TaxTMI 
TaxTMI 
2023 (8) TMI 1388
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....019 passed by the Whole Time Member (hereinafter referred to as 'WTM') of Securities and Exchange Board of India (hereinafter referred to as 'SEBI') issuing various directions. In so far as National Stock Exchange of India Ltd. (hereinafter referred to as 'NSE'), noticee nos. 1, Way2wealth Brokers Pvt. Ltd. noticee nos. 8 (hereinafter referred to as 'W2W') and GKN Securities Pvt. Ltd. noticee nos. 12 (hereinafter referred to as 'GKN') are concerned, a direction to disgorge an amount alongwith interest and other directions have been issued. With regard to other noticees, a restraint order has been passed for different periods restraining the said noticees / appellants directly or indirectly from holding any position or being associated with any listed company. 2. The facts leading to the filing of the present appeals is, that the respondent received various complaints alleging irregularities in respect of colocation facility in NSE. Another complaint dated October 3, 2015 was received by the respondent alleging that W2W was permitted to utilize Point-2-Point (hereinafter referred to as 'P2P') dark fibre connectivity from Sampark Infotainment Pvt. Ltd. (hereinafter referred to as 'S....
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....SE was not transparent to its Trading Members (hereinafter referred to as the "TMs") about which Telecom Service Providers (hereinafter referred to as 'TSPs') were authorized to provide services that could be availed by the TMs for establishing P2P connectivity. b. Permission was given to an unauthorized service provider Sampark, who did not possess the requisite DoT certificate to install its network equipment and was in violation of the NSE's circular. c. Preferential treatment given to certain TMs by the NSE with respect to installation of P2P connectivity. d. Allowing installation of Multiplexer (hereinafter referred to as 'MUX') by Sampark in the NSE Meet Me Room (hereinafter referred to as 'MMR') in the Colo facility without verification of its licenses. e. Unfair latency advantage conferred to W2W and GKN through the un-authorised P2P connectivity provided by Sampark. f. Continuation of Sampark connectivity by W2W and GKN even after discovering that Sampark lacked proper license, thereby acting in collusion between W2W / GKN and NSE. g. Site inspection of brokers' offices at BSE office building conducted for some other brokers, viz: Millennium, GRD and SMC etc. f....
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....r the respondent. NSE, Noticee Nos. 1 11. The allegations against NSE are as under :- (i) Two TMs, W2W and GKN were allegedly permitted to avail connectivity through the services of Sampark, a telecom service provider, who was not appropriately licensed by the DoT to service end-customers. (ii) When NSE discovered that Sampark lacked an appropriate DoT license, it denied Millennium and Mansukh, permission for connectivity from Sampark. (iii) W2W and GKN were allowed to avail P2P services via a MUX installed by Sampark, while NSE refused Millenium permission to install a MUX via Sampark. (iv) At the same time, NSE permitted Sampark to continue rendering services despite licensing deficiencies but denied permission to Microscan Computers Pvt. Ltd. (hereinafter referred to as 'Microscan'), who had similar licensing deficiencies. (v) The cabling arrangement for W2W's connection in NSE's co-location facility and the BSE's co-location facility ('BSE Colo'), was installed by Sampark in a manner that resulted in an alleged unfair latency advantage i.e. it allegedly received data faster than other brokers did. (vi) SEBI alleged that the modification to the NSE Circular dated A....
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.... SEBI within 45 days from the date of this order. b) NSE, on completion of every six months (by June 30th and December 31st) for the next three years, shall get its network architecture and infrastructure in its Colo facility and its linkages to the trading infrastructure audited by an independent CISA / CISM qualified and CERT-IN empanelled auditor. The deficiencies / shortcomings observed therein and the corrective steps taken thereon, with the comments of the MD and CEO of the Noticee No. 1 shall be submitted to SEBI after obtaining approval of its Governing Board within 60 days from June 30th and December 31st of the year starting from June 30, 2019. c) NSE is directed to prepare a comprehensive documented policy which shall, inter alia, include Guidelines, Standard Operating Procedures and Protocols with respect to its Colo facility including the eligibility criteria for Telecom Service Providers, the norms to be observed by the Stock Brokers and other registered intermediaries. The said documented policy is directed to be issued to the market intermediaries under intimation to SEBI, within three months from the date of this order. d) NSE is directed to submit to SEBI, a....
