[By Priyanshu & Mahek Gupta]
The authors are students of Hidayatullah National Law University, Raipur.
INTRODUCTION
In a recent regulatory crackdown, the Securities and Exchange Board of India (‘SEBI’) froze the demat accounts of the designated persons in the Gensol Engineering fiasco related to diversion of loans and corporate misconduct. The Board exercised its power to freeze someone’s account for non-compliance with the SEBI Regulations from circular number SEBI/HO/CFD/CMD/CIR/P/2018/77 dated May 3, 2018, which outlines the procedure for suspension or revocation of trading in specified securities in case of non-compliance with the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 (‘LODR Regulations’). On May 9, 2025, the affected persons appealed to the Securities Appellate Tribunal (‘SAT’) to direct SEBI to unfreeze the unlisted securities held by them in such demat accounts. The appeal presented a critical question before the SAT: Can SEBI validly freeze demat accounts, particularly those holding unlisted securities? Given the increased use of demat-based enforcement and the lack of clarity on its limitations, the authors attempt to investigate this regulatory gray area, its repercussions, and comparative views on SEBI’s authority.
WHY GENSOL ENGINEERING LTD. IS IN TROUBLE?
Gensol Engineering Ltd. (‘Gensol’) is currently under serious financial and regulatory trouble. On 15 April 2025, the SEBI passed an interim order, prohibiting Anmol Singh Jaggi and Puneet Singh Jaggi, the promoters of Gensol, from occupying board positions or accessing the securities market. SEBI also ordered a freeze on their demat accounts and shareholding. SEBI alleged that a major chunk, i.e., Rs. 262 crores of a loan for Rs. 978 crores taken from various creditors for the purchase of EVs was diverted for personal use. The order was based on credit agencies downgrading their rating for Gensol on the issue of a falsified debt servicing track record and concerns over corporate governance practices.
The order was challenged before the SAT, however, the Tribunal refused to grant relief, noting that SEBI was within its rights to take preventive steps and instructed the regulator to pass a confirmatory order within four weeks. Soon after, the Indian Renewable Energy Development Agency (‘IREDA’), one of the creditors of Gensol, filed an insolvency application against Gensol under Section 7 of the Insolvency and Bankruptcy Code, claiming a loan default of ₹510 crore. The National Company Law Tribunal (‘NCLT’) issued a notice to the company to file its reply and scheduled the next hearing on June 3, 2025. Most recently, Gensol’s Chief Financial Officer, Jabirmahendi Mohammedraza Aga, resigned, citing that his decision was linked to internal turmoil and the ongoing regulatory probes.
POWERS OF SEBI: DOES IT INCLUDE FREEZING OF DEMAT ACCOUNTS?
The enormous powers of SEBI are not unknown to the securities market. In Sahara India Real Estate Corporation Limited v. SEBI, the Supreme Court affirmed that the Board has a vast range of powers under the Securities & Exchange Board Act, 1992 (‘the Act’). The Board is given enormous responsibilities under the Act to develop and regulate the securities market. Section 11A of the Act specifically empowers SEBI to take such measures as it deems fit in the interest of the investors.
Banning parties from trading, freezing of demat accounts, or holding of securities are activities bound to severely impact any investor. Three notable circulars were passed by SEBI on November 30, 2015, October 26, 2016, and finally, the last on May 3, 2018. The third and last circular deals with the freezing of securities of the promoter(s) or promoter group. It is pertinent to refer to the circular passed on May 3, 2018, that superseded the earlier two circulars.
Specifically, the circular proposes three main actions against an entity that fails to follow certain provisions of the LODR Regulations. They are – imposition of fines under Annexure I, freezing of holdings of the promoter(s) or promoter group as per paragraph 5 of Annexure I, and suspension of trading in the shares of such entity as per paragraph 1 of Annexure II. The holdings of the promoter(s) or the promoter group are generally frozen if the fine(s)/penalty imposed based on non-compliance with the LODR Regulations are not paid by the concerned entity.
WHY DOES THIS POWER STAND OUT IN COMPARISON TO OTHER REGULATORS?
The power of SEBI directing the depositories to freeze demat account(s) of an investor is rather unique. It is pertinent to compare such power with the powers of other financial market regulators across the world, especially the United States of America and the United Kingdom, as the Financial Regulators operating in these countries are believed to be some of the most powerful financial market regulators.
