TaxTMI 
TaxTMI 
2023 (1) TMI 1323
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..... Nithyaesh Natrajan, Advocate ORDER PER: JUSTICE TARUN AGARWALA, PRESIDING OFFICER 1. The Whole Time Member ("WTM" for short) passed an order dated 30th April, 2019 directing: a. National Stock Exchange of India Ltd. (hereinafter referred to as "NSE"), noticee No. 1 to disgorge an amount of Rs.624.89 crores alongwith interest at the rate of 12% per annum with effect from 1st April, 2014 onwards to the Investor Protection and Education Fund ("IPEF" for short). b. NSE is prohibited from accessing the securities market directly or indirectly for a period of 6 months from the date of the impugned order. c. NSE to carry out System Audit at frequent intervals, after taking into consideration the changes in the technology. d. NSE to reconstitute its Standing Committee on Technology at regular intervals. e. NSE to frame a clear policy on administering whistle blower complaints. f. Mr. Ravi Narain, noticee No. 2 to disgorge 25% of the salary drawn for Financial Years 2010-11 to 2012-13 to the IPEF. g. Mr. Ravi Narain shall not associate with any listed company or a Market Infrastructure Institution or any other market ....
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....arius Khambata, Senior Advocate assisted by Mr. Somasekhar Sundaresan, Mr. Abishek Venkataraman, Ms. Sonali Mathur, Mr. Prabhav Shroff and Mr. Harshit Jaiswal, Advocates for the appellant in appeal No. 333 of 2019, Mr. Gaurav Joshi, Senior Advocate assisted by Mr. Ravichandra Hegde and Ms. Mitravinda Chunduru, Advocates for the appellant in appeal No. 184 of 2019, Mr. Pesi Modi, Senior Advocate assisted by Mr. Neville Lashkari, Mr. Rashid Boatwalla, Mr. Aditya Vyas and Mr. Dhruv Jadhav, Advocates for the appellant in appeal No. 331 of 2019, Mr. Prashant S. Pratap, Senior Advocate assisted by Mr. Piyush Raheja and Ms. S. Priya, Advocates for the appellant in appeal No. 336 of 2019 and Mr. Nithyaesh Natrajan, Advocate in appeal No. 433 of 2019 and Mr. Rafique Dada, Senior Advocate assisted by Dr. Poornima Advani, Mr. Manish Chhangani, Mr. Ravishekhar Pandey, Ms. Prerna Sharma and Ms. Samreen Fatima, Advocates the respondent and Mr. Nithyaesh Natrajan, Advocate for the Intervener in appeal nos.333 of 2019, 331 of 2019 and 336 of 2019. 6. Before we deal with the rival submissions of the parties, it is necessary to deal with the intervention application and the appeal filed by Mr. A.....
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....ing the time of Mr. Ravi Narain, NSE had launched its Colocation facility in January, 2010 which was unauthorized and did not have approval from SEBI and, therefore, such unauthorized activity was wholly illegal which SEBI should investigate. It was alleged that selected brokers were allowed to misuse the Colocation facility by giving them advantage over other market participants. It was alleged that the role of Mr. Ravi Narain and Ms. Chitra Ramkrishna should be investigated. It was contended that Omnesys Technologies Pvt. Ltd. (hereinafter referred to as "Omnesys") provided technology for trading on NSE. It was alleged that Ms. Chitra Ramkrishna was also a Director of Omnesys and was also the MD & CEO of NSE and, therefore, there was a clear conflict of interest and, therefore, investigation should also be made by SEBI with regard to the role of the IT Company which had a business relationship with NSE. 9. It was also alleged that Mr. Sanjay Gupta, owner and promoter of OPG abused the TBT architecture in connivance with the officials of NSE on the basis of which it allowed OPG to be the first one to log in the exchange server of NSE and, which resulted in unlawful gain to OPG ....
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....her urged that SEBI should be directed to exercise its powers under Section 24 of the SEBI Act and launch criminal prosecution against the erring officers. 12. It was also urged that misuse of secondary server by unscrupulous brokers manipulated the market as a result of which the purity and sanctity of the securities market was compromised. It was urged that the economic fraud of this magnitude and nature deserves no leniency or sympathy and that the wrong doers must be punished by this Tribunal. It was also urged that the WTM has passed two contradictory orders, namely, the order passed in NSE matter and in OPG matter. On account of these contradictions and inconsistency in the two impugned orders, it was urged that the two impugned orders should be set aside and a fresh direction should be issued to SEBI to reinvestigate the matter and pass fresh orders thereafter. It was, thus, contended that the appellant should be permitted to interfere and should be impleaded as a party. 13. The appeal and the intervention application was vehemently opposed by the appellants contending that the interveners are not necessary parties nor are interested parties and are unnecessarily pokin....
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....5) The Securities Appellate Tribunal shall send a copy of every order made by it to the Board of the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority, as the case may be, the parties to the appeal and to the concerned adjudicating officer. (6) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal." 17. A perusal of the aforesaid provisions indicates that any person aggrieved by an order of the Board may prefer an appeal to the Tribunal. Admittedly, the appellant is an advocate practicing in the Madras High Court. The impugned order does not affect him in any way nor is he concerned with the securities market. Nothing has been stated as to how the appellant is aggrieved by any finding of the WTM in the impugned order. Shri A. Kumar has not produced any new material or evidence which would necessitate an intervention by the applicant in the present appeal. Mr. A. Kumar admittedly had not availed any Colocation servic....
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....ed clients to access the market directly i.e. without human intervention, using the software of a trading member and routing the orders through the trading member"s infrastructure. This paved the way for algorithmic ("algo" for short) trading where the decisions on the trades are executed by computer software. The orders are executed using automated preprogrammed trading instructions. The absence of human intervention steps up the frequency and the speed of the reactions to market movements, and is called "High Frequency Trading" ("HFT" for short), using algorithms in trading. 22. Co-location services i.e. (Colo) is a facility provided by Stock Exchanges across the globe for all trading members for a reasonable fee. Interested member-brokers who are engaged in HFT, can avail Colo facility. Access to Colo is fairly and equitably available to all member-brokers. In HFT, faster access to data and price feed helps in swifter execution of a trade (which results in a high daily turnover and high order-to-trade ratio). When a member-broker avails Colo, trading or data vending systems of the broker are allowed to be "co-located" i.e. physically located within the very premises of the st....
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....phased transition, and with effect from December 3, 2016 it had completely migrated to the MTBT architecture. In the intervening period, NSE continued to provide TCP/IP TBT feed as well while the market adapted to MTBT. Thereafter, from December 2016, NSE discontinued the TCP/IP feed, which, since then, is been used as a back-up owing to the integrity of dissemination and receipt assured by MTBT. Brief description of the TCP/IP TBT System Architecture 30. NSE operates independent trading systems which match, buy and sell orders to discover price. From the trading system of the exchange, data is communicated/ disseminated to the members availing the Colo facility using the TCP/IP TBT system architecture in the nature of ticks. As stated above, each tick denotes a change in the order book i.e. order entries, order modifications, order cancellations, trades, and other data related to the market that can change the order book as they happen. The member-brokers" trading systems which are co-located in the exchange premises connect to the Ports (as defined hereinafter) through IPs, for the receipt of disseminated data from NSE"s trading systems. 31. A diagrammatic representation....