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....le fee. Interested member-brokers who are engaged in HFT, could avail Colo facility. Access to Colo was fairly and equitably available to all member-brokers. In HFT, faster access to data and price feed helped in swifter execution of a trade. When a member-broker availed Colo, trading or data vending systems of the broker was allowed to be "co-located" i.e. physically located within the very premises of the stock exchange. 20. In 2009-10, in line with international practices, NSE decided to provide Colo facility. This service was available to any desirous member-broker, for a fee. The member-broker would rent a physical rack space within the Colo facility in the premises of NSE, and place their servers therein. 21. The technology for dissemination of data in the Colo facility is through the "Tick-By-Tick (TBT)" mechanism. TBT comprises dissemination of "ticks". A "tick" is a fundamental unit of data dissemination in the TBT architecture. In other words, ticks comprise order entries, order modifications, order cancellations, trades arising from the orders, and every other piece of data related to the market, on a real-time basis. The dissemination of such data builds for the tradi....
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.... connectivity, therefore, provides no latency advantage for trading. 28. The algo server and the P2P are all part of the members infrastructure and responsibility. They are procured by, paid for, and maintained by the TM. 29. Fiber optic cable networks covers the entire world. The P2P connections are taken from the colo facility to all corners of India and even abroad. (eg. Most cities in India and to Singapore, Hong Kong, Dubai, etc.) 30. At the outset, certain technical terms and phrases have been used in this order. It would be appropriate to acquaint ourselves with the meanings of these terms :- Term/Phrase Meaning Co-Location Facility Colo or co-location facility is the data centre facility offered by exchanges to the stock brokers. Co-location facilities provide space, for the server, storage and networking equipment of the users and also connect them to network service providers. In the instant case, NSE Co-location allowed stock brokers to take on rent specific racks designated for this purpose and co-locate their servers and systems within the exchange premises, in order to have a low latency connection to the exchange. The servers and systems placed in these racks ....
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....rack space in the Colo as per their request. ] Cross Connect Cross connect, connects broker's equipment at Colo to the MUX in the MMR. In the instant case, a cross connect was used to connect a broker's rack in colocation to the MMR. Edge Router An edge router is a specialized router residing at the edge or boundary of a network. This router provides the connectivity with external networks. In the instant case, the edge routers were used by BSE to provide P2P connectivity to the brokers between NSE and BSE. The fibre connections from NSE Colo can terminate at the BSE edge router, from which the brokers get connectivity to the rack in BSE Colo. 31. With regard to the charge of non-transparent mode of communication to stockbrokers by NSE, the background facts are that NSE issued a circular No. 693 dated August 31, 2009 with regard to introduction of co-location services at their premises and algo trading. Amongst other things, TMs were required to note the following :- "Members may take one or more leased line to the co-location facility from MTNL, TATA, Bharti or Reliance for the purpose of setting up or modifying parameters, trading related activities and hardware, software,....
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....gards, Regulation 41(2) of the SECC Regulations is extracted hereunder :- "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." 36. Clause 3 of the SEBI Circular dated May 13, 2015 is also extracted hereunder :- "3. In order to ensure fair and equitable access to the co-location facility, stock exchanges shall : 3.1. provide co-location / proximity hosting in a fair, transparent and equitable manner. 3.2. ensure that all participants who avail co-location / proximity hosting facility have fair and equal access to facilities and data feeds provided by the stock exchange. 3.3. ensure that all stock brokers and data vendors using co-location / proximity hosting experience similar latency with respect to exchange provided infrastructure. 3.4. ensure that the size of the co-located / proximity hosting space is sufficient to accommodate all the stock brokers and data vendors who are desirous of availing the facility. 3.5. provide the flexibility to avail rack space in the co-location / proximity hosting so as to mee....
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..... The notification of 2013 did not amend the circular of 2009 but only provided more information. We are of the view that the finding that since the notification of 2009 did not make any cross reference of the earlier circular of 2009, the notification of 2013 became vague is patently erroneous. We also are of the opinion that the finding that TMs were not aware of the notification of 2013 is patently erroneous. All circulars, notifications, publications, etc. are uploaded on the website of NSE and it is expected that all TMs are aware of such information since it is uploaded on the website. If some TMs did not see or read the circular of 2013 then it is that member's ignorance on the issue for which NSE cannot be blamed. The finding that Rima Shrivastav, CTO of W2W and Rahul Gupta, Partner of GKN were not aware of the circular of 2013 is patently erroneous. On a perusal of their statements, it is apparently clear that there was no mention of the fact that they were unaware of the notification of 2013. 39. We find that SEBI circular dated May 13, 2015 expressly provides that the stock exchange must make available on their website the proximity of co-location facility and the requi....
