NSE colocation case: Tribunal quashes Rs 62.58 crore disgorgement orders, sets aside debarment of former officials

Securities Appellate Tribunal, Mumbai partially allowed appeals in NSE colocation facility case. Tribunal found NSE negligent in allowing unauthorized vendor Sampark to provide P2P connectivity without proper license verification, but rejected fraud charges under PFUTP Regulations due to lack of evidence of inducement. Disgorgement orders totaling Rs. 62.58 crore against NSE and amounts against Way2wealth and GKN Securities were quashed as no wrongful gains were proven. Debarment orders against former NSE officials including Chitra Ramkrishna were set aside as punitive rather than remedial. However, business restrictions on brokers for undertaking violations were upheld. SEBI directed to refund disgorged amounts within four weeks.

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Issues Involved:
1. Non-transparent communication by NSE.
2. Preferential treatment and discrimination by NSE.
3. Verification of Sampark's license.
4. Latency advantage to W2W and GKN.
5. Collusion and fraud allegations.
6. Disgorgement and penalties.

Summary:

Non-transparent communication by NSE:
The Tribunal found that the notification of 2013 did not amend the circular of 2009 but only provided more information. The Tribunal held that the finding that the 2013 notification was vague due to lack of cross-reference to the 2009 circular was erroneous. All circulars and notifications were posted on NSE's website, and it was expected that all Trading Members (TMs) would be aware of such information. The Tribunal concluded that there was no violation of Regulation 41(2) of the SECC Regulations and Clause 3 of the SEBI Circular dated May 13, 2015.

Preferential treatment and discrimination by NSE:
The Tribunal found that when the licensing issue of Sampark was discovered, NSE took remedial measures by transitioning the connectivity to Reliance, which did not indicate any preferential treatment to W2W or GKN. The Tribunal held that the finding of preferential treatment and discrimination against Millennium and Mansukh was erroneous. The Tribunal also noted that the entire issue was resolved within 24 days, and thus the central charge was unfounded.

Verification of Sampark's license:
The Tribunal held that NSE failed to carry out due diligence in verifying Sampark's license. However, it found no deliberate attempt by NSE to defraud other TMs. The Tribunal concluded that there was no violation of Regulations 3 and 4 of the PFUTP Regulations or Regulation 41(2) of the SECC Regulations.

Latency advantage to W2W and GKN:
The Tribunal found that the allegation of latency advantage given to W2W was based on surmises and conjectures. It was noted that no evidence showed that data reached W2W before going to Sampark's MUX in the NSE MMR. The Tribunal concluded that there was no latency advantage given to W2W or GKN.

Collusion and fraud allegations:
The Tribunal found that there was no evidence of collusion or fraud by NSE or the brokers. It held that the charge of fraud under Regulations 3 and 4 of the PFUTP Regulations read with Section 12A of the SEBI Act was not proved. The Tribunal emphasized that fraud cannot be inferred solely based on negligence.

Disgorgement and penalties:
The Tribunal quashed the direction to disgorge Rs. 62.58 crore along with interest against NSE, Rs. 15.34 crore against W2W, and Rs. 4.9 crore against GKN, as no wrongful gain was found. However, the Tribunal sustained other directions under Section 11 and 11B of the SEBI Act. The Tribunal also quashed the directions debarring Chitra Ramkrishna, Mr. Ravi Varanasi, Mr. Nagendra Kumar, Mr. Deviprasad Singh, and Mr. M. R. Shashibhushan from holding positions in any stock exchange, clearing corporation, or depository, but allowed for the imposition of penalties if any violations were found. The Tribunal affirmed the direction restraining W2W and GKN from accepting new clients and trading in their proprietary accounts for specified periods.

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