbitrary and cannot be accepted. Once an order of

freezing has been passed by an order dated April 16, 2019 on the

basis of non-compliance of Regulation 33 of the LODR Regulations

which stood subsequently complied by the company on April 30,

2019, the freezing of the demat accounts should have come to an end

there and then. If the company thereafter has violated any other

provisions of the LODR Regulations, it would be open to BSE to

issue notice to the company requiring them to comply with the

provisions and if they failed to comply within the stipulated period, it

would be open to BSE to proceed against the company, Directors,

promoters in accordance with law, but the freezing of the demat

accounts cannot continue when the initial violation of the provision

stood complied with and came to an end.

14

18. In the light of the aforesaid, all the appeals are allowed. The

freezing of the demat accounts of the appellants pursuant to the order

of BSE dated April 16, 2019 is set aside. It would however be open

to BSE to proceed afresh against the company, its directors,

promoters and promoter group in accordance with the LODR

Regulations and circular dated May 3, 2018, if the company has

violated any other provisions of the LODR Regulations. In the

circumstances of the case, parties shall bear their own costs.

TARUN Digitally signed by TARUN AGARWAL DN: c=IN, o=PUBLIC WORKS DEPARTMENT UTTAR PRADESH, postalCode=221505, st=Uttar Pradesh, 2.5.4.20=30fcf68685192bbc53e6ff1608a83fb3881de7ac2ab7954d5

AGARWAL 09c85ed6e0f7c41, serialNumber=095f8b286bb0b1cd07ff676611f4f5e7999727d404aa 38ca422f9d3529bdb8a3, cn=TARUN AGARWAL Date: 2020.11.12 16:43:28 +05'30'

Justice Tarun Agarwala Presiding Officer

Dr. C. K. G. Nair Member

Justice M. T. Joshi Judicial Member 12.11.2020 PTM