TaxTMI 
TaxTMI 
2023 (8) TMI 1388
X X X X Extracts X X X X
X X X X Extracts X X X X
....allenged the common order dated April 30, 2019 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 Infotain....
X X X X Extracts X X X X
X X X X Extracts X X X X
....t the appellants are as under :- a. The appellant NSE 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ee, the learned senior counsel with Mr. Manish Chhangani, Ms. Samreen Fatima, Mr. Sumit Yadav, the learned counsel for 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 u....
X X X X Extracts X X X X
X X X X Extracts X X X X
....Act. 14. The WTM accordingly passed the following directions :- a) NSE is directed to deposit a sum of Rs. 62.58 crores alongwith interest calculated at the rate of 12% p.a. from September 11, 2015 till the actual date of payment, to IPEF of 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....out 2008, the algo servers of the brokers were placed in their offices and orders and market data was transmitted to the brokers through the same fibre optic cables. 19. Co-location services i.e. (Colo) is a facility provided by Stock Exchanges across the globe for all TMs for a reasonable 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 uni....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ptic cable which connects the brokers algo server in the colo rack to the brokers office outside the NSE building, so that the broker can receive data in his office and set up the parameters of the algo server in the rack so that the server can automatically shoot orders without human intervention. The P2P 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ders through the MUX installed by the network service providers. Colo Rack In the Colo facilities, the exchange provides rack space, called Colo rack, for keeping servers and other allied infrastructure. In the instant case, NSE leased the Colo rack space to the brokers availing Colo facilities on an annual fee basis. The brokers were provided one or more 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 3....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ircular of August 31, 2009 and consequently, were unaware of the notification of 2013. The WTM, therefore, came to the conclusion that the mode of communication by notification of 2013 issued by NSE violated the principles of transparency and consistency and, therefore, NSE violated Regulation 41(2) of the SECC Regulations and Clause 3 of the SEBI Circular dated May 13, 2015. 35. In this regards, 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 al....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nsel for the parties and having perused the circular of 2009 and notification of 2013, we find that under the circular of 2009, TMs were put to notice that they can take a leased line to the co-location facility from MTNL, TATA, Bharati or Reliance. Thus, TMs were notified of these service providers from whom the TMs could avail service facilities. The notification of 2013 indicated that TMs can take a leased line to the co-location facility from different telecom service providers. 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....en W2W's rack at NSE colo and their office at the BSE building through Sampark who was a licensed vendor. NSE granted permission to W2W on April 6, 2015 subject to the condition that W2W's connection should terminate at their office at P. J. Towers which is the same building which houses BSE and that the link should not be terminated directly at W2W rack in BSE. An undertaking, in this regard, was given by W2W on April 22, 2015. Based on the aforesaid permission, connectivity was provided 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ion by providing to Sampark a list of service providers through whom it could continue. In this regard, it has come on record that Sampark had a business relationship with Reliance and, therefore, Sampark volunteered to work with Reliance. A service agreement between Sampark and Reliance was entered into and on August 19, 2015, Reliance confirmed to NSE that Sampark infrastructure installed at NSE MMR had been transferred to Reliance and that W2W had also switched from Sampark to Reliance. Since Reliance 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 c....
X X X X Extracts X X X X
X X X X Extracts X X X X
....nd GKN on one hand and discriminated Millennium and Mansukh on the other hand. The charge that there was lack of transparency is also erroneous. In this regard, we are constrained to observe that this issue has been blown out of proportion. A mountain is being made out of a molehill. The entire timeframe of the discovery of the lacunae in Sampark's license from July 27, 2015 to the migration by Sampark to Reliance on August 19, 2015 constitutes only 24 days and, therefore, the central charge in these proceedings 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....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d consequently, came to the conclusion that NSE was involved in the deal between Sampark and Reliance so that W2W and GKN could continue to enjoy the connectivity without any loss to their latency advantage. In the first instance, we find that the WTM has misdirected itself and travelled beyond the show cause notice as we do not find any such allegation of a transition to Reliance so as to preserve any purported latency advantage to W2W and GKN. From the record, we find that NSE was not involved in the decision of Sampark 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 eq....
