TaxTMI 
TaxTMI 
2015 (8) TMI 335
X X X X Extracts X X X X
X X X X Extracts X X X X
....ocate, Mr. Hitesh Shah, Managing Director Per: Justice J.P. Devadhar (Majority view) 1. In these three appeals dispute relates to trades that were executed on National Stock Exchange on October 5, 2012, wherein these three appellants as well as respondent nos:4 to 9 are parties to the trades. Hence these three appeals are heard together and disposed of by this common judgment. APPEAL NO. 64 OF 2013 2. Appellant herein is aggrieved by the decision of National Stock Exchange of India Limited ("NSE" for short) dated April 29, 2013 whereby, application made by appellant on October 7, 2012 for annulment of trades executed by appellant's dealer on October 5, 2012 has been rejected. Although appellant had claimed annulment of all trades executed by appellant's dealer on October 5, 2012, at the hearing of this appeal before us, counsel for appellant has restricted claim for annulment of only those trades wherein respondents no. 2 to 9 are counter parties to the trades. 3. Case of the appellant in nutshell is that the trades executed on October 5, 2012 constitute "material mistake in the trade" under Bye law 5(a) framed by NSE and hence those trades are liable to be annulled.....
X X X X Extracts X X X X
X X X X Extracts X X X X
....agar Shah, immediately after substantial NIFTY Basket order got executed. Sagar Shah tried to cancel pending orders but could not do so as orders had already hit the exchange server. J) At 09:50:58 A.M. Sagar Shah reported the error to Mr. Kalpesh Parekh and to the IT Department. K) By 09:51:00 A.M., Rs. 650 crores worth of NIFTY Basket order got executed and cash segment of NSE halted. L) At 09:54:00 A.M. Mr. Prakash Kacholia, Managing Director of appellant called the then Deputy Managing Director of NSE, Ms. Chitra to inform her about the error at the appellant's end. M) At 10:01:00 A.M. Mr. Sandeep Singal, Co-Head Institutional Equities with a view to mitigate the possible losses on account of error trades, gave necessary instructions to the dealing team to buy NIFTY futures and options at suitable strike prices to hedge short error position of NIFTY Basket as cash segment of NSE alone had halted and futures and derivative system of NSE was operational. Thereupon the dealing team of the appellant bought: i) 3,01,750 Qty. of Nifty Oct futures ii) 50,000 Qty. of Nifty 5800 CALL iii) 24,000 Qty. of Nifty 5900 CALL and iv) 63,000 Qty. of Nifty 6000 CALL. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....said show cause notice on October 8, 2012 and by an order dated October 29, 2012 the Disciplinary Action Committee ("DAC" for short) constituted by NSE imposed monetary penalty of Rs. 25 lakh by holding that the trades executed on October 5, 2012 were the outcome of an error. U) On October 7, 2012 appellant made an application for annulment of erroneous trades executed on October 5, 2012 in terms of bye-law 5(a) of Chapter-VII of bye-laws framed by NSE inter alia on ground that the trades were outcome of a material mistake in the trade. V) By impugned order dated April 29, 2013, NSE has rejected the annulment application made by the appellant. Challenging aforesaid order of NSE, present appeal is filed. 6. Mr. Khambata and Mr. Modi, learned Senior Advocates appearing on behalf of appellant have submitted that the impugned order passed by NSE cannot be sustained for the following reasons:- a) For determining the question as to whether a mistake is a material mistake or not, one has to look at the magnitude of the mistake as also the size/volumes and the scale of impact. In the present case, erroneous action of appellant's dealer led to a basket order of 17 lakh NIFTY ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sent case, very foundation of the need for a contract not to have been vitiated by a mistake is missing for all the trades in question in view of the error in the placement of the order on part of appellant's dealer. Therefore, such a contract being not enforceable, NSE ought to have annulled the trades in question. d) Erroneous sell order led to execution of erroneous trades for approximately Rs. 660 crores within 6 seconds of the market opening, which is far in excess of the total daily turnover and trading in the first hour after the market opened. Thus, it is clear that there occurred an extraordinary substantial and material mistake and therefore the trades in question ought to have been annulled. e) Committee on Model Bye-laws of Stock Exchanges constituted by SEBI way back in May 1997 had, inter alia, recommended in its report for annulment of trades initiated by mistake. In the present case, trades were outcome of a material mistake in the initiation of trade owing to a mistake by appellant's dealer in placing an order for sale of 17 lakh NIFTY 50 units instead of order for sale of Rs. 17 lakh worth of NIFTY 50 units and hence the trades executed thereunder were liabl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....to be annulled. i) Erroneous sell order placed by appellant got executed to the extent of Rs. 660 crores, because the circuit breaker system of NSE failed to trigger market halt after the NIFTY 50 fell below 10%, which was in violation of SEBI Circular dated June 28, 2008. As a result whereof, loss caused to the appellant escalated to Rs. 51 crores from approximately Rs. 19 crores. Thus, in the facts of present case, where erroneous trades took place on account of respondent nos. 2 to 9 purchasing NIFTY 50 beyond their capital adequacy and on account of failure of NSE's trading system to halt the trading after NIFTY 50 fell below 10%, NSE is not justified in rejecting the annulment application of the appellant. j) As per NSE Circular dated April 24, 2012 every broker has to confirm availability of adequate capital before proceeding with trades in excess of specified threshold. Since counterparty brokers in the present case that is, respondents no. 2 to 9 had confirmed about capital adequacy but in fact there was no capital adequacy for the trades, it is clear that respondents no. 2 to 9 had misrepresented and therefore, respondents no. 2 to 9 cannot be permitted to profit unj....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... the other hand submitted as follows:- a) Admittedly dealer's computer which crashed on October 5, 2012 at 08:30:00A.M. was replaced at 08:45:00 A.M. with a standby computer. Part of sell order received from the client was placed into the NSE's trading system at 9:50:54 A.M. Thus, there was clear gap of more than one hour for appellant to set up on the said stand-by computer the checks and risk management measures which ought to have been necessarily set up on the computer used at the dealer's level. Moreover, no risk parameters were set up even on the CTCL Server level, NEAT CTCL USER ID level and at the Corporate Manager level of the appellant. Thus, apart from placing erroneous sell orders, appellant is guilty of gross negligence/ non compliance as the appellant failed to set up checks and risk management measures in to the trading system of the appellant before entering deals on the Exchange. (b) When a dealer logs into the system of NSE to place a basket order, following procedure is followed-(i) The dealer has three choices for placing an order namely based on value, based on value (in lakhs) and based on quantity. Based on value is the first choice and based on quantit....
