Transparent market access and fair connectivity rules were breached through preferential treatment, licence lapses, and collusive exchange arrangements.
SEBI examined NSE's non-transparent communication of changes to authorised service providers, preferential treatment to selected brokers, installation of MUX without licence verification, latency advantages, continuation of Sampark connectivity despite licence issues, uneven site inspections, and facilitation of arrangements to regularise unauthorised connectivity. The conduct was described as contrary to SECC Regulations, 2012, SEBI circular requirements, and fair market access principles, and was characterised as collusion and fraud under PFUTP norms. The directions recorded in the text require NSE, W2W and GKN to make deposits to the IPEF, impose market-access and business bans on specified individuals, and restrain Sampark and Prashant D'Souza from offering telecom services to stock exchange entities for two years.
Issues: (i) whether the stock exchange's communication of its revised colo connectivity policy through a website update, without clear cross-reference to the earlier circular, breached transparency and fairness requirements; (ii) whether permitting two brokers to use an unauthorised service provider, while denying similar access to other brokers, and allowing the service provider's infrastructure in the exchange premises without verifying its eligibility, amounted to preferential and discriminatory treatment; (iii) whether continuing the connectivity after discovering the service provider's licensing deficiency, facilitating the transition to another carrier, and the manner in which the cable path was arranged to give latency advantage, constituted fraud and unfair trade practice under the securities laws; and (iv) whether the concerned officers, brokers, directors, partners and the service provider were liable for the violations.
Issue (i): whether the stock exchange's communication of its revised colo connectivity policy through a website update, without clear cross-reference to the earlier circular, breached transparency and fairness requirements
Analysis: The revised position was communicated only by a website posting and not by a proper amending circular. It did not clearly refer back to the earlier circular and thereby created ambiguity as to the governing policy. The exchange's own staff and the affected brokers were unaware of the change, which showed that the communication method was not unambiguous, consistent or transparent. The regulatory framework required fair, equitable and transparent access and the exchange, as a frontline regulator, was bound to communicate policy changes in a clear manner.
Conclusion: The exchange violated the transparency and fairness norms.
Issue (ii): whether permitting two brokers to use an unauthorised service provider, while denying similar access to other brokers, and allowing the service provider's infrastructure in the exchange premises without verifying its eligibility, amounted to preferential and discriminatory treatment
Analysis: The exchange granted permission to two brokers to use the same service provider while refusing comparable requests from other brokers, including requests involving a similar vendor and similar connectivity arrangement. It also allowed the service provider to install equipment in the meet-me room without first verifying whether it had the requisite licence. The exchange's own policy and practice showed that access approval and physical inspection were required in comparable cases, yet those safeguards were selectively waived for the favoured brokers. This differential treatment was not justified by any consistent policy and undermined equal access.
Conclusion: The exchange gave preferential and discriminatory treatment to selected brokers and failed to ensure equal access.
Issue (iii): whether continuing the connectivity after discovering the service provider's licensing deficiency, facilitating the transition to another carrier, and the manner in which the cable path was arranged to give latency advantage, constituted fraud and unfair trade practice under the securities laws
Analysis: After the licensing deficiency came to light, the exchange did not disconnect the already-installed connectivity and instead allowed the favoured brokers to continue using it while other brokers were kept waiting or denied similar access. The record also showed that the cable path was arranged in a manner that shortened the route and conferred lower latency on one broker, and that the broker's BSE-end connection was terminated directly at the rack rather than at the office stated in its request. These acts, taken together with the selective continuation of service and facilitation of the handover to another carrier, were found to be deliberate and to have the effect of inducing market participants to deal through a faster and more advantageous connectivity arrangement. On the broad inclusive definition of fraud and unfair trade practice, such conduct fell within the prohibitory provisions.
Conclusion: The conduct amounted to fraud and unfair trade practice under the securities law framework.
Issue (iv): whether the concerned officers, brokers, directors, partners and the service provider were liable for the violations
Analysis: Liability was fastened on the exchange's senior management and functional heads because they were found to have been involved in, or responsible for, the relevant approvals, approvals by silence, or continuation of the arrangement. The broker that benefited from the arrangement and its CEO were held accountable because the arrangement was knowingly continued and the connectivity path was manipulated for advantage. The other brokers' partners were held jointly and severally liable on partnership principles. The service provider was held liable for active participation in laying the cabling in the advantageous manner. By contrast, the CTO and two non-executive directors were found not to have a sufficient role in the impugned acts.
Conclusion: Liability was upheld for the exchange, several officers, the beneficiary brokers, their partners and the service provider, while the CTO and two non-executive directors were exonerated.
Final Conclusion: The order sustains regulatory action for unfair and preferential handling of colo connectivity, with directions and monetary deposits imposed on the exchange, the beneficiary brokers and the service provider, while granting relief to the noticees found not to have participated in the impugned conduct.
Ratio Decidendi: A stock exchange, as a frontline regulator, must ensure transparent, fair and non-discriminatory access to its infrastructure, and any selective waiver of policy, continuation of an unauthorised connectivity arrangement, or cabling designed to confer latency advantage can amount to fraud and an unfair trade practice in the securities market.
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