2015 (8) TMI 335 - AT - Companies Law

Tribunal remands annulment issue, rejects appellant's claims, sets aside penalties - NSE to reconsider.

M/s. Emkay Global Financial Services Limited and Others Versus The National Stock Exchange of India Limited and Others

M/s. Emkay Global Financial Services Limited and Others Versus The National Stock Exchange of India Limited and Others - TMI Issues Involved:1. Annulment of trades due to 'material mistake in the trade.'2. Violation of margin money norms by counterparty trading members.3. Faulty trading system and market halt procedures of NSE.4. Penalties imposed on trading members for violations.Detailed Analysis:1. Annulment of Trades Due to 'Material Mistake in the Trade':The appellant sought annulment of trades executed on October 5, 2012, claiming they constituted a 'material mistake in the trade' under Bye-law 5(a) framed by NSE. The appellant's dealer mistakenly placed an order to sell 17 lakh units of NIFTY 50 instead of selling Rs. 17 lakh worth of NIFTY 50, resulting in a sell order worth Rs. 980 crores. The NSE rejected the claim, stating that the appellant failed to install a prudent risk management system, which could have prevented the error. The Tribunal held that the mistake was due to gross negligence and breach of duty by the appellant, which does not qualify as a 'material mistake in the trade' under Bye-law 5(a). The Tribunal emphasized that trades executed due to negligence cannot be annulled, as it would defeat the purpose of inviolability of trades specified in Bye-law 5(a).2. Violation of Margin Money Norms by Counterparty Trading Members:The appellant argued that the erroneous trades were exacerbated by the counterparty trading members (respondents) placing buy orders far away from the market price without adequate margin money, violating SEBI/NSE norms. The Tribunal noted that respondents no. 2 and 3 placed orders significantly in excess of their available margins, which was a violation of the NSE's regulations. The Tribunal found that the NSE failed to adequately consider the appellant's argument that the trades were vitiated due to these violations by the counterparty trading members. The Tribunal remanded the issue to the NSE for fresh consideration, directing it to determine whether the trades involving respondents no. 2 and 3 should be annulled or if other disciplinary actions should be taken against them.3. Faulty Trading System and Market Halt Procedures of NSE:The appellant contended that the NSE's trading system failed to halt the market when the NIFTY index fell by 10%, as required by SEBI guidelines, and only halted when the index fell by 15.5%. Additionally, the NSE resumed trading within 15 minutes, contrary to SEBI guidelines which mandated a longer halt. The Tribunal noted that SEBI had issued a show cause notice to the NSE regarding these issues, and the matter was still pending adjudication. The Tribunal refrained from commenting on the merits of this issue, as it was under SEBI's investigation.4. Penalties Imposed on Trading Members for Violations:The Tribunal reviewed the penalties imposed by the NSE's Disciplinary Action Committee (DAC) on respondents no. 2 and 3 for placing orders far away from the market price and violating margin money norms. The DAC's orders were found to lack detailed reasoning and failed to consider the appellants' submissions adequately. The Tribunal set aside the DAC's orders and remanded the matter for fresh consideration, directing the NSE to pass new orders on the merits after hearing both parties.Conclusion:The Tribunal partially allowed the appeal by remanding the issue of annulment of trades involving respondents no. 2 and 3 to the NSE for fresh consideration. The Tribunal rejected the appellant's contentions regarding the material mistake in the trade and the faulty trading system of the NSE. The penalties imposed on respondents no. 2 and 3 were set aside, and the NSE was directed to pass fresh orders on the remanded issues. The Tribunal emphasized the need for the NSE to consider the gravity of violations and the potential impact on market integrity while making its decisions.