X X X X Extracts X X X X
X X X X Extracts X X X X
....thereby minimize the possible losses on account of erroneous trades. Even if erroneous trades in question are annulled, appellant's subsequent square off buy order will remain and the appellant may end up with a profit on the said square off buy order as the market rose subsequently. Thus annulment of trades in question, if granted, would benefit appellant who is guilty of gross negligence, which is undesirable in the interests of securities market. (f) Bye-law 5(a) framed by NSE provides for annulment of a transaction on the Exchange only if the relevant authority i.e. NSE is satisfied that such transaction ought to be annulled on ground of fraud, or willful misrepresentation or material mistake in the trade. Any and every mistake made by a party cannot be classified as a material mistake in the trade. Failure to install adequate and required checks and balances before a computer is used for trade does not and cannot amount to a mistake and in any event cannot be considered as material mistake. Even after erroneous tab was selected, appellant's dealer had 4 to 5 opportunities to rectify the error before placing the sell order, but the appellant's dealer failed to utilize those ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....em. Thus, after triggering of the market wide circuit breaker, a minimum process time would be involved for halting the entire market. This is endemic to any computer system and even SEBI has acknowledged the same in its 'note on market halt' dated May 18, 2009. In the past, time lag between triggering the circuit breaker and complete halt was 13 seconds. However, in the present case, on circuit breaker triggering at 09:50:58 complete shutdown took place by 09:51:04 A.M. i.e., within just 6 seconds. In between circuit breaker triggering and complete shut down, executable and matchable orders existing within the system at that time got executed. Therefore, it is incorrect to state that market wide circuit breaker did not trigger at 10% NIFTY fall. (i) Allegation that after circuit breaker system triggered, cash segment of the Exchange was erroneously halted for only 15 minutes and not for the period mandated by SEBI is also without any merit, because immediately on circuit breaker system triggering it was ascertained that (i) the fall in the market was only due to the negligent order emanating from the appellant (based on the communication received from the appellant) (ii) NSE's ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s, it did not invalidate the trades and wherever margin money violations were noticed, NSE has taken action against the respective respondents and in fact appeals filed against those orders are pending before this Tribunal. In any event appellant who has violated the mandatory norms laid down by NSE and has been grossly negligent in placing the sell orders cannot claim that there is material mistake in trade and consequently the trades in question cannot be annulled and the amounts due to the respondents which are withheld by NSE must be directed to be released to the respective respondents forthwith with interest at such rate as this Tribunal deems fit and proper. 9. We have carefully considered submissions made by counsel on both sides. We have also considered submissions made by applicants in Miscellaneous Application nos. 80 and 81 of 2014. 10. Since the dispute herein relates to interpretation of Bye-law 5, we may quote Bye law 5 framed by NSE which reads thus:- " 5 Inviolability of Trade (a) All the dealings in securities on the Exchange made subject to the Bye Laws, Rules and Regulations of the Exchange shall be in-violable and shall be cleared and settled in acc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....tem of NSE ought to have brought about a coordinated trading halt when NIFTY index fell below 10%. However, on October 5, 2012 the trading system of NSE failed to halt when NIFTY index fell below 10% but halted when NIFTY index fell by 15.5%. Apart from above failure, decision of NSE to resume trading within 15 minutes of the market halt was also erroneous and contrary to aforesaid SEBI circular dated June 28, 2001, which led to execution of some more erroneous trades. If the market halt was continued for the period specified under the aforesaid circular dated June 28, 2001, additional erroneous trades could have been avoided and erroneous trades to the extent of Rs. 660 crores would not have taken place. Therefore, the trading system of NSE being faulty and decision of NSE to resume trading within 15 minutes of the market halt being erroneous, it is just and proper to hold that the NSE was not justified in rejecting the annulment application of the appellant. 12. First question, therefore, to be considered is, whether appellant is justified in contending that mistake committed by appellant's dealer in punching erroneous sell order constituted 'material mistake in the trade' und....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... not), the Trading Member shall be bound to fulfil the obligation arising out of those trades, unless the trades fall within the exceptions carved out under Bye law 5(a). 17. Object of Bye law 5(a) is to ensure sanctity of the dealings on the Exchange by making the trades inviolable. With a view to facilitate inviolable trades, NSE has inter alia issued a circular on July 15, 2005 requiring members using CTCL facility to incorporate suitable validation mechanism as part of risk management, if not already provided to avoid erroneous orders with large quantities being transmitted through CTCL system into Exchange's trading system. In the present case, it is not in dispute that the dealer's terminal did contain risk management system, however it did not contain suitable validation mechanism as a part of risk management system. As a result, when one of the computer in the dealer's terminal crashed on October 5, 2012, IT Department of appellant installed a standby computer and when erroneous order for sale of 17 lac NIFTY 50 instead of Rs. 17 lac worth NIFTY 50 was entered on the said standby computer, erroneous trades to the extent of Rs. 660 crores took place. If suitable validatio....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... to five level checks on the trading terminal were provided with a view to enable the trader to rectify any order erroneously placed by him. Ignoring these four to five level checks that were provided on the screen itself constitutes failure to exercise due care, caution or diligence. Para 24 of the impugned order reads thus:- "24. The trading terminal that is used for placing a basket order, by design and default provides for the following checks for a basket order:- a. As the first level check, in the order entry screen, there are three choices for placing an order namely based on value, based on value (in lacs) and based on quantity. Based on value is the first choice and based on quantity is the last choice. b. As the second level check, while placing the order of Rs. 17 lacs the dealer had entered the figure "1700000" in the screen which shows-"Based on Quantity". c. The third level check is that the quantity and value of the proposed order is shown at the bottom right corner of the screen. In this case, the screen shot provided by the Applicant during inspection, of a sample basket order of same quantity shows net quantity of 1,97,44,895 shares of all NIFTY scrips....
X X X X Extracts X X X X
X X X X Extracts X X X X
....l checks that were prominently displayed on the screen. By ignoring four to five level checks that were prominently displayed on the screen, appellant's dealer pressed 'OK' button thereby allowing erroneous order to hit the server of NSE. In these circumstances, having committed breach of duty by not installing risk management parameters before entering sell order and having been negligent in ignoring four to five level checks that were displaced on the screen before transmitting the erroneous sell order from dealers terminal to the trading system of NSE, appellant cannot escape liability arising out of such trades even if it amounts to incurring huge losses. 21. In a bid to overcome above difficulty, appellant claims that the trades in question, deserve to be annulled on ground that the mistake committed by appellant constitutes material mistake in the trade under Bye law 5(a). Under Bye-law 5(a) inviolability of trades is a rule and annulment of trades is an exception. Where a trading member entering erroneous order is guilty of breach of duty as well as negligence, annulling trades of such trading member would amount to defeating the object of inviolability of trades specifie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....seen circumstance that can be said to vitiate the trades executed on the exchange. 23. It is contended on behalf of appellant that the question as to whether a mistake is a material mistake or not has to be determined on the basis of the magnitude of the mistake, size of the volumes and the scale of impact. There is no merit in the above contention as can be demonstrated from the following illustration. Suppose, a Trading Member by mistake enters sell order for sale of NIFTY 50 Basket worth Rs. 100 crores instead of an order for sale of NIFTY 50 Basket worth Rs. 10 crore. Similarly, suppose another Trading Member by mistake enters sell order for sale of NIFTY 50 Basket worth Rs. 1000 crores instead of an order for sale of NIFTY 50 Basket worth Rs. 10 crore. In such a case, if both sell orders gets executed on the Exchange, to hold that trades of the Trading Member who had erroneously entered sell order for Rs. 1000 crores are liable to be annulled on ground that there is material mistake in the trade in view of magnitude, size and scale of mistake and to hold that the Trading Member who has erroneously placed order to sell NIFTY 50 Basket worth Rs. 100 crore must comply with his....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Bye laws of Stock Exchange constituted by SEBI way back in May in 1997 is also misplaced because, recommendation of that committee in so far as it relates to annulment of trades initiated by mistake, has not been adopted in the Bye-laws finally approved by NSE. In fact, in the Bye-laws finally approved by NSE, recommendation of the committee for suo motto annulment of trades initiated by mistake has been expressly omitted. In these circumstances, first contention of the appellant that punching erroneous sell order which led to fall in NIFTY index by 15.5% and consequent market halt constitute 'material mistake in the trade' under Bye-law 5(a) cannot be accepted. 26. Second contention of the appellant is that apart from erroneous sell order placed by appellant, erroneous trades took place because respondent Nos. 2 to 9 had placed unrealistic orders to buy NIFTY 50 at a price far away from the market price and that too in some cases without adequate margin money which was in violation of the norms laid down by SEBI/NSE and therefore unrealistic trades executed would constitute 'material mistake in the trade' and hence liable to be annulled. Relying on notification dated 1st March,....