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....rs receives the information is dependent on which POP Receiver is switched on first manually. Ports 35. From the POP server, the information is transmitted to the three Ports. Every POP Server also has three POP Senders, also known as "Ports". Data which is received by the POP Receiver is in turn, disseminated onwards through the "Ports" to the servers of member-brokers sitting on the Colo-rack. 36. Each trading member is connected to a particular Port and cannot shift without the express permission of NSE. Member-brokers were allotted specific ports & IP addresses on the POP Servers, and could only access the POP server through their respectively assigned IP address and port. Member-brokers were also given access to the secondary server. 37. The information is transmitted out of the Port on the basis of "first connection" and the order of dissemination remains the same throughout the day in the same chronology. Secondary Server 38. The term "Secondary Server" is a nomenclature used for an additional/alternate/backup POP Server provided by NSE. The secondary server was meant to act as a back-up server in the event of a primary POP Server failure in which case the ....
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....rvers that were installed for the purpose of business continuity, whose access should ideally be permitted in case the primary servers went down, were allowed to be accessed by OPG as load on such server was low. g. Once NSE started MTBT at its co-location facility, the market share of OPG fell off the chart. 40. Upon receipt of the complaint, SEBI constituted a Cross Functional Team ("CFT" for short) to conduct a preliminary fact finding on the veracity of the complaints. A report dated 30th November, 2015 was submitted by CFT to the Technical Advisory Committee ("TAC" for short). On examination of the preliminary report of the CFT, TAC recommended that a detailed analysis be carried out by an Expert Committee. The recommendation of the TAC was accepted by SEBI and an Expert Committee was constituted which submitted its report on 2nd March, 2016 contending that: a. NSE TBT architecture was prone to market abuse thereby compromising market fairness and integrity; in that it provided quicker order dissemination to those who managed to login early, i.e, if one entity is ahead of the other while logging in the morning, it gets information ahead of the other throug....
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.... advantage to such members. c. In order to ensure that the norms of 'fair access' were not breached, it was possible for NSE to negate the advantage of connecting first by implementing a 'randomizer' which would randomly pick a connection to begin dissemination of data, rather than starting with the first connection each time. However, though NSE developed a randomizer in 2011 that was implemented only for Bucket POP servers. This was not replicated on the broader TBT systems." 43. Subsequently, vide letter dated 28th February, 2017, SEBI advised NSE to undertake a forensic audit in the Cash Market ("CM") segment, Currency Derivatives ("CD") segment and Interest Rate Futures ("IRF") segment for the period 2010-15 and to examine the benefits/profits made by the TMs through the TBT mechanism. Based on the directions, NSE appointed M/s. Ernst & Young LLP (hereinafter referred to as "EY") to carry out forensic audit of CM, CD and IRF segments. NSE also appointed Indian School of Business ("ISB") to undertake examination to estimate the benefits/ profits to the TMs who logged in first. EY submitted its report on May 18, 2018 and ISB submitted its report on November 14, 2017.....
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.... in a transparent, fair and open manner and, consequently, failed to fulfil the objects envisaged in its MoA and the conditions of recognition. 46. Subsequently, issue relating to access to Non-ISPs for laying of Dark fiber within the exchange premises was split into different show cause notices in 2018. One set of show cause notice was issued on July 3, 2018. Supplementary show cause notice was issued on July 31, 2018 and, in this way, notices initially issued to 15 noticees increased to 17 noticees. 47. Summary of allegations contained in 2017 show cause notice, 2018 show cause notice and supplementary show cause notice are as under: a. TCP/IP based TBT architecture was allegedly prone to manipulation which compromised market fairness and integrity. NSE did not consider the principles of fair and equitable access while taking a decision regarding the system architecture; b. NSE allegedly failed to implement a 'randomizer' in its TBT architecture. Although, NSE had developed a randomizer in 2011 and implemented it for the Bucket POP servers, this was not implemented on TBT servers; c. NSE allegedly failed to implement a load balancer and di....
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....ted May 13, 2015 by failing to ensure fair, transparent and equitable access to all trading members in respect of the co-location facility; b. NSE failed to comply with clause 4(i) of SEBI circular CIR/MRD/DP/09/2012 dated March 30, 2012 by failing to have adequate controls and policies in respect of the Co-location facility, thereby making the system prone to manipulation; and c. NSE and its employees allegedly violated Section 12A(a), (b) and (c) of the Securities and Exchange Board of India Act, 1992 (hereinafter referred to as "SEBI Act"), Regulations 3(a), 3(b), 3(c), 3(d) and 4(1) of the Securities and Exchange Board of India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (hereinafter referred to as "PFUTP Regulations") by colluding with OPG to provide preferential access to OPG, and thereby indulged in fraudulent and unfair trade practices. d. It was alleged that OPG was constantly logging in across servers and OPG was aware of the weakness of the system architecture and the advantage of having first access in terms of trade. Further, OPG had designed the software in such a way that OPF could ....
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....l Protocol/Internet Protocol ("TCP/IP") and (ii) Multi-cast TBT ("MTBT"). NSE made a bona fide choice of using the TCP/IP protocol for its TBT architecture, for sound and valid reasons, as explained in detail below. 54. The Colo facility was being introduced for the first time. It was critical to lay a sound foundation. Choices of technology were primarily driven by the need to have complete and fully assured high integrity of dissemination and receipt of the ticks. TCP/IP was seen as an appropriate choice of technology for a nascent market. At the relevant time, the F&O segment volume was only 3,000 to 5,000 messages/ second, which TCP/IP could effectively handle, while even guaranteeing absolute market safety and integrity. 55. On the other hand, MTBT is akin to a broadcast, and can simultaneously transmit large volumes of data to a large number of persons, with the potential downside of loss of some data packets. In MTBT, delivery of data is on a "best effort" basis, i.e., the network does not guarantee or confirm data delivery, and this can result in loss of packets or the sequence in which packets are delivered. In MTBT, the onus of ensuring the receipt of data packets i....
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....ber who received the first tick would have an advantage by early login into the system. 63. It was, thus, alleged that the TBT architecture was prone to manipulation in the absence of automation, random function at POP servers and load balancers, as well as allocation to servers with fewer occupants giving them an added advantage. 64. The above charge was denied vehemently. It was contended that the TCP/IP architecture was not prone to manipulation. The sequential dissemination of TBT data did not offer any advantage to the members who logged in first nor there is anything on record to support as to what advantage was conferred to the members logging in first nor any analysis has been done on this aspect. It was also urged that the architecture had an inbuilt randomizer in the dissemination of the data and that no member could be sure of receiving TBT data earlier than others even if they connect first to the POP server since it could not be ascertained whether their particular POP server was connected first. Further, each POP server had three Ports and, therefore, members could not be sure which data disseminated first on a particular Port. 65. The WTM after weighing the ....