USA
Arguably one of the most powerful financial markets regulators, the United States of America’s Securities and Exchange Commission (‘SEC’) has never directly ordered the freezing of someone’s demat account. Such actions usually require judicial sanction. There have been numerous occasions on which the SEC has sought freezing of assets or accounts of individuals from a district court. In a press release dated June 21, 2021, the SEC notified an action of asset freeze on two individuals on the charges of offshoring of funds to the shell companies and defrauding the investors. The key point to note here is that the said action was taken in pursuance of an emergency court order, and the SEC did not act on its own.
Similarly, in a press release dated April 14, 2017, the SEC announced a freeze of assets in two brokerage accounts that were used to generate a benefit of more than $1 million in an alleged insider trading case. The SEC undertook this move after getting an emergency court order from the District Court for the Southern District of New York. It is apposite to note that the SEC has never obtained such an order for non-disclosure of information. The Commission usually obtains such orders in cases of, but not limited to, fraud and insider trading.
UK
When it comes to the United Kingdom’s Financial Conduct Authority (‘FCA’), their powers are similarly constrained. As per Section 381 of the Financial Services and Markets Act 2000, the court may grant an injunction restraining the concerned person from disposing of any asset. This is also known as asset-freezing injunctions as per the Handbook of FCA. The FCA is not known for using the Account Freezing Order (‘AFrO’) excessively. However, it has the authority to obtain such an order from a court if it deems fit. In a nutshell, even FCA can freeze someone’s account, but it must be based on an AFrO from the competent court.
CHALLENGES POSED BY THE FREEZING POWER OF SEBI
Several challenges and problems come along with powers that can have such far-reaching implications. The process followed by the SEC or FCA which rely on judicial approval, provide accountability and transparency. In contrast, SEBI’s model lacks oversight.
Recently, in Dr. Pradeep Mehta vs. Union of India & Ors., SEBI, while exercising its power to freeze demat accounts, froze the demat accounts of certain promoters of a company. This move was heavily criticised by the Bombay High Court, as during the period when the concerned company made the defaults, the penalised promoters were not even a part of the company. It must be noted that the Supreme Court set aside the penalty imposed by the High Court, however, the lack of accountability at the Board’s end remains the same.
Part C of Annexure II of the Circular dated May 3, 2018, puts forth the Standard Operating Procedure (‘SOP’) for revoking the suspension. As per the prescribed procedure, the recognised stock exchange shall issue a public notice regarding compliance on the date which the default undertakes the compliance. Seven days following such notice, the suspension on trading in shares of the company shall be revoked. Moreover, the freeze on demat account of the promoter(s) or the promoter group shall be revoked after three months from the date of the public notice.
The question lies: Is the SOP being followed? Considering Alpana R. Kirloskar & Others vs SEBI & Another, despite a SAT order dated October 12, 2022, directing unfreezing of the demat accounts of the petitioners, SEBI and the National Securities Depository Limited (‘NSDL’) failed to unfreeze the demat accounts. On December 13, 2022, SEBI directed NSDL to comply with the said order. However, after inaction by the Depository, appellants addressed an email to SEBI as well as NSDL on February 23, 2023. Upon which, NSDL responded to share the details from SEBI/Statutory Authority regarding defreezing of the securities frozen in terms of the order. In furtherance, NSDL vide an email dated March 13, 2023, requested SEBI for further directions that were not addressed by the Board.
The above-mentioned cases denote a lack of effectiveness of the SOP provided by the SEBI to unfreeze the demat accounts. Whether it is the blame game between the Board and the Depository, ultimately, the investor is left to suffer.
CONCLUSION
In Gensol’s case, the strengths and perils of SEBI’s powers are reflected. On the one hand, SEBI’s swift action ensures that suspected financial impropriety is curbed. However, the sweeping nature of the regulator’s powers raises concerns about procedural fairness. The process to freeze an investor’s demat account can be amended to include a prior approval from SAT to ensure that the power used by SEBI comply with procedural fairness.
It is quite apparent that SEBI is one of the most powerful adjudicatory bodies and regulators of the financial market, not just in India but across the world. Like every adjudicatory body, SEBI can exercise discretionary powers, and this power of freezing demat accounts is perhaps one of them. However, the Supreme Court has reiterated on multiple occasions that those discretionary powers shall be used fairly and reasonably. If the freezing of the demat accounts can be done effectively by SEBI, it should be unfrozen in an equally effective manner, which has not been the situation, by the looks of situations in Dr. Pradeep Mehta case as well as the Alpana R. Kirloskar case.