X X X X Extracts X X X X
X X X X Extracts X X X X
....rties to the trades executed on the stock exchange i.e. selling trading member as well as buying trading member are guilty of violating the norms and if the selling trading member who is guilty of violating the norms claims that the trades are vitiated on account of violations committed by the buying trading member and accordingly claims annulment of trades inter alia on ground of material mistake in the trade, whether the Stock Exchange can refuse to consider that argument is the precise question that needs consideration. In other words, in an unprecedented case like the present one, where NIFTY index crashed by 15.5% and market halt took place within few seconds of market opening, can it be said that the trades have vitiated market sanctity due to violations committed by both parties to the trades and if so, whether, imposing penalty of Rs. 20-25 lac on both parties to unrealistic trades and allowing respondent nos:2 and 3 who gained several crores of rupees from unrealistic trades to retain such gains, would act as deterrent or boost the morale of respondent nos:2 and 3 who admittedly have violated the norms laid down by SEBI/NSE regularly, is the question which deserves conside....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it Financial Services, orders worth Rs. 468.96 crores were placed 18.64% below the last traded price. Out of the total buy orders of Rs. 1083.42 crores, orders worth Rs. 214.82 crores fructified into trades. This was against the deposited margin of Rs. 4 crores thus leading to a margin shortfall of 87%. Respondent No.2 had also placed sell orders on behalf of Ankit Financial Services for Rs. 555.81 crores out of which orders worth Rs. 392.16 crores were placed 21.88% above the last traded price of the shares. The buy limits set on Respondent No.2's terminal was Rs. 36 to Rs. 71 crores and the sell limits set on the Respondent No.3's terminal was Rs. 37 to Rs. 75 crores. There was no link between the above set limits to the margin/collateral. 33. It is relevant to note that DAC of NSE in its orders both dated April 30, 2013 has held that respondent Nos. 2 and 3 are guilty of violating the margin money norms by committing breach of following Circulars/Regulations:- (a) NSE Circular dated 9th May, 2005. (b) SEBI Circular dated 23rd February, 2005. (c) NSE Circular dated 23rd March, 2007. (d) NSE Capital Market Segment Regulation 4.5.4.c(i) and 4.6.1 (e) NSE Capital M....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ndent nos:2 and 3 by merely recording that respondent nos:2 and 3 have represented that their trades were in the ordinary course of business and that they had placed buy orders even before appellant placed sell orders. If placing buy orders far away from the market price and in violation of margin money norms was the regular practice followed by respondent nos.2 and 3, then surely it was a case for taking more stringent action against respondent nos:2 and 3 as there was constant danger of their buy orders disturbing the market equilibrium as well as sanctity of trades compared to the erroneous sell orders placed by appellant by failing to install suitable validation mechanism in the risk management system and by ignoring four to five level checks displayed on the screen. 38. NSE ought to have appreciated that between the two violators who deserved to be more disciplined. In other words NSE ought to have appreciated that for violations committed by appellant whether imposing penalty of Rs. 25 lac in addition to the loss of more than Rs. 51 crores was appropriate or for violations committed by respondent nos:2 and 3 whether imposition of penalty of Rs. 20-25 lac on respondent Nos:....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gly second contention raised by appellant is remanded qua respondent nos:2 and 3 for fresh consideration and in accordance with law. 44. Third contention of appellant is that the trading system of NSE was faulty because, firstly, contrary to SEBI guidelines, market halt did not take place when NIFTY index fell below 10% and secondly, decision of NSE to resume trading within 15 minutes after the market halt took place when NIFTY index fell by 15.5%, was in violation of SEBI circular dated June 28, 2001 and therefore trades in question are liable to be annulled. 45. No doubt that SEBI has issued a show cause notice to NSE on the above issues. NSE has replied to the said show cause notice and the matter is still pending adjudication before SEBI. Since the above issues are pending for decision before SEBI it would not be proper for us to comment on the merits of the issue raised herein. However, for the purposes of this appeal, we may consider the prima facie view of SEBI in the show cause notice as well as the reply filed by NSE before SEBI. In its reply, NSE has stated that on NIFTY index falling below 10% the circuit breaker system did trigger and entry of fresh orders into th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sed is disclosed nor the basis of quantifying penalty is disclosed. Similarly in the impugned orders without assigning any reasons it is held that the appellants have violated the circulars issued by NSE under the provisions of Prevention of Money Laundering Act and the Rules made thereunder. 49. Apart from above, since issue relating to taking action on account of respondent nos.2 and 3 placing buy orders far away from the market price and in violation of margin money norms is remanded for the reasons set out in paragraphs 33 to 43 above, without going into merits of rival contentions, we set aside the orders impugned in both appeals and direct NSE to pass fresh order on merits and in accordance with law after hearing both parties. 50. In the result, all the three Appeals as well as Miscellaneous Application Nos.80 and 81of 2014 are disposed of in the following terms: a) Appeal No.64 of 2013 is partially allowed by remanding the issue relating to annulment of only those trades in which respondent nos. 2 and 3 are counter parties to the trades. On remand, NSE shall rehear both appellant as well as respondent nos. 2 and 3 on the question as to whether the trades in which re....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Y sale order worth Rs. 980 crore. This error was identified at 9:50:58 and immediately at 9:51:00 after NIFTY basket order got executed to extent of Rs. 660 crore, Market halted due to fall in NIFTY index by 10%, necessitating market to shutdown. 3. At 10:05:00, when Respondent No. 1 resumed trading on NSE, some more orders worth, out of Rs. 980 crore sale order, Rs. 5 crore got executed, since they were pending in the system, instead of being returned by trading system of Respondent No. 1 and rest of pending orders of Appellant were cancelled. 4. At 11:45:00 Appellant reached Respondent No. 1 office and explained what transpired, i.e. their version, and requested Respondent No. 1 to annul these "error" trades. At this juncture, it is stated that the term 'error trade' will be used subsequently also, since this term has been started by Appellant and all others are referring to these trades as 'error trade', but the undersigned will not be bound by 'error trade' as representing an actual error, at any point up now or in future. 5. At 12:00 noon, Appellant's system were put on square off mode, but due to problems of margin, the trades could not be squared off and thereafter ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nt. It may be pointed at this stage that Appellant has not quantified, value of trades which took place when NIFTY had fallen by 10% and what value trades occurred when it fell from 10 to 15.5% and how Appellant has concluded that fall of NIFTY from 10 to 15.5% caused it enormous loss, when it had been clarified by Respondent No. 1 that trading worth Rs. 5 crore only took place, between fall of NIFTY INDEX from 10% to 15.5% of opening mark. 9. It is also stated by Appellant that Respondent No. 1 conducted immediate inspection of system and risk management of Appellant and issued SCN, which was replied and Disciplinary Action Committee (DAC) of Respondent No. 1 imposed monetary penalty of Rs. 25 lakh on Appellant after holding trades executed on October 5, 2012 was outcome of an error, vide order dated October 29, 2012. 10. On October 7, 2012, Appellant applied before Respondent No. 1 for annulment of trades of October 5, 2012 in terms of buy-law 5(a) of Chapter-VII of buy-laws of Respondent No. 1, on grounds that trades were outcome of a material mistake. Bye-law 5(a) reads: "CHAPTER VII: DEALINGS BY CLEARING MEMBERS INVIOLABILITY OF ADMITTED DEALS (a) All the dealings ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ituations; 13. NSE called up counter party brokers to file their reaction to application of Appellant to cancel trade and Appellant was asked to file its response to counter-parties reaction. After hearing Appellant and all major counterparties, NSE, passed Impugned Order dated May 1, 2013, rejecting Annulment Application. 14. It is further submitted that SEBI has initiated proceedings against NSE, in regard to erroneous trade of Appellant on October 5, 2012, and issued show cause notice to Respondent No. 1 on following points:- (a) systems of Respondent No. 1 did not work as required under the provisions of securities laws by not coming to a halt when the index fell by 10%; (b) Respondent No. 1 erred in not keeping the market system shut for two hours, and instead resumed trading within a period of fifteen minutes; (c) Respondent No. 1 failed to put in place order / trade limit controls and risk management at its end and has rather put the onus for the same solely on the broker; and (d) counterparty brokers had been able to enter large purchase orders at unrealistic market prices without even posting margin, and therefore were able to cause a systemic risk and th....