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....cross servers varied significantly. h. NSE should have installed a load balancer which would have taken care of overcrowding on a particular Port. i. The WTM found that absence of load balancer had created an advantage to certain TMs in receiving ticks first who logged in first before those IPs that are connected later in time. j. Had there been a load balancer, each Port across each server would get the same/similar number of connections without crowding any out. k. Had there been a randomiser, the order of TMs connectivity to each Port would be randomized thereby negating the effect of first connect/early login. l. NSE had implemented a randomiser in Bucker POP but no clear reason was given for not implementing a randomiser in the TBT architecture. m. Absence of randomiser on the TBT dissemination servers created an inherent advantage in receiving TBT data by members connecting first. 66. Contention of NSE is, that the sequential data dissemination or early login did not confer any benefit or advantage for a variety of reasons. It was urged that: i. There was variation in the sequence in which POP servers connected....
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....t may not receive all batches first on that Port." ix. Deloitte, on whose reports SEBI places heavy reliance, has confirmed that they did not examine the receipt of ticks. x. There were multiple queues for dissemination of data (9 in F&O and CM, 6 in CD/IRF). A member would need to log in first on all queues/Ports (across all 3 POP servers) to be sure of first dissemination of ticks. A TM would have no knowledge of his connection on all queues (including the order of connections of the POP servers to the PDC). No instances of a member logging in first on all queues occurred. xi. TMs were not aware either of the order in which POP serves would connect to the PDC or whether they were on the first Port of a particular server, or were first on a particular Port. TMs also did not know the order of connection of each Member to a Port. xii. Therefore no one could gain from first connect. Even NSE did not know the order of connections and could only check this post facto by review of connection logs. xiii. Findings in EY Reports and ISB Report also demonstrate that no advantage was conferred by first/early login (technologically or financially).....
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....the respondent SEBI is, that the sequence of the dissemination at the PDC and the POP Server level is not disputed. The charge in the show cause notice is not in respect to the order of dissemination at these levels, i.e. PDC level or the POP Server level. The charge is confined to the dissemination of the tick at the Port level. It was urged that the TBT architecture was prone to market abuse thereby compromising market fairness and integrity. The order of dissemination connected to the same Port in a server, is on a first come first serve basis, meaning thereby a member connecting first to a specific Port in a dissemination server will receive the tick before all other members connected to that Port on that server. It was urged that the data was disseminated in a sequential manner meaning thereby that a member who connected first to the POP Server received the ticks before the member who connected later. It was urged that a member who was aware of the sequential nature of dissemination of TBT data would derive an advantage by early login into the system. Hence, the TBT architecture was prone to manipulation. 69. On the issue of first connect/early login, what we find is, that ....
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....ch receiver was activated first through the Epsilon script. The Ticks received by the Receivers percolates to the Sequencer which sequences this information in the order of the Ticks. Thereafter, this information goes to the Processor. 74. From the Processor, the information goes to the POP Server. The order in which the POP Server gets connected to the PDC through Epsilon script is random due to the variation in the TBT application start up time within each POP Server. According to EY, the dissemination sequence from PDC Processor to POP Server could be different on each trading day. According to SEBI, the sequence in which the POP Receiver receives the information is dependent on which POP Receiver starts or gets connected first to PDC. 75. We also find that the information sent from the Processor to the POP Server is in a sequence, namely, that information is received in POP 1 Receiver, then POP 2 Receiver and POP 3 Receiver and then POP 4 Receiver (Secondary Server). On another trading day, the information transmitted by the Processor could be received first by POP 2 Server, and, thereafter POP 3 Server, POP 4 Server and POP 1 Server. This order of receiving information w....
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.... also inclined to accept that there was some randomness in the sequence of the POP servers connecting to the PDC as brought out in para 8.1.1.9 (b) earlier." 79. The WTM has held that the dissemination of information at the Port level was in a predefined sequence, i.e., first to Port 1, then to Port 2 and then to Port 3. The WTM held that since the dissemination of information at the Port level was in a defined sequence, the TM who logs in first to Port 1 of the POP Server would get the data first at the start of the trading day and thereafter the sequence of the IPs in a Port would continue to remain the same throughout the day. The information dissemination order from a Port would remain static throughout the day depending upon the ranks established on the strength of log in timings. It was thus held that equal access of information was not possible to all the TMs logged into the TB data feed system at a given point of time and, therefore, the system conferred an advantage on early loggers in a Port compared to others. 80. The aforesaid conclusion drawn by the WTM was primarily based on the fact that the dissemination of information at the Sender Port level of a particular ....
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....minated a batch before others on that Port for that trading day. Similarly a member ranked last on the array on a Port would always be disseminated a batch last on that Port for that trading day. vii. Further, there were three POP servers (including secondary) with three Ports each and consequently nine independent dissemination queues. A member would need to be first on all the nine Ports (across three POPs) to be disseminated all the batches first on that trading day. viii. Each POP had a receiver and three senders (also termed as Ports) since December 2011. The Port numbers assigned in CM were 10980, 10981 and 10982. ix. The Ports would start in the sequence of Port 10980, 10981 and 10982. x. POP receiver receives a batch from PDC and disseminates it to the respective queue of each Port sequentially. xi. Each Port will read the batch from its respective queue. Source code did not define the order of the receipt of batch at each Port. xii. An array (dissemination sequence) is maintained by each Port which is created based on the time of login by a member on that Port, i.e. earliest login is ranked first. Dissemination from a P....
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....rst as another TM who logged in at a later point of time on another Port may receive the information/tick first. f. EY in its report states that the source code defined the order of dissemination of batches but not that of their receipt at each Port within the same POP. For example, batch 1 may be received first by Port 10980, while batch 2 may be received first by Port 10981. There are nine independent dissemination queues and dissemination on each Port is sequential based on login time of a TM. g. Thus again, we find that there is some randomness in the dissemination of data from POP Server to Port. The dissemination from the POP Server is sequential but receipt of the information at the Port level may not be sequential. One batch of information may be received first by one Port and another batch of information may be received by another Port first. h. Each Port was an independent dissemination queue and dissemination from a Port to TM was sequential based on their ranks on a Port. Such sequential dissemination on the Port was on account of an array that was designed based on login time of a TM IP. i. A TM logging in first on a particular Port ....
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....as variability in the order of receipt of data at the Port level and even the Port that was disseminated data first did not necessarily receive all the data first. A TM who logged in first would receive the data first on the Port ahead of the TM who logged in after him. The TM who logged in first would continue to receive the batches of information ahead of the TM who logged later from the rest of that trading day. We also observe that the TM who logs in first may get a probabilistic advantage of receiving the data first ahead of other TM who logged in later on that particular Port. b) Absence of Randomiser 81. The show cause notice alleged that absence of randomiser on the TBT dissemination server created an inherent advantage in receiving TBT data by members connecting first. It was also alleged that a randomiser was developed by NSE in 2011 and was implemented for the bucket POP Server in 2012 but the same was not implemented in the normal TBT segment server and that NSE was unable to explain the reason for not implementing the randomiser in the normal TBT segment server. It was also alleged that the development of the randomiser and its implementation in the bucket POP Se....