X X X X Extracts X X X X
X X X X Extracts X X X X
....amely : (a) one end is the TM's rack at NSE colo; and (b) the other end is a location designated by the members i.e. the B-end point (usually the member's office(s) outside NSE premises). Therefore, P2P connectivity starts where the colo infrastructure of NSE ends. 60. The P2P connection does not lie in the core data dissemination and trading path of NSE, and is not directly connected to the NSE's trading systems. P2P connectivity to the outside world begin from NSE's MMR in which TMs were assigned their respective racks. 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. ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ven though it is the TMs infrastructure, it is the onerous duty of NSE to ensure that such infrastructure which is being laid inside NSE premises are in accordance with the policies laid down by NSE through its circulars and notifications. NSE cannot escape this obligation. 65. We find that NSE had issued the 2009 circular and the notification of 2013 requiring TMs to take leased line from service provider licensees of DoT. Thus, if the TMs approached NSE for P2P connectivity to its colo rack placed inside NSE premises, it was the duty of NSE to inquire as to whether 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 cer....
X X X X Extracts X X X X
X X X X Extracts X X X X
....that the connectivity from NSE colo was to be first terminated at the office of the brokers and then from the office of the broker the connectivity was taken to BSE colo rack. In the investigation, it was noted that P2P connectivity of W2W was directly terminated at the W2W rack in BSE colo instead of terminating at their office which was in violation of NSE's policy. On this basis, it was alleged that NSE by facilitating laying of cable for W2W through Sampark provided latency advantage to W2W over other stockbrokers. It was also alleged that when Sampark had installed its MUX 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d W2W before going to Sampark MUX in the NSE MMR. In this regard, we find that initially Sampark has installed its MUX at W2W's rack and when more TMs required P2P connectivity, it was found that there was cabling issues in the duct space and, consequently, MUX was shifted to NSE MMR. Therefore, at the relevant time, the source cable passed through Sampark MUX installed in NSE MMR and, thereafter through W2W rack. Such procedure which was adopted and thereafter modified does not, in any way, gives any clue of giving latency advantage to W2W. It may be noted here that when connectivity 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 delibera....
X X X X Extracts X X X X
X X X X Extracts X X X X
....d December 1, 2016 and allowed direct connectivity between server of a stockbroker placed in NSE colo and server of the same stockbroker placed in colo facility on another recognized stock exchange. This circular by itself gives a clear indication that there was no latency advantage where P2P connectivity was directly connected between the two colo racks of two stock exchanges or whether it went through the office of TMs and thereafter to the colo rack of BSE. 77. In this regard, further finding that NSE did not conduct inspection of W2W connectivity at BSE office while granting P2P connectivity 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 insp....
X X X X Extracts X X X X
X X X X Extracts X X X X
....M from a telecom service provider whereby a leased line was connected to two designated points. On one end, it was the TM's rack at NSE colo facility and the other end was the location designated by the TM which was outside NSE premises. 80. It was contended by NSE that P2P connection does not lie in the core data dissemination and trading path of NSE and that P2P connection was not directly connected to the NSE trading system. This fact is borne out from the statement of Mr. Deviprasad Singh and Mr. Ravi Varanasi who were employees of NSE. SEBI's investigation report (Volume VII page No. 1640) also 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 a....
X X X X Extracts X X X X
X X X X Extracts X X X X
....aid, we are of the opinion that P2P connectivity did not give any latency advantage to the TMs. 82. The show cause notice alleged that NSE had violated Section 12A of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations. The WTM came to the conclusion that NSE had violated Section 12A of the SEBI Act and Regulations 3 and 4 of the PFUTP Regulations on account of granting preferential treatment to W2W and GKN and depriving the same to other stockbrokers for facilitating laying of cable for W2W through Sampark so as to provide latency advantage to W2W over other stockbrokers and by allowing W2W and GKN to continue to avail Sampark'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 pref....
X X X X Extracts X X X X
X X X X Extracts X X X X
....de in a reckless and careless manner whether it be true or false; (6) any such act or omission as any other law specifically declares to be fraudulent; (7) deceptive behaviour by a person depriving another of informed consent or full participation; (8) a false statement made without reasonable ground for believing it to be true; (9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price. And "fraudulent" shall be construed accordingly; Nothing contained in this clause shall apply to any general 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ors in securities. Further, such interest of the investors can be better ascertained by making reference to Section 2(h)(iii) of the SCR Act, 1956 which defines "security" to mean the right or interest in securities. A conspectus reference to Sections 12-A(a), (b) and (c) read along with Regulations 2(1)(b) and (c), as well as Section 2(h)(iii) of the SCR Act, 1956 sufficiently disclose that it would cover any act which will have relevance in protecting the interest of the investors in securities and security market with any person however remotely the same are connected with such securities, in the event of such an act working against the interest of investors in securities and securities market by way of fraud which has been elaborately defined under Regulation 2(i)(c) of the 2003 Regulations." "90. Under 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 responden....