X X X X Extracts X X X X
X X X X Extracts X X X X
....equire brokers to confirm availability of adequate capital before proceeding with trade, in excess of specified threshold; (g) If counterparty brokers have certified capital adequacy, without actually having adequate capital for the trades, it would amount to a misrepresentation, and such brokers ought not to profit unjustifiably from such orders placed; (h) Counterparties ought not to be allowed to take advantage of their own wrong or to benefit or profit from the same would amount to unjust enrichment; (i) October 5, 2012 is not peculiar to India and whenever human intervention is possible, there is possibly of human error and if error happens, stock exchanges may annul trades since these were patently erroneous; 17. Counter Party Trading Members (CPTMs) have submitted as follows:- (a) Trading on stock exchange is faceless trading where Exchanges and its Clearing Corporations act as a counter to both buyer and seller and guarantee settlement of trades executed through its trading system; (b) Business of dealing in stock markets is a business which carries inherent risk, which includes sudden increase or decrease of value of securities bought or sold. Entities tr....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ealistic prices since orders were within permissible circuit filters and orders were in capital market segment and in most liquid contracts; (j) Delivery of shares and issuance of contract note, in pursuance to trades of October 5, 2012, has been done and are complete contracts. Hence, annulment of trades would set very wrong precedent; (k) All CP's trades, that got executed, were passive trades and in system of Respondent No. 1 and got executed, when sale order came into trading system. Hence, no un-intention benefit has been obtained from sell order of Appellant; (l) Appellant has stated that it took all possible mitigating action, but one important such action for sending CP, trade cancellation request, was not undertaken; (m) Locally and internationally, trades have been annulled due to fraud / misrepresentation / manipulation, and are differentiated from facts of present case, since present trade occurred due to an alleged error; (n) Large number of trades in F&O segment are undertaken in a large number of cases to hedge their arbitrage position in cash segment and in case cash segment trades are annulled, there will be significant financial implications on conc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... part of Risk Management System to avoid erroneous orders; * There is no requirement of collection of Value at Risk (VaR) Margin on upfront basis from clients by broker in capital market segment, and collection of this margin to be as per internal policy of broker; * Deficiency of margin is no reason for annulment of trade, since availability of margin of broker with exchange is dealt by NSE as per its own procedure of dealing with the situation and exchange dealt accordingly on that day as well; * Exchange, on regular basis, put Members terminals on square off mode, due to insufficiency of margin and Members have to bring addition margin or square off trade to bring margin written limits and for this, Members are subjected to pre-defined penalty and interest for overnight shortfalls; * Annulment request is frustrated from practical stand point by impossibility, since reversal of trade would impact across the market, since trades were squared off by them and have gone to buyers who might have taken delivery or further traded in market and to annul such trades would be impossible, since de-mated shares are fungible and it is virtually impossible to track the shares, pert....
X X X X Extracts X X X X
X X X X Extracts X X X X
....laws, rules, regulations of Respondent and was bound to abide by these, but its conduct shows that Appellant did not show adequate regard for the regulations, requirements as well as prudent risk management practices; * Appellant was obligated to abide by (i) Regulation 4.5.1. of NSE Capital Market Regulation Part A - to adhere to Code of Conduct - Regulation 4.2.1 of NSE Capital Market Regulation Part A-Trading Member shall supervise activities of its employees, Regulation 3.2.5 of NSE Capital Market Regulation Part A - Trading Member will be solely responsible for accuracy of details of orders; NSE's circular dated July 5, 2005 - incorporate suitable validation mechanism as part of risk management system to avoid erroneous order with large quantities and despite all this; Appellant did not comply with these regulations, and circulars of SEBI / NSE; * Regarding mechanism of placing orders, DAC noted that dealer deliberately choose "Based on Quantity, entered 17 lakh in tab wherein it was mentioned based on quantity, net quantity showed 1,97,44,895 and net value at Rs. 9,74,28,72,733.55 - which was not noticed by dealer, quantity and value of each of the scrip showed huge fig....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that this argument is not germane to the issue under consideration. * Appellant has submitted that there was material mistake since order size was Rs. 980 crore, appellant suffered loss of 51 crore, market fell drastically because of order leading to market halt but DAC needs to look at materiality in context of whole or significant part of market and not in context of one member. Appellant suffered loss due to his consistent gross negligence and his acts brought cash market to fall and had to be halted for some time. Market recovered within seconds of reopening and value of trade, arising out of Rs. 980 crore sell order constituted only 3.35% of trading value of cash segment of NSE and 0.33% total traded value of that day on NSE; * Risk Management and control facilities provided in CTCL software, were not made use of by Appellant and Appellant tried to shift blame partially to dealer, but DAC finds this unacceptable. Since dealer is employee of Appellant and hence Appellant is responsible for all acts and omissions of the dealer, since Regulation 4.2.1 requires Trading Member (Appellant) to establish, maintain and enforce procedures to supervise its business and to supervise....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nces; when, most importantly, Appellant was negligent in placing erroneous order, in the first instance, when it did not place risk management measures in their ordering system and had put entire market at risk; * DAC also stated that annulment has been resorted to in only few occasions, in entire history of 18 years of NSE and that too where cases were pertaining to manipulations. For this and all above reasons request of Appellant for annulment of trade as per bye-law 5(a) of NSE was not accepted; 21. Now the issues that arise are:- How authentic is the version of Appellant in narration of what happened in their work station, resulting in market fall and its consequences; Whether CPTM are justified in their claims that these orders were in conformity to NSE rules, bye-laws and circulars; Whether Appellant is justified in asking for annulment of trade arising due to their erroneous order of October 5, 2012; Whether decision of DAC / NSE i.e. Respondent's refusal to request of Appellant for annulment of trade justified; • Whether it is possible to annul the trade of October 5, 2012; 22. The first issue that requires examination is whether versi....