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....dissemination of data. The purpose of a randomiser is that it would randomly send the data either to Port 1 or to Port 2 or to Port 3 and that there would be unpredictability with regard to dissemination of the data on a particular Port. As we have found that the dissemination of data from the Sender Port to the TM was not sequential but there was a randomness and that the receipt of information at the Sender Port was not sequential, namely, that batch 1 of the information may be received by Port 1 and that batch 2 may be received first by Port 2 and, therefore, till the stage of Port there was some randomness in the dissemination of the data. Thus, introducing a randomiser after the Port level would have created a randomness of dissemination of data in which randomness was already existing. In our opinion, once there was randomness in dissemination of data from the Sender Port level there was no requirement of having an additional randomiser for further randomness of dissemination of data. 86. The finding that absence of randomiser created an inherited advantage in receiving TBT data who connected first is erroneous as a TM connecting first does not give it a guarantee that it ....
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....rs are more pronounced on the days for the year 2012. d. In terms of number of IPs actually connected, the variation is even more pronounced. e. Though there was a limit of 30 connections for each Port of POP Server, the actual number of IPs allocated exceeded 30. f. It is observed that the manual load balancing of members across servers did not seem to have been performed equitably. 91. It was, thus, alleged that in the absence of a load balancer, variation of load on each Port have resulted in an inequitable access to the TMs in as much as variation of load at each Port had/or would have resulted in varied lagged time for distribution of data under sequential data distribution process. 92. The WTM upon consideration of the evidence and submissions made by the parties found that there was no SOPs for allocation of the IPs but a limitation of 30 connections per Port of POP Server i.e. a total of 90 per POP Server was fixed. The WTM found that there was a significant variation in terms of number of IPs allotted to each Port within a Port Server and the total number of IPs allotted to each POP Server. It was found that though there was a limit of 30 s....
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....oint of failure and that an additional hardware device like that of a load balancer was generally not used in the TBT architecture. In support of his submission the learned senior counsel placed reliance on the statements of Ms. Mamatha Rangaprasad, Mr. N. Murlidharan. It was further stated that in any event the variation in load across servers was not significant which would require a load balancer. It was urged that the load on each Port depended on the number of connections by members on that Port on a given day and the load was not dependent on the number of allocations of IPs on that Port. It was, thus, urged that there was no evidence or material to demonstrate that the variation in load resulted in any advantage or disadvantage to any TM. 94. Considering the submissions made by NSE and upon consideration of the material evidence that has come on record, one thing is clear that there were no defined laid down SOPs for allocation of IPs to a TM. Mr. Ravi Apte in his submission dated 2nd May, 2018 has categorically stated that "there was no system for load balancing/ dynamic load balancing" meaning thereby that there was no procedure for allocation of IPs. 95.....
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....ase the down time and most of the members found it inconvenient and that currently distribution was manual and recommended implementation of a load balancer. This email was followed by another email on 4th January, 2012 from Hozefa Poonawala suggesting implementation of a load balancer. 98. From the aforesaid, it is clear that NSE was aware of the practical difficulties in manually allocating the IPs and shifting the IPs from one Port to another Port. A load balancer was suggested. The reply of NSE indicates that a decision was taken not to implement the load balancer. We find that there is nothing on record to indicate what bonafide decision was taken by NSE for not implementing the load balancer. As we have already held there was no laid down defined SOPs for allocation of the IPs. 99. This leads us to the question of whether a load balancer was necessary in the facts of the given case. 100. A Load Balancer as described in the impugned order is as under: a. A Load Balancer is a hardware/software that distributes network / traffic load across a number of POP Servers based on a specific algorithm like least connections, least response time, round robin etc. ....
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.... or during the time of any subsequent connection. 106. In view of the aforesaid, it is apparent that a load balancer was essential for equal distribution of IPs on a particular Port. If on a given day there is a load factor on a particular Port in contrast to a lesser load on another Port, then the load balancer would automatically shift the excess IPs on one particular Port to another Port which has a lesser number of connections on that day in order to equalize and balance the load across all Ports. The load balancer distributes the traffic across all Ports and eliminates manual intervention which is otherwise susceptible to preferential treatment to a given set of TMs. 107. The alleged decision taken by NSE not to implement the load balancer is not on record and, in any case, does not appear to be a bonafide decision. Their contention that implementation of load balancer would increase the latency is per se erroneous. Latency, if any, would be equal for all TMs and it would not be a case where the latency factor is for one TM against another TM. Implementation of a load balancer if it increases the latency would be equal across all TMs who have logged in on that particular....
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....tive server and that a TM could receive data if it was connected to the secondary server. The report also stated that there was no documented policy or procedure with respect to connection to the secondary server nor was there any mechanism to identify members connected to the secondary servers. Deloitte also reported that "Ticks" were disseminated faster to members connected to less crowded server thereby giving advantage to such members. 113. EY in its report submitted that based on stimulation test performed 95% of all the batches were disseminated first to the members connected first to Port of secondary servers. 114. Thus, the two reports primarily observed that in the first few months of 2012 the connection to the secondary servers were being monitored by NSE and that certain TMs were reprimanded and were directed to disconnect it from the secondary servers. The two reports observed that whereas certain members were reprimanded other TMs were allowed to stay connected with the secondary server for no valid reason. EY has given detailed report with regard to which members being reprimanded. 115. NSE responded that the secondary server was only a backup server to be us....
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.... EY"s stimulation test observing that 95-96% in CM Segment and 80-85% in CD Segment of all batches were disseminated to members connected first to Port of secondary server and thereby certain advantages were made by these TMs. This was only possible in the absence of strict monitoring which allowed members to harvests the benefits of early access to the TBT feed from the secondary server. 118. Having heard the learned counsel for the parties and having perused the record we find that NSE had issued a Colocation guideline on 8th August 2011 which was revised on 16th April, 2012 which states as under: "Members who always check the secondary TBT parameters are working fine with their application in case of non-availability of data from TBT primary source they can move to secondary source". 119. According to NSE, the Colocation guidelines was sent as a welcome email to all new members in Colocation and that the said guidelines was never used as a circular. NSE also admitted that there was no monitoring mechanism to identify members connected to secondary servers nor was there any documented policy with respect to TMs connected to fallback servers. According to NSE, when ....
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....f time if a TM is connected. Thus, in our opinion, a system ought to have been placed whereby the secondary server could only start when the primary server failed or a mechanism should have come into existence to ensure that members could connect to secondary server only when the primary server failed. 125. It was not sufficient for NSE to hold that the TM was made aware of the use of the secondary server through their welcome email which, in our opinion, was insufficient. We find that when the load on the three Ports were being monitored it became essential for NSE to ensure that no TM had access to the secondary server for accessing the data. 126. A plausible explanation has been given that the monitoring on the secondary server was made only for a limited period during the period of data center migration. We however find that when NSE came to know about the misuse of the secondary server by the TMs, it should have set up a monitoring system immediately and ensured that no TMs accessed the secondary server without permission. We also find that there is no plausible explanation as to why during this period only some of the TMs were reprimanded and others who had also logged ....
