[Rahul is a student at West Bengal National University of Juridical Sciences.]
In its widely covered judgment in Dr Pradeep Mehta v. Union of India, the Bombay High Court (Bombay HC) held the freezing of the petitioner’s demat accounts to be illegal and imposed a fine of INR 80 lakhs on the National Stock Exchange, Bombay Stock Exchange, and the Securities and Exchange Board of India (SEBI) to be jointly paid by them. While the judgment has been stayed by the Supreme Court of India and sent back to the Bombay HC for re-adjudication owing to certain procedural infirmities, it approaches the issue of addressing protection for investor rights against arbitrary action by regulatory bodies in the form of a public law remedy in an appropriate manner, providing a framework for future cases of dealing with investor issues under writ jurisdictions and an expanded understanding of the constitutionally guaranteed right to property.
It is important to note that the alternate private law remedy for seeking compensation, as had been demanded by the petitioners, is the filing of a civil suit for seeking damages. However, the process requires a detailed examination of the type, nature, and extent of the damage that has been caused. The burden is placed on the petitioner to justify his claim and provide detailed evidence to the court. In contrast, under writ jurisdictions, the courts are more concerned with the legality of the actions at hand in the backdrop of the violation of the petitioner’s rights. While compensation is not generally awarded by courts when exercising their writ jurisdiction, if the court decides to grant the same, as it has done previously in a significant number of cases, it does not need to engage in a comparable level of detailed scrutiny in terms of the quantum of the compensation as is done in the case of civil suits for damages.
The scope of this article shall be restricted to the application of Article 300A of the Constitution of India 1950, the present judgment, and a possible framework for using the same in acting against regulatory authorities while dealing with instances of their actions being challenged on grounds of arbitrariness.
Background
In the instant case, the petitioner’s demat accounts were frozen by the National Securities Depositories Limited under orders from the SEBI for the reason that the petitioner had at one point been the promoter of a company that had failed in compliance with the requirement for furnishing financial results on a quarterly basis under Regulation 33 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations 2015 (SEBI (LODR) Regulations 2015).
Aside from holding that the petitioner could not be held liable for the compliance faults of the company, in which he held no active role whatsoever, relying on the definition of the term promoter in Section 2(69)(b) of the Companies Act 2013 that holds a promoter to be someone who has control over the affairs of the company and other case laws echoing the same, the court found that the regulator went beyond their mandate by freezing the demat accounts by being in violation of provisions of several statues including the SEBI Act 1992, the SEBI (LODR) Regulations 2015, the Depositories Act 1996 among others and thus found their actions illegal.
While the present piece shall not delve in detail into the reasoning of the court in coming to the aforesaid conclusions, it shall aim to depict how violation of such statutory framework by regulatory bodies while acting beyond their ambit can provide a ground for challenge based on such actions being illegal, arbitrary, and unreasonable, and thus in violation of the principles of natural justice and the rights as provided based on a combined reading of Articles 14, 21 and 300A based on the observations as made by the court.
The Right to Property and Requirements for its Restriction in the Context of Stock Exchanges
Under the traditionally held notion of the right to property, the right to dispose of or transfer it as the owner wishes to is an essential component. Of course, just like any other right, a person’s right to do the same can indeed be restricted by the state, but such restrictions must not be in complete contravention of principles of justice and based on wholly arbitrary grounds even despite the fact that the right to property has been, as some might call it, relegated in its status from a fundamental right to a constitutional right within the framework of the Indian Constitution.
Even despite not being a fundamental right, the court has held in a number of decisions, including Delhi Airtech Services (P) Limited v. State of Uttar Pradesh, that any restriction on the right to property must be based on a validly enacted law. In the instant case, SEBI relied on circulars issued by it dated 30 November 2015 and 26 October 2016, which prescribed the standard operating procedure for suspension and revocation of trading of specified securities in case of non-compliance of the SEBI (LODR) Regulations 2015 along with stating that under Section 31 of the Securities Contracts (Regulation) Act 1956 (SCR Act), SEBI has power to make regulations for the purposes of the act, one of which is protection of investor interests. By further relying on powers of recognized stock exchanges granted by Section 9 of the SCR Act to levy fees, fines, or penalties for non-compliance, it argued that freezing the petitioner’s accounts could be termed as a penalty in pursuance of the same.
The court, however, rejected these contentions by stating that no express provision under the SEBI Act 1992 provides for the authorities to take a step of such magnitude in the pursuance of investor interest. Further, relying on Regulation 98(1)(c) and (d) of the SEBI (LODR) Regulations 2015, it stated that the mandate of penal action only extended to freezing the holdings of the promoter in the listed company that violated the regulations and not the entire demat accounts. Thus, clearly, the circulars relied upon by SEBI were beyond its statutory mandate and cannot be deemed to be validly enacted law for the purpose of restricting rights under Article 300A.
In KC Sharma v. Delhi Stock Exchange, it has been held that stock exchanges can be considered as State for the purpose of exercising writ jurisdiction. Further, in Jayalakshmi and Others v. State of Tamil Nadu, the court has noted that the right to enjoy property shares a close nexus with the right to life. Further, the inability to trade in securities as per one’s discretion due to illegal state action can have severe financial consequences impacting the livelihood of those affected, hindering their right to life as provided under Article 21. Thus, stock exchanges need to show a high degree of caution in imposing such restrictions on their members, and an appropriate legal framework needs to be developed that is adhered to.
Compensation - A Possible Remedy
The author believes that the Bombay HC should have accepted the prayer for compensation made by the petitioner in addition to the fine that was imposed by it.
While a fine is a penalty that aims to penalize the wrongdoer for the violation of the statutory law, compensation intends to make up for the difficulties and tribulations the affected party might have had to face due to the incorrect action of the wrongdoer. Compensation has been held to be a valid remedy in the case of fundamental rights violations on the part of state authorities in Chairman, Railway Board v. Chandrima Das. Even in the instant case, the Bombay HC observed that the prayer of the petitioner to seek compensation was justified owing to the difficulties suffered by him, it failed to grant such relief. While the award of compensation as a form of a public law remedy has often been criticized on the ground that it usurpers the civil law remedy for seeking damages that can be obtained by filing a suit for damages, the Supreme Court has observed that such remedy can co-exist even in public law and thus to ensure that such illegal action on part of the regulatory authorities who have an important role to play in the financial landscape of this nation, actions like completely freezing an individual’s demat account illegally make for a fit case for the grant of compensation.
Conclusion
While the judgment may have been stayed by the Supreme Court, the reasoning and the use of public law remedies provide an appropriate approach for litigants to take when dealing with instances of arbitrary and illegal actions by financial regulators.
Circulars issued by SEBI cannot run contrary to the statutory framework for penalizing non-compliance, even if they are claimed to be intended to protect investor interests. Any action beyond its ambit restricting someone’s ability to trade in securities owned by them can therefore be termed to be outside the purview of validly enacted law for the purpose of restricting their right to property under Article 300A and further arbitrary and unjust under Articles 21 and 14 thus providing strong grounds for challenge when approaching the court under its writ jurisdiction.
Further, aside from fines, compensation can be an alternate remedy under public law for rectifying the losses suffered by litigants for illegal actions on the part of authorities while restricting their trading rights. However, the court must be cautious while granting the same under writ jurisdictions owing to its inherent overlapping with the civil remedy of seeking damages by filing a suit for damages, which requires a much higher evidentiary threshold.
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