X X X X Extracts X X X X
X X X X Extracts X X X X
....with I.D. INST19 is shown log in at 9:11:24 in machine with IP ending 155, from where he logs out at 9:13:00 and logs in again 9:18:15 to log out at 9:37:37 and thereafter log in at 9:37:55 from machine with IP ending 221 and log out at 9:52:09 i.e. at the time order for 17 lakh units of NIFTY is placed at 9:48:52. It is seen that Sagar Shah logs in machine with IP 221 at 9:37:55 after logging out of machine with IP 155 at 9:37:37 i.e. after 18 seconds and hence placed orders from a regular machine 221 and not from replaced machine 155. It is stated by Appellant that due to conflict of IP with 155, the replaced machine was given IP 221, but from opinion of experts, it can be inferred that to change IP of a machine, it takes at least 180 seconds and the same cannot be done in 18 seconds, which is the time shown in Sagar Shah switching from machine with IP 155 to machine 221. But this explanation of Appellant that IP of crashed replacement machine was changed from 155 to 221, due to conflict of IP and if did not allow dealer to log in from IP 155, but it has not been explained as to how dealer was working on IP 155 from 9:11:24 to 9:13:0, from 9:18:15 to 9:37:37, where dealer logged ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....hat systems, limits etc. were found in Appellant's work station and what has been stated about these, is the version of Appellant and definitely there are in-consistencies in these, which have been brought about by CPTM, which have substance, but not dealt properly by Respondent No. 1; hence it has to be mentioned that facts are not properly known and hence taking inferred and rational decision, will be definitely affected. 27. Appellant has relied on Indian Contract Act, 1872 for canvassing his case to the effect that since mistake was on both parties to the contract, about the subject matter and hence contract was void, but this Contract Act cannot be imported to present case, since laws governed securities market are adequate to deal with the present case and Contract Act, 1872 came into existence, when present day securities market did not exist or were even contemplated and also since Appellant / CPTMs did not plead Contract Act before Respondent No. 1/ DAC and hence we may not take cognizance of pleadings of both the parties, based on Indian Contract Act, 1872. 28. Another fact that is canvassed by Appellant is that everyone, including Respondents and CPTMs had referred....
X X X X Extracts X X X X
X X X X Extracts X X X X
...., exposing markets to risk, etc. etc.; are all versions of their own i.e. of one interested party not supported by an independent third responsible party and even Respondent No. 1 - who is also an interested party to quite an extent, as will be stated later - have conducted some enquiry / inspection, at Appellant's end, - during the day of happening, have not placed their inspection report before this Tribunal, which also has been quoted by Appellant only - that it did not find anything wrong with their system, represents a state of affairs, where this Tribunal has been called upon to take informed decisions, which will have serious repercussions on market and may give rise to further litigation; when actual facts of happenings on October 5, 2012, are not available before this Tribunal. 31. Another aspect that needs to gone into in details, is the stand taken by Respondent No. 1 in different situations, in this matter itself, while dealing with different aspects of this issue, while dealing with different parties. 32. The first important aspect that needs to be dealt is imposition of penalty of Rs. 25 lakh on Appellant vide Respondent's letter dated October 29, 2012, as per d....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... purpose inspection conducted by Respondent had been meaningful and set at rest the speculation of some counterparties that entire system of Appellant was flawed, with no limits on any machine, a dealer not tied to any terminal and one dealer operating from six terminals, one dealer shifting to another computer as a matter of routine, computer control assigning IPs without ensuring that same is not being used by another computer, terminals having or not have limits, limits left to dealers, i.e. no management controls or supervision, dealers not careful in placing orders and acting negligently; but Respondent No. 1 carried out a limited purpose inspection, not trying to find out of any relevance but reiterating what was dished out to them by Appellant, which in other words is a routine inspection, where nothing is reported or asked for, but undertaken to show that inspection was carried out for record purposes. 35. However, it may be stated that Respondent No. 1 have held, in brief, the Appellant of violative of various bye-laws, regulations and circulars of Respondent and imposed penalty on Appellant, which has been paid and not appealed against and case of Appellant is that whe....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... dated May 09, 2005; 38. These cases will be dealt separately and, at this stage no conclusion need be drawn from above, but it will be sufficient to state that Respondent No. 1 found faults with trading of Respondent No. 2, in respect of trading margin, ordering in excess of client's work, placing orders significantly away from market price and allowing trading limits on terminals to place huge quantity of buy / sell orders for clients, without collecting margin or considering clients capability; 39. Now coming to third outlook of NSE on this matter, wherein SEBI issued show cause notice to NSE, on following counts: (a) Systems of Respondent No. 1 did not work as required under provisions of securities laws by not coming to halt when index fell by 10%; (b) Respondent No. 1 erred in not keeping the market system shut for two hours and instead resumed trading within a period of fifteen minutes; (c) Respondent No. 1 failed to put in place / trade limit controls and risk management at its end and has rather put the onus for the same solely on its brokers; (d) Counterparty brokers had been able to enter large purchase orders at unrealistic market prices, without even ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o risk management controls to be placed before starting a new system, which could cause irreparable damage to the system and has not ensured that on installing the software on the new machine after the crash of the system, appropriate control, validation process and due diligence were undertaken. 45. Hence, NSE (Respondent No. 1) has not taken an inconsistent stand in dealing with issues arising out of trade of October 5, 2012; wherein Appellant had put huge unintended order for sale for NIFTY scrip. 46. It may also be mentioned that placement of a huge single sale order of Rs. 980 crore for sale of 17 lakh units of NIFTY BASKET, gave rise to unparalleled and unprecedented situation of such humongous proportion, in such short span of time, that SEBI circular / NSE's circulars, bye-laws and regulations, which deal with normal situations arising on day to day basis in conduct of trade at exchange, proved inadequate to meet the abnormal situation and hence attempts of all concerned, including SEBI and NSE, to apply their regulations - which deal with ordinary situations - to such an unforeseen, unparallel and unprecedented situation, is giving rise to dissatisfaction to all conc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....cision not yet taken by SEBI on reply on SCN to NSE, it may be mentioned that NSE, is at present, an interested party and should not be sitting over adjudication where it has interest in projecting itself above board, when it's conduct or functioning of its system is being questioned. 49. Now coming back to various events which took place on October 5, 2012, it appears that an order of Rs. 980 crore originated from Appellant, which was the single largest order in history of NSE and hit trading system of NSE at 9:50:54, and within 4 seconds order worth Rs. 660 crore got executed which resulted in fall of NSE index by 10% and, as per circular of SEBI, NSE cash segment stopped trading and system came to a halt at 9:51:04, when NSE index had fallen to 15.5.%. Trade worth Rs. 660 crore, involved, Appellant, 660 counter-parties and 14,000 clients. 50. Out of 665 counter-parties to the trade, some eight had major contribution amounting to 70% of trade, and most of these eight counter-parties, who executed trade upto Rs. 462 crore or so, allegedly fell short of margin requirement, alleged to have also traded by placing orders far away from last traded price or realistic prices, allow....