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....d by Sampark and W2W started using this connectivity with effect from May 28, 2015. 42. Similarly, GKN applied for permission on April 16, 2015 to avail P2P connectivity from Sampark and to install a MUX in its own rack at the NSE colo. Such permission was granted by NSE on April 22, 2015. An undertaking was given by GKN and connectivity was provided by Sampark. GKN started using this facility with effect from May 7, 2015. 43. On June 22, 2015, Mansukh applied for P2P connectivity through Sampark and on June 23, 2015, Millennium also applied for P2P connectivity through Sampark. While these applications were being processed, NSE realised that there was insufficient duct space to house multiple and separate cables for individual members' servers on the colo racks and, therefore, the request of Millennium and Mansukh for P2P connectivity was not found feasible. Around July 15, 2015, NSE gave approval to Millennium to commence pilot testing of the fibre optic link. In the meanwhile, NSE started getting more requests for similar P2P connectivity from other TMs. NSE started exploring to deploy a MUX in the NSE MMR. Sampark sought permission on June 25, 2015 to host common infrastructu....
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....eliance came into the picture, the applications of Millennium and Mansukh were processed and Millennium started availing P2P connectivity from Reliance with effect from August 22, 2015. W2W switched to Reliance from Sampark on September 9, 2015 and Mansukh was given P2P connectivity by Reliance on October 9, 2015. 47. The finding that W2W and GKN were given preferential treatment as they were allowed to obtain P2P connectivity from Sampark and, on the other hand, Millennium and Mansukh were denied Sampark services for connectivity is erroneous and a wrong appreciation of the factual position. The finding that NSE adopted a discriminatory approach towards TMs Millennium and Mansukh and consequently failed to provide fair and transparent access to members in an equal manner is patently erroneous. 48. In our view, when the lacunae in Sampark's IP license was discovered by NSE, NSE could have directed disconnection of its connectivity but chose not to make any disconnection and, on the other hand, sought to rectify the situation by informing Sampark that it should provide services to the license service providers of DoT. Sampark chose Reliance as it had previous business relationship....
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....ngs is much ado about nothing. 53. The finding of the WTM that NSE could not have allowed continuation of Sampark connectivity to W2W and GKN after NSE discovered the lacunae in Sampark license and should have taken penal measures against Sampark, W2W and GKN is one view which could have been taken but by not taking was not fatal inviting penal consequences. In the first instance, we find that the impugned order alleges NSE of permitting an unauthorized service provider to provide P2P connectivity. Secondly, the impugned order finds fault in NSE for not permitting more brokers to use the same unauthorized service provider. Thirdly, the impugned order finds fault with NSE for remedying the situation within a short span of 24 days. The impugned order, therefore, suffers from an inherent inconsistent and self-destructive finding which cannot be reconciled. If NSE had permitted Sampark to provide connections to Millennium and Mansukh after discovery of its licensing deficiencies, such an act could have been assailed as NSE perpetuating a wrong in the name of equality. Negative equality is no equality. This would not be setting a wrong right but would be perpetuating another wrong. 54....
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....mpark to take the services of Reliance. In fact, Sampark itself volunteered to work with Reliance as it had prior business relationship, based on which NSE on August 12, 2015 allowed W2W to switch from Sampark to Reliance. Subsequently, Sampark transferred its infrastructure to Reliance in which NSE was not involved. NSE at that time was only interested in rectifying the discrepancy and the lacunae at the earliest which was done within 24 days. If NSE facilitated the transfer of Sampark's infrastructure to Reliance, it is hard to comprehend as to how the transitioning of an infrastructure from an illegible entity to a legible entity was violative of norms of fair and equitable access or such facilitation became fraudulent. We find that NSE was not involved in the decision of Sampark to handover its assets to Reliance. The evidence on record establishes that NSE only gave a list of service providers to Sampark. In our view, the transitioning of the infrastructure from Sampark to Reliance follows all norms or fair and equitable access nor is the same fraudulent. We find that Sampark had itself volunteered to work with Reliance. Further Reliance had upgraded its infrastructure around ....
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....acks. The MMR, therefore, was the end point of NSE's co-location architecture. The cabling for the P2P connectivity began from these racks and proceeded onward to the B-end point, chosen by the TM. P2P connectivity is not part of the infrastructure provided by NSE to TMs. 61. It was urged that there is a distinction between Exchange provided infrastructure and TM's infrastructure and that NSE can only ensure similar latency i.e. the time taken for a packet of data to travel through its source to its destination. It was contended that NSE cannot control latency outside of its infrastructure since it would depend on the member's infrastructure. It was also urged that SEBI investigation report itself revealed that P2P connectivity was part of members infrastructure and thus, it was urged that P2P connection does not lie in the trading path of NSE as it was not directly connected to NSE's trading system. 62. It was contended that if TMs wanted to avail P2P connectivity, NSE merely facilitated the same by allowing the members (and/or their service providers) to enter the co-location facility to lay cables, and physically access the co-location data centre to set up such P2P connectivi....