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.... held: "8.3.3.8 As far the exchange is concerned, the factual build up and the allegations levelled in the SCN, pertain to violations that are arising by flouting the principles underlying the conduct of business of a stock exchange, pertaining to fair and equitable access to information. Alleging "fraud" against the Exchange, in this scenario, tantamounts to attributing "intention" or "knowledge". In the absence of facts pointing towards the collusion of employees with the TMs or proof of specific discrimination towards any specific TM or the accrual of monetary benefits/ unjust enrichment to any employee or TM, etc., I find it difficult to conclude that there is a violation of the provisions of SEBI (PFUTP) regulations, involved in the matter." 133. The WTM further held that failure to place the randomizer or load balancer in the TCP IP dissemination protocol, cannot be categorised as breach of the principles of "fairness and equity" attracting the provisions of PFUTP Regulations. The WTM held that the dissemination of information which is in breach of the stipulation contained in SECC Regulations cannot automatically attract the rigors of PFUTP Regulations, without t....
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....8. In exercise of the powers conferred by Section 4, Section 8A and Section 31 of the SCRA Act read with Section 11 and Section 30 of the SEBI Act, SECC Regulations were framed on 20th June, 2012 for the purpose of requiring recognition, ownership and governance in stock exchange. Regulation 41(2) of the SECC Regulations, 2012 provides as under: "Regulation 41(2): The recognised clearing corporation and recognised stock exchange shall ensure equal, unrestricted, transparent and fair access to all persons without any bias towards its associates and related entities." 139. A perusal of the aforesaid provision indicates that a stock exchange is required to ensure equal, unrestricted, transparent and fair access to all persons. Clause 4(i) of the circular dated 30th March, 2012 issued by SEBI is extracted hereunder:- "Guidelines to the stock exchanges and the stock brokers 4. Stock exchanges shall ensure the following while permitting algorithmic trading: (i) The stock exchange shall have arrangements, procedures and system capability to manage the load on their systems in such a manner so as to achieve consistent response time to all sto....
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....is, rightly came to the conclusion that no case of fraud or inducement was made out against NSE under Regulations 3 and 4 of the PFUTP Regulations. 144. The WTM, however, came to the conclusion that Regulation 41(2) and 42(2) of the SECC Regulations, 2012 were violated by NSE in "letter and spirit". The WTM found that there was inequity at different stages of the technology process i.e. TBT architecture and, accordingly, in paragraph 10.1 of the impugned order held that NSE had not exercised the requisite due diligence while putting in place the TBT architecture and that the same created a trading environment in which the information dissemination was asymmetric, which cannot be considered fair and equitable and, consequently, the failure of NSE to ensure equitable and fair access violated Regulation 41(2) of the SECC Regulations, 2012. In paragraph 8.3.3.10, the WTM held that the omission/commission on the side of NSE was in violation of Regulation 41(1) and 42(2) of the SECC Regulation read with Clause 4(i) of the circular dated 30th March, 2012. 145. The conclusion drawn in paragraph 10.1 of the impugned order that the dissemination was asymmetric is based on the findings ....
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.... architecture. Considering the evidence that has come on record and, upon an analysis of the evidence made by us, we are of the view that there was a randomness in the dissemination of the data/information/tick in the TBT architecture starting from the PDC stage till the Ports and there was clear, unrestricted, transparent and fair access to all the TMs who received the data in their Colo rack from their respective Ports. We, thus, hold that there was no violation of Regulation 41(2) of SECC Regulations. 150. We also find that the conclusion drawn in paragraph 10.1 of the impugned order is based on the finding given in paragraph 8.3.3.7, namely that the dissemination of data was asymmetric which could not be considered as fair and equitable and, consequently, resulted in violation of Regulation 41(2) of the SECC Regulations. In the first instance, this finding is purely perverse and cannot be accepted in as much as the choice of architecture was never disputed by the respondent. There was some randomness in the dissemination of data even from the Port to the Colo rack. It seems that the WTM has confused itself between randomness in the dissemination of a tick to that of dissemin....
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....ous Ports. We also find that NSE should have provided a load balancer to equalize the load on each server. We also find that no laid down policy or SOP was made to monitor frequent connection to the secondary server and, thus, there was a violation of circular of 2012. 154. The SCRA Act was framed with the object of preventing undesirable transaction in securities. The Act required all contracts in the securities to be dealt only on a recognized stock exchange. The Act conferred a larger responsibility upon the exchanges to ensure that undesirable transactions do not take place. In U.P. Stock Exchange Broker's Association and Ors. v. Securities and Exchange Board of India & Anr., (2014) 3 Comp. LJ 462, the Allahabad High Court held: "51. Stock exchanges provide what is described as "the first layer of oversight". In many areas, stock exchanges are self-regulators. As self-regulatory organizations, stock exchanges have a front-line responsibility for regulation of their markets and for controlling compliance by members of rules to which they are subject. They ensure, in that capacity, compliance of the requirements established by the statutory regulator. Apart from the r....
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....ns of SECC Regulations. The WTM found that these noticees held the senior most management position in NSE and being in charge of the affairs of the conduct of the stock exchange business, cannot limit their role to the non-technology issues of the exchange and cannot abdicate their responsibilities by citing limited knowledge in certain spheres of business activities. The WTM came to the conclusion that they were vested with the general and overall responsibility of ensuring the implementation of the principle of equal, fair and transparent access, under Regulation 41 of SECC Regulations and were therefore responsible for the overall efficiency of the stock exchange which they failed to do so. 159. The WTM also found Mr. Mahesh Soparkar and Mr. Deviprasad Singh, noticee nos.9 and 10 responsible for not monitoring the unauthorized connection in the secondary server. The WTM found that these two employees headed the Project Management Team (PMT) and were responsible in enforcing discipline with respect to the connections established by TMs in the secondary server. The WTM came to the conclusion that being Head of the PSM Team it was their responsibility to inform the Colo team wit....
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....oss averted by such contravention." 163. From the above provision, it follows that any direction to disgorge must: a. be made in relation to any transaction or activity; b. such transaction or activity ought to be in contravention of the provisions of SEBI Act or the Regulations made thereunder; c. the person directed to disgorge must have made profit or averted losses from such activity or transaction; and d. an amount equivalent to the "wrongful gain" made or "loss" averted by such contravention may be disgorged. 164. The contention of NSE is, that the direction to disgorge was made without providing an opportunity to show that the quantification is inappropriate. It was urged that the show cause notice failed to indicate the nature of the measures or directions which the authority proposed to take under Section 11 and 11B of the Act. It was contended that the statutory authority was bound to set out the exact nature of the measures which it proposed to take in the show cause notice and by not providing the requisite measure in the show cause notice the order of disgorgement was wholly illegal and in violation of the principles of natural....