X X X X Extracts X X X X
X X X X Extracts X X X X
....gin. SEBI and NSE have to sort this out and it NSE had difficulty in implementing SEBI's instructions on this issue, they should have brought it to notice of SEBI or SEBI should have ensured that their instructions are implemented; but none of these two has happened. 55. Fact of the matter is that member's terminals do not get switched off automatically on reaching 100% utilization and NSE on realizing that a member has reached 100% margin limit, put off that members terminal and brings these in compulsory square off mode and at this member has option of squaring off his open positions to come within margin available or to bring an additional margins. 56. As per Respondent No. 1, trading of members does not stop at 100% utilization of margin, since when margin is on verge of crossing 100% margin utilization level, if a large order of a member is under execution, the same will be completed and any action to put his terminals on compulsory square off made (mode that does not allows further trading); is taken thereafter and invariably results in members overshooting 100% margin in these cases. 57. In view of above imperatives of practicability, Exchanges (including NSE) have ....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... and some brought in some additional margin and/or squared off their open positions. Hence, counter-parties did what they are habituated to do, as per requirements of system and law and no fault / violation can be found, in this respect. 61. Another point stressed by Appellant that counter parties) i.e. Respondent Nos. 2 to 9) had placed orders worth hundred to thousand crore, without having capability and capacity to execute the same. In this respect Respondent No. 2 is a case in point, which had placed orders of Rs. 1083.42 crore, for both buy and sell side. As per Respondent Nos. 2 and 3 and others, who appeared before this Tribunal have stated that it was their practice to put orders in a similar manner which they did on October 5, 2012, before Appellant's sell order came in, from past for a long time and is part of their trading strategy and they have made money or lost on trading, based on this strategy, but have always fulfilled their commitments. 62. Since Respondent No. 1 has not refuted this statement that Respondent Nos. 2 to 9 were not placing such big orders in the past, hence it was an acceptable practice of Trading Members to place such order and as per Respond....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ng Cash Market - Risk Management Framework, 'Members should have a prudent system of Risk Management to protect themselves from client default. Margins are likely to be an important element of such a system. The same shall be well documented and be made accessible to the clients and the stock exchanges. However, the quantum of these margins and the form and mode of collection are left to discretion of Members'. As per this, Exchange is concerned with Members and clients of members are left to be dealt by member and if a member chooses to take small / insignificant / or no margin, it is his discretion, to be exercised with prudence Respondent No. 2 represented that this client has been with them for 20 years, has met all his obligation and has never defaulted and otherwise he is very solvent and his net profit is Rs. 57.53 lakh during 2011-12, which was wrongly stated at Rs. 57.53 lakh as income. Respondent No. 2 also stated that their client, AFS, has fulfilled all obligations arising out of trade all these years and by not taking any margin from this client, has been done after necessary due diligence. This argument, since based on reason, logic and on law, is accepted. 65. Nex....
X X X X Extracts X X X X
X X X X Extracts X X X X
....o or assists in carrying out any plan or scheme from the making of any purchase or sales or offers or offers of purchase or sale of securities for the purpose of upsetting the equilibrium of the market or bringing about a condition in which prices will not reflect market values; * Unwarrantable Business: If it engages in reckless or unwarrantable dealings in the market or effects purchases or sales for its constituent's account or for any account in which it is directly or indirectly interested which purchase or sales are excessive in view of its commitments or his own means and financial resources or in view of the market for such security. 68. Although Appellant made a big issue of Respondent Nos. 2 to 9 acting in prejudicial business or unwarranted business, but this has to be seen in background of unforeseen events in NSE on October 5, 2012, where a single sale order of Rs. 980 crore shock the market, which was stabilized to quite an extent due to pre-existing orders of Respondents in a layered manner, which had been their strategy since a long time, where were in NSE's system for every single day since long and hence NSE was aware of these order and if NSE had any proble....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r NSE's circulars, rules and bye-laws, to which learned senior counsel for Appellant, stated that capital adequacy is required, as per above mentioned circular of NSE and hence capital adequacy and also net worth should also be sufficient to place orders or execute trade of the order placed by Respondent Nos. 2 to 9. The above has been quoted by Appellant, out of context, and has no relevance to trading on NSE and capital adequacy is in relation to sufficiency of margin and not in terms of net worth of members. This actually, was not clarified by NSE, on whose circular, rule, bye-law, Appellant was arguing and it is strongly felt that NSE, who was represented by its senior counsels / counsels / representative, throughout the discussions of relevant appeal, should have clarified the matters, which concerns them and are arising out of their directives. 72. As a matter of fact, NSE should be careful in drafting their circulars, regulations, bye-laws to make these clear and understandable by all concerned in an unambiguous manner, since these are required by all players in security market; but it is a matter of regret, that NSEs circulars, bye-laws, rules are drafted in a manner, wh....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... 9:55:11 Last order acceptance time 9:55:18 9:55:53 Last trade time 9:55:21 9:55:54 Market reopened after 2 hour halt 11:55:00 11:55:00 Circuit Triggered for second time 11:55:17 11:55:17 Last order acceptance time 11:55:19 11:55:32 Last trade time 11:55:25 11:55:33 76. In narration, it is stated that, in earlier instance of market-wide circuit filter triggered on May 18, 2009 and NSE system brought market to halt in 13 second, where BSE system took 43 seconds to halt market, with further falls in NSE and BSE, between trigger and halt. When markets resumed functioning, after halt on above triggers, markets had to be closed a second time and it took 7 second for NSE system to halt after trigger, while BSE system took 13 seconds to halt after trigger. This time BSE trading was not halted, after NSE system halted after 6 seconds of trigger. It further stated that time taken by system to bring market to halt, depends on level of activity on the market when triggered. SEBI have agreed to this contention and recorded, in this matter as : Difference between circuit trigger time and last order acceptance time on the exchan....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny such eventuality, in future. 81. One thing must be mentioned that, as per SEBI's instructions to NSE, to disable members trading terminal when margin available is utilized to the extent of 100% and NSE passing this responsibility to members with instructions of not trading when margin is exceeded, whether NSE was justified in pass the buck to members and whether it was possible to have a tab in their trading system, which will disable members, trading terminals on exhausting available margin. NSE is definitely not justified in passing the responsibility of stopping trading on exceeded available margin to members and should have tried to implement this in their trading systems and if it was not possible, due to some reasons, should have brought this to notice of SEBI. This was not done and to resolve this SEBI and stock exchanges should consider what has to be done to address this problem. 82. The last question to be considered is whether NSE is justified in turning down Appellant's request for annulment of trade of October 5, 2012, in terms of Chapter VII : Dealings of Clearing Members para (b) regarding cancellation of impugned trades allegedly vitiated by fraud, material....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inter-alia -, whether how dealer within 4 seconds realized that he had made a mistake when - as per Appellant - all the trade happened in 6 seconds before market halt got triggered, whereas as per NSE all the trade happened in 4 seconds before market halt got triggered and from which computer order was placed, whether it had address end 221 or 155 - the replacement of crashed computer and whether explanation of Appellant , is plausible, that IP 155 of computer was changed to IP 221; without change of computer, which was done in 18 seconds, when experts say this will take at least 180 seconds. 87. Since this Tribunal has take a view whether request for annulment is justified and practical, it can be held in equity that such a request is not justified, in given circumstances, since it is not possible to believe that buy order of Appellant was result of one punching error and that it is not possible, at this juncture, to annul the trade, due to practical difficulties that will arose and may put counter-parties to grave loss, for no fault on their party and will enrich Appellant, who created all the problem, due to its negligence. 88. Towards the end may be mentioned that modifie....