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....the vendor i.e. Sampark was a licensed service provider or not. In the instant case, we find that no such steps were taken by NSE to find out as to whether Sampark was the authorised license vendor of DoT to lay the P2P infrastructure and provide services to the TMs. By not doing this minimum inquiry, NSE has failed to carry out due diligence on this aspect. 66. The contention that NSE policy distinguished between provisions of NSE owned infrastructure and deployment of member's infrastructure and that no monitoring or verification was required for deployment of members own infrastructure is not correct. Once certain policies and circulars are issued by NSE and any infrastructure is being laid inside NSE premises then it became an onerous duty of NSE to ensure that infrastructure is being laid in accordance with its circulars and notifications. In our opinion, verification was required for deployment of TMs infrastructure inside NSE premises. NSE has failed to regulate the infrastructure installed in member's infrastructure which was being done by an unauthorized vendor. 67. We are of the opinion that in this regard, NSE has failed to carry out due diligence in not verifying the ....
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....at NSE MMR, it was installed in such a manner that the source cable was first connected to W2W MUX and from thereon it went to other brokers rack through Sampark's MUX into NSE MMR. On the basis of a diagram in the given investigation report, it was alleged that W2W through Sampark had arranged the cabling in NSE colo rack in such a manner that W2W had lower latency compared to other stockbrokers connected through Sampark MUX placed in NSE MMR. It was, thus, alleged that NSE failed to conduct due diligence and failed to provide a level playing field to all its stockbrokers. 70. The WTM after considering the material evidence held that the diagrammatic representation clearly indicated that a latency advantage was given to W2W. Further, the direct connectivity between NSE colo and BSE colo by W2W gave advantage of a minimum latency as compared to other brokers. Further, the path of source cable which went from the W2W's rack in Sampark's MUX in MMR instead of going to the MUX first also gave connectivity benefit to W2W with lower latency. The WTM further found that Sampark had promised W2W that if they choose Sampark's P2P connectivity, it would give latency less than one milisecond....
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.... was given to W2W, at that moment of time, W2W was the only member connected to Sampark MUX. 73. There is no doubt that as per the NSE policy W2W was required to give an undertaking that the P2P connectivity would terminate at their office in BSE and not at the BSE colo. The correspondence on the record of W2W internal mail which SEBI had accessed clearly demonstrated that W2W was misleading NSE with respect to the end-point termination of its P2P link. The employees of W2W were aware that their connectivity directly to BSE colo was in violation of NSE policy. The WTM rightly found that W2W deliberately misled NSE while terminating the link at W2W rack at BSE colo. 74. However, once the aforesaid finding is given that NSE was misled by W2W, the WTM fell in error in holding that NSE facilitated laying of cable for W2W by Sampark so as to provide latency advantage to W2W over other stockbrokers. This finding, in our opinion, is patently erroneous and based on surmises and conjunctures. Once a finding has been given that W2W was deliberately misled NSE, the question of NSE facilitating W2W or Sampark for the purpose of giving latency advantage to W2W does not arise. 75. The finding....
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....vity to some TMs and conducting site visits for other TMs and, therefore, NSE adopted a discriminatory approach, in our opinion, is stretching the alleged violation a little too far. In this regard, we find that NSE at the relevant time did not allow direct connectivity between NSE colo and BSE colo. It was noted that on December 1, 2016, vide SEBI's circular it had allowed direct connectivity between two colo racks in the two different stock exchanges. Therefore, prior to December 1, 2016, P2P connectivity requests were made by TMs, the membership department of NSE used to initiate site inspection. Undoubtedly, when W2W applied for P2P connectivity, no site visit was undertaken. The explanation given was that W2W already had a P2P connectivity from Reliance and, therefore, it was not necessary to conduct another onsite inspection. Similarly, the site visit for GKN was not undertaken at the time as NSE was informed that the connection would terminate at the BSE Edge router. The explanation has been disregarded by the WTM and a finding of discrimination has been given solely on the ground that a site inspection was carried out for GRD Securities (hereinafter referred to as 'GRD') an....
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....so suggests that P2P connection was not in the trading path. There is no discussion on this issue nor any finding has been given by the WTM in the impugned order to the effect that P2P connection was in the core data dissemination and trading path of NSE. Admittedly, P2P connectivity was not part of the infrastructure provided by NSE to the TMs. 81. We, however, tend to agree with the submission of NSE that the P2P connection was not in the trading path of NSE for the following reasons :- a. P2P connectivity does not fall within the trading path of the co-location facility at NSE and does not come to NSE trading system. The trading on the colocation facility is between the stock exchange trading server and member's server on the co-location rack. The dissemination of live data ends at the colo rack of the TM. The P2P connectivity starts beyond this path and connects post-trade and pre-trade connectivity to the members' premises. There is nothing to indicate that P2P connectivity has two live points in the trading system. b. P2P connectivity is not part of the infrastructure provided by NSE to its TMs which is admitted by the respondent. P2P connectivity is the infrastructure p....
