Tribunal upholds trades, dismisses appeal citing NSE bye-law 5.

Anand Rathi Share and Stock Brokers Limited Versus National Stock Exchange of India Limited, Nirpan Securities Pvt. Ltd., JM Global Equities Pvt. Ltd., Transglobal Securities Ltd., IKM Investors Pvt. Ltd., Gee Bee Securities Pvt. Ltd., Haven Financial Services Pvt. Ltd., Inventure Growth & Securities Ltd., Todi Securities Pvt. Ltd., Bhaijee Portfolio Ltd. And Lohia Securities Ltd.

Anand Rathi Share and Stock Brokers Limited Versus National Stock Exchange of India Limited, Nirpan Securities Pvt. Ltd., JM Global Equities Pvt. Ltd., ... Issues Involved:

1. Annulment of trades executed on September 26, 2013.
2. Alleged "inadvertent punching error" and "fraud and criminal breach of trust."
3. Compliance with NSE Circulars and bye-laws.
4. Applicability of the Black-Scholes model for pricing.
5. Comparison with the Emkay case.
6. Inviolability of trade under NSE bye-law 5.

Issue-wise Detailed Analysis:

1. Annulment of Trades Executed on September 26, 2013:
The appellant challenged the order of the Independent Oversight Committee of NSE dated July 07, 2017, which rejected the request for annulment of certain trades executed on September 26, 2013, in NIFTY Options Contract. The appellant argued that the trades were executed at substantially low prices due to an "inadvertent punching error" and sought the annulment of these trades. The NSE, however, rejected the application for annulment on May 06, 2014, and the matter was remanded to NSE by the Tribunal for a fresh order in view of the Emkay judgment.

2. Alleged "Inadvertent Punching Error" and "Fraud and Criminal Breach of Trust":
The appellant contended that the orders were placed at market rate due to negligence of the dealer traders and not based on client instructions. The appellant also filed a criminal complaint alleging "fraud and criminal breach of trust by employees" and requested NSE to withhold payouts to counterparty brokers. The NSE and respondent brokers argued that the appellant, being an experienced trader, deliberately chose the market price option to ensure the entire quantity would be squared off within the limited trading time.

3. Compliance with NSE Circulars and Bye-laws:
The appellant referred to various NSE Circulars advising market participants not to place orders at unrealistic prices. The appellant argued that the low execution prices were against these Circulars and requested NSE to investigate potential fraudulent activities. However, the respondents contended that the Circulars belonged to an earlier regime and that the pricing at the relevant time was determined by the Black-Scholes model.

4. Applicability of the Black-Scholes Model for Pricing:
The respondents emphasized that the prices of the options premium at the relevant time were decided by the Black-Scholes model, which was known to all market participants. The Tribunal noted that the price range set by the Black-Scholes model was from Rs.0.05 to Rs. 570.10 for NIFTY put Options 6000 and from Rs.0.05 to Rs. 687.45 for NIFTY call Options 5700. The Tribunal accepted this methodology as the appropriate range since it was not challenged by the market participants at the relevant time.

5. Comparison with the Emkay Case:
The appellant heavily relied on the Emkay case, where the Tribunal annulled trades due to abrupt movements in the NIFTY Index and violations of position limit and margin rules by counterparty brokers. However, the Tribunal distinguished the present case from Emkay, noting that there was no movement in NIFTY, and the appellant's large sell orders in the last minutes of trading led to low execution prices.

6. Inviolability of Trade under NSE Bye-law 5:
The Tribunal referred to bye-law 5 of Chapter VII of NSE, which allows annulment of trades only in cases of fraud, willful misrepresentation, or material mistake. The Tribunal found no merit in the appellant's claim of an unintentional mistake, as it was a conscious decision to square off positions in the last minutes of trading. The Tribunal emphasized the importance of upholding the sanctity of trade and concluded that the impugned trades were not liable to be annulled.

Conclusion:
The appeal was dismissed, with the Tribunal finding no material mistake in the trades executed by the appellant's dealers. The Tribunal also noted the ambiguity in NSE's advisories on trading at far away prices but refrained from issuing directions to NSE, acknowledging the clarity brought by the Circular dated April 11, 2014. The appeal was dismissed with no order on costs.