SAT holds Freezing of the demat accounts after compliance of violation to be bad in law – Eshwars
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SAT holds Freezing of the demat accounts after compliance of violation to be bad in law

Authored by Padma Akila R

Date of Order  12th November 2020
Grievance based on which Appeal was filed The Appellants’ demat accounts were frozen by Central Depository Services (India) Ltd. on the instructions given by BSE for non-compliance of Reg. 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (“LODR Regulations”) by the company, Subway Finance and Investment.
Appellants Manisha B. Kadhi (“Appellant 1” and Promoter of Subway Finance and Investment), Bhupendra Kadhi (“Appellant 2”and Promoters of Subway Finance and Investment) and Harhit Kadhi & Heer Kadhi (“Appellants 3” and children of Appellants 1 & 2)
Persons against whom the Appeal was filed SEBI (“Respondent 1”), BSE Ltd (‘BSE’, “Respondent 2”), Subway Finance and Investment (“Respondent 3”), Central Depository Services (India) Ltd. (“Respondent 4/company”)


1. The Respondent 3 had failed to submit the financial results and audit reports for its quarterly results for two consecutive quarters viz: September 2018 and December 2018.

2. Stock exchange pursuant to the circular dated May 3, 2018 pertaining to standard operating procedure for suspension and revocation of trading for non-compliance of certain provisions of LODR Regulations, issued notices on 4 different dates requiring the Respondent 3 to comply with Regulation 33[i] and also pay the fine.

3. Respondent 3 did not comply with the same, and hence BSE directed suspension of trading and also directed freezing of entire shareholding of promoter and promoter group.

4. The Appellant 1 and 2 held small stake of 2% shares each and the children held demat account jointly with Appellant 1, and were not involved in the day to day management of Respondent 3.

5. The Appellants were informed by Respondent 3 that it has complied with the order, a week prior to the freeze order was to take effect.

6. Letters written by the Appellants to the stock exchange did not yield result, which led to filing the appeal.


a) The Appellants challenged the circulars dated November 30, 2015 and October 26, 2016 (specified as October 20, 2016 in the SAT Order), both of which were issued under Regulations 97 and 98 of the LODR Regulations, as arbitrary as they override the LODR Regulations.

b) The Appellants held on 2% shares, and as the non-compliance is by the company, only the directors should be penalised and not the promoters, and hence the circulars were arbitrary.

c) Since, the Respondent 3 has subsequently complied with Reg. 33 and also deposited fine, continuing the freezing of their demat account was arbitrary and illegal.


1. 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 was not open for SAT to question the veracity and / or legality of a circular issued by SEBI and that 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, SAT concluded that the prayer of the Appellants for quashing of the circulars dated November 30, 2015 and October 26, 2016 which was superseded by the circular dated May 3, 2018 did not arise.

2. With regard to the contention that they were promoters to the extent of 2% of the company, and were not involved in the day to day management was not accepted. SAT held 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. SAT further held that it was immaterial that the appellants were not actively involved in the management of the company. Further, Regulation 98[i] of the LODR Regulations read with the circular dated May 3, 2018 allowed BSE to freeze the demat accounts of the promoters and promoter group for non-compliance of the LODR Regulations.

3. As regard the continuation of the freeze of the demat accounts even after compliance and payment of the fine, the stock exchange had contended that Respondent 3 had defaulted under other provisions of the LODR Regulations and consequently, till such time compliances of the other provisions of the Regulations were not made by the company, the freezing of the demat accounts of the appellants would continue.

4. SAT dismissed the above contention of the stock exchange, and held that once the non-compliance of Regulation 33 of the LODR Regulations was subsequently complied by the company on April 30, 2019, the freezing of the demat accounts should come to an end there and then. SAT further said, if the Respondent 3 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 was 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. The freezing of the demat accounts of the Appellants pursuant to the order of BSE dated April 16, 2019 was set aside by SAT

[i] Regulation 33 requires that financial results and audit reports of the company 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

[i] Regulation 98 talks about the consequences to be faced by a listed entity or any other person who contravenes any of the provisions of the LODR regulations.

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