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....s connectivity even after finding that Sampark did not have a requisite license and by conducting site inspection in the office of Millennium, GRD and SMC for the purpose of P2P connectivity while not following the same procedure for W2W and GKN and, therefore, such preferential treatment was collusive and fraudulent. 83. We have already held that NSE did not give any preferential treatment to the two stockbrokers nor any latency advantage was given to the two stockbrokers while using the P2P connectivity. We have also held that no preferential treatment was granted to the two stockbrokers permitting them to establish P2P connectivity through an unauthorized service provider nor any discriminatory approach was made by NSE towards other stockbrokers. We have also found that there was no intentional negligence on the part of the NSE by waiving physical inspection of the office site of W2W. 84. Therefore, finding of collusion and / or fraud on the part of NSE in the given circumstances cannot be sustained. In this regard, the provisions of Section 12A(c) of the SEBI Act, Regulations 3(d) and 4(1) of the PFUTP Regulations and definition of 'fraud' as defined under Regulation 2(c) of ....
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.... comments made in good faith in regard to- (a) the economic policy of the government (b) the economic situation of the country (c) trends in the securities market; (d) any other matter of a like nature whether such comments are made in public or in private." 85. Section 12A of the SEBI Act provides that no person shall engage in any act which would operate as a fraud or deceit on any person in connection with the issue or dealing in the securities. Regulation 3(1)(d) of the PFUTP Regulations is on the same lines as provided under Section 12A of the SEBI Act. Regulation 4(1) of the PFUTP Regulations further provides that no person will include in a fraudulent and unfair trade practices in securities. 'Fraud' is defined under Regulation 2(c) of the PFUTP Regulations and includes such act which induces another person or his agent to deal in securities with his connivance. 86. In Securities and Exchange Board of India Vs. Pan Asia Advisors Limited and Another, [(2015) 14 SCC 71], the Supreme Court has set out the scope of Section 12A of the SEBI Act. The Supreme Court held :- "78. Section 12-A of the SEBI Act, 1992 creates a clear prohibition of manipulating and deceptive....
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....der Section 12-A, it is specifically provided to prohibit any manipulative and deceptive devices, insider trading and substantial acquisition of securities or control by ANY PERSON either directly or indirectly. If SEBI's allegation listed out earlier as well as all the other allegations fall under Sections 12-A(a), (b) and (c), there will be no escape for the respondents from satisfactorily explaining before the Tribunal as to how these allegations would not result in fully establishing the guilt as prescribed under sub-clauses (a), (b) and (c) of Section 12-A. Similar will be the situation for answering the definition under Regulations 2(1)(b), (c), 3, 4(1), (2)(a), (b), (c), (d), (e), (f), (k) and (r) of the 2003 Regulations, apart from taking required penal action against those who are involved in any fraud being played in the creation of securities." 87. In N. Narayanan Vs. Securities and Exchange Board of India, [(2013) 12 SCC 152] the Supreme Court held :- "33. Prevention of market abuse and preservation of market integrity is the hallmark of securities law. Section 12-A read with Regulations 3 and 4 of the 2003 Regulations essentially intended to preserve "market int....
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....of Regulation 2 defines "fraud". "11. Regulation 3 prohibits certain dealings in securities, whereas Regulation 4 prohibits manipulative, fraudulent and unfair practices. Regulation 5 deals with the power of the board to order investigation. Regulation 6 elaborates on the power of the investigating authority." "14.2. Clauses (i), (j), (l), (m), (p), (o) and (q) of subregulation (2) of Regulation 4 expressly make themselves applicable only to the case of intermediaries and not to individual buyers or sellers." "23. The object and purpose of the 2003 FUTP is to curb "market manipulations". Market manipulation is normally regarded as an "unwarranted" interference in the operation of ordinary market forces of supply and demand and thus undermines the "integrity" and efficiency of the market." "29. On a comparative analysis of the definition of "fraud" as existing in the 1995 Regulations and the subsequent amendments in the 2003 Regulations, it can be seen that the original definition of "fraud" under the FUTP Regulations, 1995 adopts the definition of "fraud" from the Contract Act, 1872 whereas the subsequent definition in the 2003 Regulations is a variation of the same and doe....