X X X X Extracts X X X X
X X X X Extracts X X X X
....eged violations (V), reply of Appellant (R) and decision of Disciplinary Action Committee (D) of Respondent are enumerated below, ad seriatim:- (i) (V) Appellant placed, on behalf of his client, orders worth Rs. 1083.42 crore on Respondent; as against margin of Rs. 4 crore, on October 5, 2012 between 9:05:00 a.m. to 9:50:59 a.m.; (R) Regarding placing orders and applicable margin in trading system, of Rs. 1083.42 crore, VaR margin shall be collected on gross open position of the member, as per Clause 11.52 of Circular No. 541/2011 (Download Ref. No. NSE/CMPT/19139 dated October 14, 2011; which in effect means that during Rolling Market, requirement of margin is applicable on open position and not on pending orders entered by members (brokers) in trading system of exchange; Exchange levies margin on pending orders in pre-open session, which means Exchange has mechanism to levy margin based on pending orders, but exchange has not applied this to Rolling Market Session and that requirement of margin is upon execution of trade in Rolling Market Session - and this facility has been extended by this Members to its clients; Member did not enter these kinds of orders for first ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s for which derivative products are available and scrips included in indices on which derivative products are available. However, in order to prevent members from entering orders at non-genuine prices in such securities and in pursuance of Regulation 2.5 of Part - A of Regulation of Capital Market Segment, Exchange maintains dummy circuit filter (operating range) of 20% of such securities; This in effect means Respondent generally recognizes that orders placed within range of 20% of LTP are not non-genuine and orders placed by Appellant were well within the parameters stipulated by Exchange. Comparison of order price with LTP, which is as per Respondent's letter is 18.64% of some buy orders and 21.88% of some sell orders form LTP is also within framework of 20% price band to previous close, as stipulated by Respondent; (D) Buy orders for huge quantities placed, at a price significantly away from market price were matched and led to steep market fall. Appellant has represented that it had placed all its orders within permissible limits and no order was placed beyond limits set by Exchange and client has always being adopting this strategy of trading in the past. DAC noted that....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t of 91% is crossed - which was not enacted by Respondent. Over and above that, the orders placed by Appellant, after reach 100%, Respondent puts the members (including Appellant) into a compulsory square off mode. (D) Does not deal with this specifically but, "perhaps", assumes that decision in (ii) will apply. (v) (V) As per income proof submitted by client, gross total income for year ended March 3, 2012, was Rs. 57.53 lac and total value of orders, in all scrips for buy / sell, was Rs. 1083.42 crore on October 5, 2012, which shows Appellant provided exposure to client which was hugely disproportionate, with income of client. This exposure was arbitrary, reckless, grossly negligent for exceeded known capabilities of client. (R) Client's net profitability for FY 2011-12 was Rs. 57.53 lac, erroneously shown as gross total income, which is appreciative, considering adverse market conditions in previous FY. Partners of client are High Net Worth Individuals and deal in securities market through Appellant only. Combined financial capability of the client group is much over Rs. 100 crore. Client places such orders on daily basis and all orders placed on trading system do not g....
X X X X Extracts X X X X
X X X X Extracts X X X X
....it consumption for executed orders limits were set up with adequate care and caution and looking at general trend in market i.e. very small % of orders get executed and result into trade. (D) Buy limits and sell limits placed on terminals used by trading member on October 5, 2012 of between Rs. 36 crore to Rs. 71 crore for buy and between Rs. 37 crore to Rs. 75 corre for sell, without collecting adequate margins or considering client's ability. Therefore, no care and caution had been exercised in setting the limits for the dealers or by linking the same to margins / collateral and such conduct resulted in disablement of Member, which is in violation of Rule 4(d) of Chapter VI of Rule of Exchange and Exchange Circular Reference No. NSE/CMPT/6122 dated May 09, 2005. (viii) (V) Non adherence to prescribed risk management policy and providing high exposure without adequate margins is not in accordance with the Exchange Circular (NSE/CMPT/6122) dated May 09, 2005 and also constitutes violation of the provisions of Prevention of Money Laundering Act, 2002 ("PMLA") as informed to you vide various circulars issued by the Exchange from time to time including Circular (NSE/INVG/7102) d....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... Chapter IV of Rules of Exchange) un-businesslike conduct (Rule 4 of Chapter IV of Rules of Exchange and Unprofessional Conduct (Rules 5 of Chapter IV of Rules of Exchange); (R) As explained above, Appellants have not violated any Regulations of exchange and deny violation of Rule 3, 4 and 5 dealing with misconduct, un-businesslike conduct and unprofessional conduct; (D) Deals with gross income of client "AFS" for FY 2011-12 at Rs. 57.53 lac, against exposure of Rs. 1083.42, in placing buy and sell orders by Appellant on behalf of client on October 5, 2012; which was considered arbitrary, reckless, and with gross negligence and far exceeded known capabilities of client and since no margin was collected by Appellant from client, conduct of Appellant indicates un-businesslike conduct; 3. From scrutiny of 'alleged violations', 'reply' of Appellant and 'Finding and Decision'; it is seen that matter has been dealt by Respondents and DAC of Respondent in a unprofessional, un-businesslike and ad-hoc manner, without going into any depth of the problem and in a perfunctory manner, not expected of exchange of national level competing with best in India and abroad and most importantl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....alt in 4 paras of findings by DAC of Respondent to hold Appellant violative of 21 circulars of Respondent and one PMLA master circular and relevant PMLA rules and 3 rules of Chaper IV of Rules of exchange, etc.. It is not clear as to how 9 alleged violations have been dealt in 4 para findings by DAC, without giving any credence to reply of Appellant, let alone indicating why replies of Appellant were not considered satisfactory or how these replies did not rebut allegations and why some of the alleged violations in SCN have been accepted or why some of these overlooked / not mentioned. 7. In fairness, it must be admitted that though inspection carried out by team of officials of Respondent was not conducted in a satisfactory manner and had other deficiencies, but still brought out nine violations on part of Appellant in clear terms, but same cannot be said of conduct of DAC of Respondent, which met in all solemness, conducted appropriate proceedings, took oral evidence of Appellant and after examining their written submissions, made some findings in 4 paras for 9 alleged violations, without indicating which para of findings deals with which violations, and on what basis DAC conc....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... from the previous close price is being applied since a very long period of time. * The Exchange has quoted some figures, selectively taking into account a few orders that are far away from the extreme ends of order log without taking into account the law of averages that is applied in all business." 9. It can be seen from table that orders for purchase of Rs. 531.7 crore were placed by Appellant on October 5, 2012, at different levels, for purchase of NIFTY Scrip and these orders got converted into trades of Rs. 214.83 crore. It may be seen from data in above table and finding that buy orders worth Rs. 214.83 got converted into trade, it will be safe to conclude that all buy orders which got converted into trade, were from 0-5% and 5 to 10% range of buy order of Appellant. Hence, what buy orders got converted into trade, were placed at 0 to 10% of previous close, which is also supported by Appellant's contention that their average profit from trades on October 5, 2012 was 7½ % only. 10. Now, it is not understood, as to why Appellant is being faulted for steep fall in market, when only buy orders got converted into trade were placed in range of 0-10% of previous clo....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... constituted. It may also be stated that imposition of penalty on so many entities by Respondent, included Appellant, for occurrences of October 5, 2012; has proved an opportunity in disguise for Respondent to make money by imposing penalty to extent of lac of rupees, know-beat everyone concerned by being held violative of so many of its rules, buy-laws, circulars; without explaining , let alone advising, anyone how to conduct themselves in matters of trading, confusing everyone as to how trade at Respondent's trading system is to be conducted and engaging lots of entities in lot of meaningless litigation. 14. Before concluding, it may also be stated Respondent was asked by the undersigned as what the allegation were, how the Appellant violated its regulations etc. and how the trading on its system was to be conducted, but representatives of Respondent did not clarify any such matters but stated, in brief, what was contained in SCN or in findings of DAC and hence did not make the undersigned, any wiser, to understand the case. 15. Hence, in conclusion it is held that impugned order imposing penalty of Rs. 25 lac and for providing Rs. 25 lac for withholding to ensure complianc....