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....5) Before we deal with the contentions of the parties, it is necessary to understand what disgorgement is. It is a common term in developed markets across the world though it is new to the securities market in India. Black's Law Dictionary defines disgorgement as "The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion." In commercial terms, disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrongdoers by the courts. Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Disgorgement of ill-gotten gains may be ordered against one who has violated the securities laws/regulations but it is not every violator who could be asked to disgorge. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. Since the chief purpose of ordering disgorgement is to make sure that the wrongdoers do not profit from....
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....g the total profits on each of the trades during the existence of the unlawful scheme. Unlike each of the cases discussed above, there is no evidence here that the defendants' unlawful conduct-that is, the scheme to hide beneficial ownership by failing to disclose transactions-resulted in any market distortion, price impact, or profit tied to the violation. Nor is there evidence that the scheme was motivated by the expectation of such profits. Without proof, a court cannot speculate about the impact of the Wylys' failure to disclose on share price... To hold otherwise would create a per se rule requiring disgorgement of all profits made by those who fail to properly disclose their beneficial ownership of securities-regardless of whether that failure resulted in unlawful trading, market manipulation, or distortion. Such a rule would eliminate the requirement that the government provide a reasonable approximation of the profits that are causally connected to the violation. There would be no need for any approximation-reasonable or otherwise-if the required disgorgement is always one hundred percent... As a matter of law, the SEC cannot show that all of the p....
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....th SEBI circular of 2012. It was further urged that on the basis of a finding of the WTM that there was lack of due diligence on the part of the appellant in placing the TBT architecture, it still did not warrant a direction of disgorgement under Section 11 and 11B of the SEBI Act without even attempting to establish what gains were made or loss averted as a result of the alleged lack of due diligence. 172. It was also contended that direction of disgorgement, in the instant case was punitive and was not remedial in nature. In support of his submission, the learned counsel placed reliance upon a decision of this Tribunal Dushyant N. Dalal v. SEBI, Appeal No. 182 of 2009, decided on November 12, 2010. 173. It was also urged that the direction for disgorgement was also disproportionate. It was contended that the basis for calculation of disgorgement was based on the percentage of NSE revenue from the operations which included co-location and non-colocation operations which could not be taken into consideration. At best, the disgorged amount could be taken for those transactions which were against the Acts, Rules and Regulations. It was contended that the profits sought to be....
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.... authority has been given under the law to take appropriate measures as it thinks fit and that by itself is sufficient to clothe the SEBI with the authority of law." 176. Similarly, the Delhi High Court in MZ Khan v. SEBI (AIR 1999 Del.164) held: "Under section 11 of the SEBI Act, the SEBI has the power to protect the interests of the investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. The power is of a very wide nature and is not hedged in by any restrictions. This power will embrace the power to issue interim orders. The SEBI in a fit case can pass interim orders in the interests of investors and to promote the development of and to regulate the securities market. Under the same provision, it can frame regulations as well for the same purpose. The final orders after the inquiry are contemplated under section 11B of the Act and at that stage it can issue such directions to any person referred to in the section as may be appropriate in the interests of investors and securities market. Both under sections 11 and 11B the duty is cast on the Board to protect the interests of the investors in s....
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.... this regard." 179. It was further held that: "Therefore, in our view, the express grant of statutory power conferred by section 11B carries the authority to use of reasonable means to make such power effective. If one has regard to the aforesaid principles, it would follow that the power which has been conferred by section 11B to issue direction are of a widest possible amplitude and are exercisable in the interest of investors and in order to prevent, inter alia, a broker from conducting his business in a manner detrimental to the interests of the investors or the securities market. The said power to issue directions under section 11B must carry with it, by necessary implication, all powers and duties incidental and necessary to make the exercise of these powers fully effective including the power to pass interim orders in aid of the final orders...." 180. In Anand Rathi v. SEBI 2002 (2) Bom CR 403 has held that: "The SEBI is charged with the duty to protect the public. What will protect the public must involve an exercise of discretionary powers. And so the question of the appropriate remedy is necessarily a matter of administrative competence. T....
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....aries or other delinquents associated therewith out of the market.... Even under section 11(1) and thereafter with the introduction of section 11B in the year 1995, the power of the Board was very wide and it could take every measure that a situation would demand and issue such directions that it considered necessary including the suspension of an intermediary. Yet, to put everything beyond the shadow of doubt, even the implicit has been made explicit by adding sub section (4) in Section 11 which now expressly authorizes the Board to issue various kinds of orders, "either pending investigation or enquiry or on completion of such investigation or enquiry. .......... As already observed, section 11 is the very heart and soul of the Act. This provision has been periodically amended and today it is substantially different from what it was at its inception in the year 1992. The scope of the power has been considerably widened. The introduction of sub section (4) in section 11 and various other provisions like section 11B is indicative of the legislative intent. These provisions are meant to arm the Board with authority so as to be able to effectively exercise power and....
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....ific provision in the SEBI Act is required and the power to order disgorgement is inherent in the Board. The Supreme Court held: "9. Since disgorgement is not a punishment but only a monetary equitable remedy meant to prevent a wrong doer from unjustly enriching himself as a result of his illegal conduct, we are of the view that there need be no specific provision in the Act in this regard and this power to order disgorgement inheres in the Board." 185. In Mahavirsingh Chauhan v. SEBI, Appeal No. 393 of 2018 dated 18th October 2019, it was held by this Tribunal that: "21. From the aforesaid, it is clear that a person can be directed to disgorge amount equivalent to the wrongful gain made by him. [...] The order of the WTM is consequently, modified to the extent that the liability of the appellants in question except Rajesh Ranka to disgorge the amount is to the extent of the profit earned by them as calculated by the WTM under Table 9. In the event of failure by these appellants to pay the amount, it would be open to SEBI to recover the amounts in the order of hierarchy stipulated in paragraph 145EUR of the impugned order." 186. In Gagan Rastogi v. SEBI, App....
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....to disgorge an amount of USD 2.7 million. In this case, disgorgement was directed even though there was no wrongful gain or loss caused. It was thus urged that the concept of disgorgement cannot be restricted to just recalling unlawful gains which would lead to it being given a very narrow interpretation. 191. In another matter of TPG Capital Advisors, LLC, dated December 21, 2017 SEC charged the Respondent for inadequate disclosures that involved a breach of fiduciary duty. It failed adequately to disclose or obtain the consent of the Funds to its receipt of accelerated monitoring fees. Despite the practice of receiving accelerated monitoring fees, TPG did not adopt or implement any written policies or procedures reasonably designed to prevent violations of the Advisers Act or its rules arising from the conflicts of interest associated with the undisclosed receipt of fees. The Respondent was, inter alia, directed to disgorge an amount of USD 9.4 million along with interest. 192. Similarly, in the matter of Kestra Advisory Services, LLC dated July 9, 2015, the Respondent breached its fiduciary duty to advisory clients by failing to provide full and fair disclosure regarding t....