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....." "34. Regulation 4 prohibits manipulative, fraudulent and unfair trade practices. It is to be noted that Regulation 4(1) starts with the phrase "without prejudice to the provisions of Regulation 3". This phrase acquires significance as it portrays that the prohibitions covered under Regulation 3 do not bar the prosecution under Regulation 4(1). Therefore Regulation 4(1) has to be read to have its own ambit which adds to what is contained under Regulation 3." "39. It should be noted that the provisions of Regulations 3(a), (b), (c), (d) and 4(1) are couched in general terms to cover diverse situations and possibilities. Once a conclusion, that fraud has been committed while dealing in securities, is arrived at, all these provisions get attracted in a situation like the one under consideration. We are not inclined to agree with the submission that SEBI should have identified as to which particular provision of the 2003 FUTP Regulations has been violated. A pigeon-hole approach may not be applicable in this case instant." "47. Accordingly, non-intermediary front-running may be brought under the prohibition prescribed under Regulations 3 and 4(1), for being fraudulent or unfair....
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....of cases like the present the element of dishonesty need not be present or proved and established to be present. In the latter category of cases, a mere inference, rather than proof, that the person induced would not have acted in the manner that he did but for the inducement is sufficient. No element of dishonesty or bad faith in the making of the inducement would be required." 90. In the light of the above and on the totality of the facts in the given case, we are of the opinion that while interpreting a statute, an effort must be made to give effect to each and every word used by the legislature. The Courts should presume that the legislature inserted every part for a purpose and the legislative intention is that every part of the statute should have effect. While interpreting a provision, the effort must always be made to find out the true intention behind the law. 91. From the aforesaid decisions and on a reading of the provisions of Section 12A of the SEBI Act and Regulation 3 & 4 of PFUTP Regulations, it is apparently clear that the object of Section 12A & PFUTP Regulations is to curb "market manipulations". The manipulative and deceptive devices must be in relation to "se....
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....at purpose. We have held that there was lack of due diligence and, thus, negligence on the part of NSE. Lack of due diligence and / or negligence cannot amount to fraud as defined under Regulation 2(c) unless there is evidence to show that there was a deliberate intention on the part of NSE to commit a fraud by misrepresentation or by concealment of fact or by such act or omission under any other law specifically declares it to be fraudulent. In the absence of any such evidence, we are of the opinion that the charge of fraud under Regulations 3 and 4 of the PFUTP Regulations read with Section 12A of the SEBI Act is not proved. 97. This leads us on the last issue relating to disgorgement. The WTM has directed NSE to disgorge a sum of Rs. 62.58 crore alongwith interest at the rate of 12% p. a. from September 11, 2015 till the date of the actual payment. Other directions under Section 11 and 11B of the SEBI Act were also passed. Since we have already held that no violation was committed under Regulation 3 and 4 of the PFUTP Regulations and Section 12A of the SEBI Act, and we have also found that NSE has not violated Regulation 41(2) of the SECC Regulations, therefore, the question of....
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....s to what would be the consequence if the noticee does not satisfactorily meet the grounds on which an action is proposed. To put it otherwise, we are of the opinion that in order to fulfil the requirements of principles of natural justice, a show cause notice should meet the following two requirements viz: i) The material/ grounds to be stated on which according to the Department necessitates an action; ii) Particular penalty/action which is proposed to be taken. It is this second requirement which the High Court has failed to omit." 101. It was also urged that before a direction of disgorgement could be passed it was necessary for the respondent to give a finding of ill-gotten gains or unfair profit or unjust enrichment made by NSE by the ill-gotten or unethical acts. It was contended that only a wrong doer who had made gains from the wrong doing can be asked to disgorge. In support of his submission, NSE relied upon the decision of this Tribunal in Karvy Stock Broking Ltd. Vs. SEBI, [2008 SCC Online SAT 74], wherein this Tribunal held :- "(5) Before we deal with the contentions of the parties, it is necessary to understand what disgorgement is. It is a common term in deve....
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....gulations made thereunder. Further, the person must have made profit or averted loss from such transaction or activity. 104. Disgorgement means that the act of giving up something, namely profit obtained by illegal or unethical acts. It is a repayment of ill-gotten gains by the wrong doer. Disgorgement is also an equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not necessary that in each and every case there should be a direction to disgorge profits merely because the provisions of the Act or Regulations have been violated. Disgorgement should be ordered only where persons have made gains or averted loss/losses as a result of their illegal / unethical acts. 105. Thus, it becomes essential first to pin point a person and hold him guilty of making illegal gains and only thereafter direct him to disgorge the ill-gotten gains. Further, there must be a finding of ill-gotten gains by illgotten or unethical acts. 106. Disgorgement is not a punishment but only an equitable remedy to prevent a wrongdoer from unjustly enriching himself as a result of his wrongful acts. As stated earlier, disgorgement should ....