X X X X Extracts X X X X
X X X X Extracts X X X X
....er, Appellant did not default on their obligations as a broker. (D) Trading Member has exceeded its exposure by 718% by executing total buy trades worth Rs. 158.87 crore, as against total available collateral of Rs. 2.88 crore i.e. collateral available was 14% of required collateral for execution these transactions. Thus Member has evaded margin in violation of Rule 5(i) of Chapter IV of Rules of Exchange and Exchange Circular ref. no. NSE/CMPT/6122 dated May 9, 2005. (ii) (V) You placed total of 2381 buy orders (for Rs. 264.38 crore) in NIFTY scrips, out of which 2026 orders (for a value of 260.24 crore) were placed at prices significantly below Last Traded Price (LTP) upto 18.15%; on October 5, 2012 between 9:02:44 and 9:50:10. Further, on same during this day between 09:04:30 and 09:50:53 you placed total of 2675 sell orders (for Rs. 305.40 crore) on NIFTY scrips, out of which 2291 orders (for Rs. 298.41 crore) were placed at prices significantly above Last Traded Price upto 20.28% and, therefore, it is apparent that you placed orders away from the market on buy and sell side; (R) Buy orders cannot result in falls in price of scrip. Top 5 orders in respect of scrip (in ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....23, 2007, wherein attention of members was drawn to Regulation 4.5.4(c). Further it was also stated in the said exchange circular that non-compliance with the requirement specified in Trading Regulation shall attract disciplinary action. Additionally, members were advised to exercise due diligence and caution at the time of entering orders which are far away from market price and also advised to put in place appropriate internal systems and procedures for ensuring that such orders are not entered. (R) Same as in (ii). (D) Same as in (iii) (v) (V) You, in your proprietary account placed buy orders with the exchange in all the scrips during the period 09:02:44 and 09:50:52 of a total value of Rs. 300.61 crore, which is 11 times your net worth as on March 31, 2012 i.e. Rs. 27.78 crore. (R) Trades in proprietary account were jobbing transactions and orders were placed in normal course of business. Observation that buy order exceeded 11 times net worth is based on incomplete appreciation of facts, since margin calls are not based on order placement, but on executed trades. Appellant was well within financial net worth and admittedly not in default in respect of trading oblig....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... with gross negligent and far exceeded the known capabilities of the clients. Further, no margin was collected by the trading member from the clients. The Committee noted that the said conduct of the trading member indicates unbusinesslike conduct as defined in the Rule 4(f) of Chapter IV of Rules of the Exchange, Exchange circular reference no. NSE/CMPT/6122 dated May 9, 2005 and Exchange circular on PMLA. (vii) (V) As per exchange circular no. NSE/CMTR/4749 dated January 21, 2004 - Members are urged to ensure that they collect adequate and proper margins from the investors and do not fall prey to any possible temptation to fund margin / pay-in for their investing clients. It is again reiterated that members must exercise proper due diligence in assessing the financial capacity of clients for whom they are executing orders to ensure that their clients market activity is commensurate with their financial ability. (R) Same as in (vi). (D) Same as in (vi). (viii) (V) Buy limits placed on terminals used by you for placing orders, pertaining to your clients on October 5, 2012 was Rs. 200 crore, Further, the buy and sell limits set for the terminals used by you for placing o....
X X X X Extracts X X X X
X X X X Extracts X X X X
....010 and PMLA Master Circular (NSE/INVG/16703) dated January 05, 2011 and relevant PMLA Rules. (R) Appellant has robust and well documented margin collection and risk management system, which has been implemented and reviewed frequently and past inspections by NSE have not questioned Appellant Risk Management System. Appellant, on behalf of itself and of its client, did not default in their obligations to Exchange and violation of PMLA 2002 is denied. (D) No mention. (x) (V) From the above, your conduct indicates Misconduct (Rules 3 of Chapter IV of Rules of the Exchange), Unbusinesslike Conduct (Rule 4 of Chapter IV of Rules of the Exchange) and Unprofessional Conduct (Rule 5 of Chapter IV of Rules of the Exchange). (R) No reply. (D) Same as in (v). (xi) (V) Considering the seriousness of violation involved and the adverse impact that it has created on market and investors at large and the systemic risk it posed, you are hereby called upon to show cause as to why disciplinary action should not be initiated against Prakash K Shah Shares & Securities Pvt. Ltd. for violation of Rules 3, 4 and 5 Chapter IV of Rules of the Exchange, violation of Regulation 4.5.4(c)(i) ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....pondent and DAC has not considered the replies of Appellant but come to same conclusions which were alleged in inspection. DAC's finding and decision are stated in 5 paras on pages 5 and 6 of Respondent's communication dated April 30, 2013 and thereafter 6 sub-paras on page 6 and 7 state some observations, which concludes violation by Appellant of various rules, bye-laws, regulations and circulars of Respondent, followed by imposition of penalty of Rs. 20 lac and deposit another Rs. 20 lac to monitor compliance. 6. Thus a 10 point charge sheet of Respondent has been dealt in 5 paras of findings by DAC of Respondent to hold Appellant violative of 18 circulars of Respondent and one PMLA master circular and relevant PMLA rules and 3, 4 and 5 rules of Chaper IV of Rules of exchange, etc.. It is not clear as to how 10 alleged violations have been dealt in 5 para findings by DAC, without giving any credence to reply of Appellant, let alone indicating why replies of Appellant were not considered satisfactory or how these replies did not rebut allegations and why some of the alleged violations in SCN have been accepted or why some of these overlooked / not mentioned. 7. In fairness, ....