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....operations and of these defendants' employment. But for the securities violations, CEG would have collapsed earlier, so the violations enabled the defendants to continue their employment. There is no magic to the fraction of one-half, but it is intended to reflect in an equitable way the fact that both defendants also provided real and valuable services to CEG and the Church of God for many years, as well as other mitigating factors." 196. From the aforesaid decisions, it is clear that SEBI has wide powers to issue directions for disgorgement under Section 11 and 11B of the Act. However, explanation to Section 11B, as inserted by Act No. 27 of 2014 gave specific power to SEBI to issue a direction for disgorgement of an amount equivalent to the wrongful gain. Further, the direction to disgorge must be in relation to any transaction or activity and that such transaction or activity is in contravention to the provisions of the SEBI Act or the Regulations made thereunder. Further, the person must have made profit or averted loss from such transaction or activity. 197. Disgorgement means that the act of giving up something, namely profit obtained by illegal or unethical acts. ....
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....semination of information/data from the PDC center to the POP Receiver and thereafter to the Port were random, namely there was randomness in the dissemination of data from the PDC center right up to the Port and no fault has been found in the dissemination of data in the TBT architecture. We also find that the data that was disseminated from the Port to the Colo rack of the TM was equal, unrestricted and transparent and there was fair access. 203. We have also found that there was no violation of Regulation 41(2) of the SECC Regulations. We also observed that Regulation 41(2) of the SECC Regulations cannot be invoked for placing the TBT architecture which has already been placed in 2010. 204. We found that the TBT architecture provided equal, unrestricted, transparent and fair access to data dissemination from its TBT architecture to the TMs. We also found that there was lack of due diligence while allocating IPs to various Ports and that there was unequal load on various Ports and a load balancer would have ensured equal distribution of IPs. We also find that there was a human lapse in not putting the system in place to monitor frequent connections of certain TMs to the sec....
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....ge an amount was totally unwarranted. 208. In view of the aforesaid, it is not necessary for us to go into the question raised by the appellant, namely, that the respondent was duty bound to set out the exact nature of the measure which it proposed to take in the show cause notice and that it did not provide the requisite measures in the show cause notice and, consequently, the order of disgorgement was in violation of the principles of natural justice. 209. Insofar as Mr. Ravi Narain and Ms. Chitra Ramkrishna are concerned, the show cause notice alleged that Mr. Ravi Narain being the Managing Director and Chief Executive Officer ("MD and CEO") of NSE from 2000 to March, 2013 and Ms. Chitra Ramkrishna, being the Deputy Managing Director from 2008 to 2010; Joint Managing Director ("JMD") from 2010 to 2013 and Chief Executive Officer ("CEO") from April, 2013 to December, 2016 and during the relevant period failed to take any steps to ensure proper systems, checks and balances so as to provide fair and equitable access to all. The show cause notice alleged that adherence to the principle of fair and equitable access was left to the technology team without any specific guidance a....
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....s. The WTM further directed Ms. Chitra Ramkrishna to disgorge 25% of the salary drawn for the financial year 2013-14 prohibited her from associating with any listed company or a market infrastructure institution or any other market intermediary for a period of five years. 212. Mr. Ravi Narain holds a degree in Economics and according to him does not have any computer technology qualifications. He became the first Deputy Manager of NSE and became it MD and CEO in the year 2000. Mr. Ravi Narain ceased to be the MD and CEO on 31st March, 2017 but continued till June, 2017 as a Non-Executive Director, after which he left NSE. 213. Ms. Chitra Ramkrishna was with NSE since inception and is a qualified Chartered Accountant. According to her, she is not a technical expert nor does she have any IT qualification. Ms. Chitra Ramkrishna was promoted as Deputy Managing Director in 2003 and all department heads were directly reporting to her. After Mr. Ravi Narain, Ms. Chitra Ramkrishna became the MD and CEO from April, 2013 onwards and resigned on 3rd December, 2016. 214. We have already held that the TBT architecture provided equal, unrestricted and fair access to the data disseminati....
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....he responsibility at the end of the day falls squarely upon the MD and CEO. The implementation of the Colocation technology was carried out under the overall supervision of Mr. Ravi Narain and Ms. Chitra Ramkrishna and, therefore, they cannot abdicate their responsibility for the lapse that has been incurred in the monitoring of certain areas. 217. We, however, find that there is no finding to the fact that Mr. Ravi Narain or Ms. Chitra Ramkrishna has made profit or wrongful gain which is a prerequisite for issuance of a direction under Sections 11 and 11B for disgorgement. In the absence of any finding of wrongful gain being made by Mr. Ravi Narain and Ms. Chitra Ramkrishna, we are of the opinion that no direction for disgorgement can be made especially when there is no finding of fraud, unfair trade practice or collusion with any TM. 218. We also note that the direction to disgorge 25% of the salary is patently erroneous. The power under Sections 11 and 11B for disgorgement cannot be extended to recover money from salary. Salary is a periodical payment for one"s labour. As per Black"s Law Dictionary Eight Edition salary means compensation for services. Salary is given to a ....
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....y connecting to Secondary POP Server almost on a daily basis without valid reasons, gained unfair advantage over other TMs. iv. Connivance/Collusion with NSE - OPG displayed disregard to the norms of NSE and yet NSE continued to permit OPG to connect to the Secondary POP Server. The reluctance on the part of NSE to prevent OPG from accessing the Secondary POP Server to gain unfair advantage could only have been possible through active connivance/collusion of NSE and OPG. v. Unlawful gains- OPG gained materially by being the first logger as well as by connecting to the Secondary POP Server. vi. Conduct of OPG and its Director, Sanjay Gupta, during SEBI Investigation-OPG acting through its Director, Sanjay Gupta, had concealed/ destroyed vital information which could have been helpful in providing better insight and evidence in arriving at more conclusive findings in the instant proceedings. 221. Based on the aforesaid charges, for reasons best known to the WTM only four issues were framed namely: i. Issue 1: Whether OPG consistently logged in first across POP Servers on account of being aware of the weakness of the TCP/IP TBT System architectur....
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....ential access to TBT architecture and, consequently, decided issue No. 1 in favour of OPG holding that even though OPG logged in first across POP server it did not gain any advantage. 225. On issue No. 2, the WTM again came to the conclusion that even though OPG were allotted several IPs and were allocated to a single Port enabling it to establish 1st, 2nd, 3rd and even 4th connection to the POP server it did not gain any advantage over other TMs. The WTM held that since data dissemination occurs first to Port 1 of the POP server and then to Port 2 and then to Port 3 OPG was allotted Port 1 on only one primary POP server (TBTCOLO26) and the secondary POP server (TBTCOLO27). The WTM came to the conclusion that assigning multiple IPs to OPG on single Port did not crowd out the other TMs as data dissemination occurred first to POP server and thereafter to different Ports and that similar process of allocating multiple IPs on single Port were also given to other TMs. Consequently, issue No. 2 was also decided in favour of OPG and its Directors. 226. Even though there was a specific charge that OPG disregarded the norms of NSE and that NSE continued to permit OPG to connect to the....