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....nkages to the trading infrastructure audited by an independent CISA / CISM qualified and CERT-IN empanelled auditor. The deficiencies / shortcomings observed therein and the corrective steps taken thereon, with the comments of the MD and CEO of the Noticee No. 1 shall be submitted to SEBI after obtaining approval of its Governing Board within 60 days from June 30th and December 31st of the year starting from June 30, 2019. c) NSE is directed to prepare a comprehensive documented policy which shall, inter alia, include Guidelines, Standard Operating Procedures and Protocols with respect to its Colo facility including the eligibility criteria for Telecom Service Providers, the norms to be observed by the Stock Brokers and other registered intermediaries. The said documented policy is directed to be issued to the market intermediaries under intimation to SEBI, within three months from the date of this order. d) NSE, is directed to submit to SEBI, a report duly certified by its MD and CEO and with the comments of its Governing Board certifying that the network architecture and connectivity at its Colo facility and its linkages to the trading infrastructure are in conformity with SE....
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....park. 114. The stand of the appellant Chitra Ramkrishna is the same as that of NSE. The appellant however contended that she was the Managing Director and Chief Executive Officer of NSE from April 1, 2013 till December 2, 2016 and was responsible for the day to day affairs of NSE. Nonetheless, the appellant was not involved in the day to day operations of NSE colo facility and the decision with respect to providing access to brokers to colo system was taken by the Business Team of NSE in consultation with the Technology Team and Colo Support Team. Further, the functional heads of each division were to oversee the day to day activities of their respective teams and consequently, the said appellant had no specific role in the matter of permitting members to select the ISP providers or permitting the service provider to set up any equipment in the NSE colo premises or from scrutinizing the eligibility of the service provider. It was stated that such action was required to be taken by the functional heads and these issues were never brought to her level. The appellant categorically contended that none of the functional heads responsible for the issues raised in the show cause notice h....
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.... findings against her are consequently set aside. 118. We have already held that no preferential treatment was granted to W2W and GKN nor any discriminatory policy was adopted for other stockbrokers. Further, NSE did not adopt any non-transparent mode of communication to its stockbrokers through issuance of circular and notification nor any discriminatory policy was adopted over other stockbrokers. We have also found that no latency advantage was given to W2W and GKN. Thus, the charges on these grounds, etc. against the appellant cannot be sustained. 119. The only charge that was proved against NSE was lack of due diligence and negligence in not verifying the license of Sampark. We have held that it was the duty of NSE to verify the license, since it was part of their policy. The contention of the appellant noticee nos. 3 that such alleged violation was never brought to her notice by the functional heads and, therefore, she cannot be made vicariously liable for their actions since she had no knowledge appears to be attractive but cannot be believed. It may be true that while permission was granted by the functional heads and its subordinate officers to W2W and GKN to install the ....
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....anager, secretary and any person who has been authorized by the board or by any director are now officers in default. Section 5(g) of the Companies Act makes it apparently clear that if there is a managing director appointed in a company, he would be an officer in default. Further, in the absence of any managing director, if the board has specified any particular director or manager or any other person as an officer in default in which case only that specified director or manager etc. as the case may be would be an officer in default." "14. Section 5(g) of the Companies Act further provides that apart from the directors any officer can also be penalized if his role can be attributed to be an officer in default. If any officer has played some role in bringing about the default or he might have performed the duties assigned to him then he could be penalized as an officer in default. Section 5(g) of the Companies Act thus makes it clear that in the absence of any managing director or any specific order of a board, then by a deeming fiction, all the directors of the company would be officers in default." "21. In this regard the Ministry of Corporate Affairs while initiating prosecu....
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....ishna shall not hold any position in any stock exchange, clearing corporation, depository for a period of three years. Further she will not hold any position in a listed company for three years. 125. The powers conferred on SEBI under Section 11 and 11B is to protect the interests of investors in securities and to promote the development of and to regulate the securities market. Therefore, the measure to be adopted by SEBI is remedial and not punitive. In a given case a measure of debarring a person from entering the securities market will be justified, but in our view, by no stretch of imagination debarring noticee nos. 3 for the alleged lapse could be remedial in nature. A remedial action is to correct a wrong or a defect. Preventive measure can be issued in a given case of unfair trade practice or where fraud is proved. In the instant case, the above is lacking and debarring the noticee would be clearly punitive and violation of Article 19(1)(g) of the Constitution of India as it takes away the fundamental right to carry on its business. 126. Thus, the direction to debar the appellant noticee nos. 3 cannot be sustained and is quashed. At best penalty could be imposed upon appe....
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....ing benefits by providing lower latency also cannot be sustained and are set aside. 131. The only point that remains to be considered is with regard to the non-verification of Sampark's license and, therefore, there was lack of due diligence and negligence on their part. In this regard, we find that Mr. Ravi Varanasi contended that he was the Head of the Business Development Team and was not concerned with the setting up of the colo facility or the day to day management of the colo facility. The request for P2P connectivity was lodged initially with his team i.e. Business Development Team and thereafter the team used to pass such request to the concerned department of NSE for further processing. Therefore, the permission to lay the P2P lines to Sampark was not within his domain. Further, it was specifically stated that verifying license of Sampark was outside the scope of his role and responsibility. 132. Mr. Nagendra Kumar, noticee nos. 6 was the Head of the Membership Department and contended that as head of the department, he is not required to verify the license of the service provider and that he had no role to play regarding the verification of the license. The said appella....
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.... connectivity of Sampark. The Membership Department which was under the head of Business Development and IT Operations which was part of the colo team all reported to Mr. Ravi Varanasi. We find all the three appellants were involved at one stage or the other with regard to granting of permission to Sampark to lay the P2P connectivity for the two brokers. We find that these three appellants cannot shrug their responsibilities or contend that it was outside the scope and responsibilities to verify the license of Sampark. The 2009 circular and 2013 notification of NSE clearly indicated that a TM could utilize the services of a license service provider of DoT and, therefore, whenever a TM came with a request seeking permission for getting the P2P connectivity through a service provider, it was the onerous task of the Business Development Team and the IT Operations to find as to whether the vendor had a valid license provided by DoT. In the instant case, we find that these appellants have no right to shrug of their responsibilities by saying that the P2P connectivity was being processed by the concerned department and not by their department. We further find that an evasive reply has be....
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....requisite license to provide such connectivity. Further, Sampark's connectivity at NSE to other stockbrokers was from Sampark's MUX placed at NSE MMR whereas Sampark's MUX was connected to BSE co-location through W2W rack which was only rectified in April 2016 and, therefore, gave a latency advantage. In so far as noticee nos. 9 Mr. M. R. Shashibhushan is concerned, he was a Chief Executive Officer and was found to be involved in the P2P connectivity by the impugned order. W2W has been directed to disgorge a sum of Rs. 15.34 crore along with interest at the rate of 12% p. a. and further have been directed not to accept, induct or enroll any new client for a period of one year from the date of the order and that noticee nos. 8 would not undertake any trades on any stock exchange recognized by SEBI in its proprietary accounts for a period of two years. In so far as noticee nos. 9 is concerned, the WTM directed that he shall not hold any position either directly or indirectly or be associated directly or indirectly with any stock exchange, clearing corporation, depository for a period of two years. 138. In view of the findings given by us in the earlier paragraphs that there was no c....
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....he irregularities. We, thus, find that the broker W2W and its Chief Executive Officer noticee nos. 9 to be guilty of these irregularities. 142. However, for the reasons stated earlier on the issue of disgorgement with NSE and for the same reason, we find that the direction to disgorge a sum of Rs. 15.34 crore alongwith the interest cannot be sustained and is quashed. For the violations committed by the broker, the direction of the WTM not to accept, induct or enroll any new client for a period of one year and not to undertake any trades in its proprietary account for a period of two years was appropriate. The direction against noticee nos. 9 Mr. Shashibhushan not to hold any position with any stock exchange, clearing member, etc. for a period of two years is harsh and inappropriate and cannot be sustained and is quashed. However, for the violation found by us, appropriate penalty could be imposed, if any. GKN Securities noticee nos. 12, Ms. Sonali Gupta noticee nos. 13, Mr. Om Prakash Gupta noticee nos. 14 and Mr. Rahul Gupta noticee nos. 15 143. The allegation against GKN is that they were direct beneficiary of preferential treatment by NSE since NSE allowed GKN to continue to ....
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....foresaid, we direct the appellant to transfer Rs. 62.58 crores from this escrow account to SEBI within two weeks from today. SEBI shall keep this amount in an interest bearing account which would be subject to the result of the appeal. We further direct the appellant to ensure that all revenues emanating from co-location facility including from any fiber connectivity from stock brokers co-location facility to their offices shall continue to be placed in the same escrow account as was placed during the pendency of the investigation before SEBI and such details of the escrow account would be submitted to SEBI from time to time." 148. Since we have set aside the unlawful gains, we direct SEBI to refund a sum of Rs. 62.58 crore along with interest accrued on it to the appellant within four weeks from today. We further vacate the direction given to the appellant for depositing the revenues emanating from colocation facility, etc. in an escrow account and the details to be submitted to SEBI from time to time. 149. In Appeal No. 337 of 2019 of Chitra Ramkrishna noticee nos. 3, the direction given by the WTM debarring Chitra Ramkrishna from holding any position for a period of three year....