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....s gained unfair advantage over other stock brokers. Further, it is alleged that NSE was aware that OPG has been generally connecting to the secondary server, NSE did not take any steps nor took any action. It was therefore alleged that there was connivance between OPG and NSE to give preferential treatment to OPG. It was also alleged that OPG has acted in a fraudulent manner and had indulged in fraudulent and unfair trade practices in securities market. 229. The WTM after considering the submissions of OPG and the material evidence on record as well as the TAC report and Deloitte report came to the conclusion that OPG was connecting to the secondary server on a regular basis and at times had logged in only on the secondary server and did not log on the primary POP server. The WTM further found that the load on the secondary server was very low and inspite of several warnings being issued by NSE to shift to the primary server OPG continued to ignore those warnings and continued to login on the secondary server. The WTM did not accept the contention of OPG that it was facing disconnection issues which resulted in OPG logging on to the secondary server. The WTM found that on accoun....
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.... 232. It was also urged that 67 out of 108 TMs were connected to the secondary server and only directions under Section 11 and 11B has been issued to OPG which is arbitrary and discriminatory. It was contended that during September to October, 2011, OPG faced disconnection issues with the NSE servers which continued in the subsequent years. It was contended that disconnection/disruption of the servers on a trading day even for a few seconds can result in huge financial losses and adversely impact the business of OPG. Frequent disconnection resulted in potential loss of business and this frequent disconnection resulted in connection to the secondary server. It was contended that between December, 2012 to May, 2014 there were a total of 35,817 disconnections from the primary server on 357 days which came to 98 disconnections per day. NSE was aware of such disconnection as OPG made certain complaints in this regard which remained unattended and which has not been considered in the impugned order. It was also urged that in order to avoid trade losses, OPG connected one or two IPs to the secondary server and minimal business was conducted through the secondary server connections. 233....
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....ot be taken to be the gospel truth regarding disconnection on all these days as from the logs furnished by OPG itself one finds that OPG was connecting to the secondary POP server consistently from 7 a.m. to 7.05 a.m. which disproves the theory of OPG being disconnected at odd times of the day during the trading days. The logging on the secondary server from morning itself prior to the start of the trading clearly indicated that OPG was continuously logging in to the secondary POP server irrespective of disconnection issues relating to the primary POP server. The contention raised by the appellant in this regard is clearly an afterthought and against the material evidence. 236. In this regard, the WTM has analysed the complaints referred by OPG and found that complaints were only made in the Futures and Options Segment on five days. Further, OPG itself stated that disconnection in the primary server was less frequent in 2013. These facts have not been disputed before us and in view of the admission that disconnection to the primary POP server was less frequent in 2013 yet the evidence indicates that OPG was connected to the secondary server on 248 days without being connected to....
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....lines for moving to the secondary server such disregard for the norms and the manner in which OPG was connected to the secondary server amounted to an unfair trade practice which, in our opinion, is violative of Regulation 4(1) of the PFUTP Regulations. In this regard, Regulation 4(1) of the PFTUP Regulations is extracted hereunder: "4. Prohibition of manipulative, fraudulent and unfair trade practices (1) Without prejudice to the provisions of regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities market. Explanation.-For the removal of doubts, it is clarified that any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company shall be and shall always be deemed to have been considered as manipulative, fraudulent and an unfair trade practice in the securities market." 240. Whether an act or practice is unfair is to be det....
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....computation of unfair gains as made out in the show cause notice to the extent of first login made by OPG cannot be accepted or adopted. 246. The WTM, however, took into consideration table A11 and A15 of the ISB report and based on the calculations made in table XXI of the impugned order came to the conclusion that OPG had made a profit of Rs.15.57 crores on account of unauthorized connection to the secondary server. 247. In our opinion, the calculation of profits made on the basis of ISB report is patently erroneous. Admittedly, the ISB report was made on the allegations that OPG by being the first logger/early connection gained materially for the purpose of analyzing the profits the sample taken of the trading made in the Futures and Options Segment was on the basis of OPG logging in first on those days. 248. When a categorical finding has been given by the WTM and we have also arrived at the same finding that early login or first logger did not create any advantage the basis of calculation of profits or unlawful gain cannot be made under this criterion. 249. The ISB report used First-In-First-Out (FIFO) methodology to calculate both intraday and overnight profits. Intr....
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....ubmit its own finding. It only relies on the findings of earlier expert committee"s report. The Pasumarthy Report has not based its findings on independent research and, therefore, in our opinion the WTM rightly rejected the Pasumarthy Report. 255. Before we conclude, we must observe that when serious allegations were made against a first level regulator, namely, NSE, SEBI should have been proactive and should have conducted the investigation seriously. We find that SEBI had adopted a slow approach and, in fact was placing a protective cover over NSE"s alleged misdeeds. It is only when questions were placed on the floor of the Parliament that SEBI woke up and instituted an investigation. The scope of investigation was limited and not made under Section 11(4) but was conducted by another agency under Section 11C. In our opinion, considering the gravity of the alleged charges, SEBI should have itself conducted an investigation/enquiry instead of delegating it to NSE to conduct an investigation. It is strange and it does not stand to reason as to how SEBI directed NSE to conduct an investigation against itself. It is clear that a casual approach was adopted. 256. We also find th....
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....e system which NSE was mandated to comply. The decision taken by NSE not to implement the load balancer does not appear to be a bonafide decision. 260. We also found that NSE failed to monitor the secondary server which led many TMs especially OPG to misuse it to their advantage. NSE failed to follow its own norms and guidelines framed for such purpose. NSE should have placed a mechanism to check unauthorized access to the secondary server by the TMs. NSE should have placed a defined policy for use of secondary server and a mechanism ought to have been placed for monitoring connection by TM on the secondary server since it was an active server. 261. We also find that the WTM further held that failure to place the randomizer or load balancer in the TCP IP dissemination protocol, cannot be categorised as breach of the principles of "fairness and equity" attracting the provisions of PFUTP Regulations. The WTM held that the dissemination of information which is in breach of the stipulation contained in SECC Regulations cannot automatically attract the rigors of PFUTP Regulations, without there being any proof to indicate fraud. The WTM held that in the absence of any fraud or col....
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.... the WTM were rightly passed. However, the direction for disgorgement was unwarranted but the appellant NSE cannot be allowed go scot free and is required to pay a price for the lack of due diligence on account of human failure to comply with the circular in letter and spirit. Though there are no parameters to quantify the lapse committed by NSE but taking into consideration all facts and circumstances of the case and the factors contemplated under Section 15J of the SEBI Act read with 23J of the SCRA Act and in exercise of the powers confirmed upon this Tribunal under Rules 21 of the Securities Appellate Tribunal (Procedure) Rules, 2000, we are of the opinion that NSE should pay a sum of Rs.100 crores for this lapse which is not expected from a first level regulator and which would act as a deterrent. 266. In view of the reasons given in the preceding paragraph: a. We set aside the order of the WTM directing disgorgement of an amount of Rs.624.89 cores alongwith interest at the rate of 12% p.a. against NSE. b. Directions given by the WTM prohibiting NSE from accessing the securities market, directly or indirectly, for a period of six months and, further, direc....