X X X X Extracts X X X X
X X X X Extracts X X X X
....inked to "securities" and "dealing in securities". 89. The scope of PFUTP Regulations, 2003 has been set out by the Supreme Court in Kanaiyalal's case (supra). The Supreme Court held :- "10. The 2003 FUTP has three chapters, namely, "Preliminary", "Prohibition of fraudulent and unfair trade practices relating to securities market" and "Investigation". Regulation 1 contains the short title and commencement. Regulation 2 consists of certain definitions. Clause (b) of Regulation 2 defines "dealing in securities" which includes an act of buying, selling or subscribing pursuant to any issue of any security or agreeing to buy, sell or subscribe to any issue of any security or otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in Section 12 of the SEBI Act. Clause (c) 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), (....
X X X X Extracts X X X X
X X X X Extracts X X X X
....uch act or omission as any other law specifically declares to be fraudulent; (7) deceptive behaviour by a person depriving another of informed consent or full participation; (8) a false statement made without reasonable ground for believing it to be true; (9) the act of an issuer of securities giving out misinformation that affects the market price of the security, resulting in investors being effectively misled even though they did not rely on the statement itself or anything derived from it other than the market price." "33. Regulation 3 prohibits a person from committing fraud while dealing in securities. A reading of the aforesaid provision describes the width of the power vested with SEBI to regulate the security market. In our view, the words employed in the aforesaid provisions are of wide amplitude and would therefore take within its sweep the inducement to bring about inequitable result which has happened in this instant case." "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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
....action". * * * Merriam-Webster Dictionary defines "inducement" as "a motive or consideration that leads one to action or to additional or more effective actions". "56. A person can be said to have induced another person to act in a particular way or not to act in a particular way if on the basis of facts and statements made by the first person the second person commits an act or omits to perform any particular act. The test to determine whether the second person had been induced to act in the manner he did or not to act in the manner that he proposed, is whether but for the representation of the facts made by the first person, the latter would not have acted in the manner he did. This is also how the word "inducement" is understood in Criminal law. The difference between inducement in Criminal law and the wider meaning thereof as in the present case, is that to make inducement an offence the intention behind the representation or misrepresentation of facts must be dishonest whereas in the latter category 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 ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....equired to establish that the fraud was induced which, in the instant case, is missing. Merely on surmises and conjunctures one cannot come to a conclusion that a fraud was committed by NSE and that was induced in connivance with the two stockbrokers. 94. In the instant case, we find that it was the two stockbrokers who came forward with an application to get P2P connectivity through Sampark and, thus, on this short point, the question of NSE inducing W2W or GKN to subscribe to the co-location facility with the promise of faster access does not arise. 95. As we have already held that there is no relevancy of the latency advantage from P2P connectivity as no trading or live data was transmitted on these lines and, therefore, the question of NSE facilitating laying of cable, etc. and, therefore, depicting fraudulent or unfair trade practices does not arise. 96. We have also found that due diligence was not carried out by NSE while allowing Sampark to provide P2P connectivity without finding as to whether Sampark had a valid license for that 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 negl....
X X X X Extracts X X X X
X X X X Extracts X X X X
....erson 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. 100. 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 justice. In support of his submission, the learned counsel placed reliance in the case Gorkha Security Services v. Govt. of NCT of Delhi & Ors. [(2014) 9 SCC 105], wherein the Supreme court held :- "22... However, it is equally important to mention as to what would be the consequence if the noticee does not satisfactorily m....
X X X X Extracts X X X X
X X X X Extracts X X X X
....of showing that the amount sought to be disgorged reasonably approximates the amount of unjust enrichment is on the Board." 102. In National Securities Depository Ltd. Vs. Securities and Exchange Board of India, [2007 SCC OnLine SAT 208], this Tribunal held :- "We do not think that the Board could direct the appellants to disgorge the aforesaid amount without first determining their guilt and whether they had made any illegal gains. Again, it is not that every erring entity is held liable to disgorge the amount. Persons who have made illegal or unethical gains alone could be asked to disgorge their ill gotten profits." 103. 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 p....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... The two are totally different. There is no finding that NSE has charged an additional fee or revenue for P2P connectivity. 109. Portion of the revenue earned by NSE through its colo facility cannot be made part of disgorgement. Revenue earned by NSE from colo facility is not an unlawful gain and, thus, the direction to disgorge an amount from the revenue earned is wholly erroneous and illegal. 110. We have found that NSE was negligent in not carrying out due diligence while allowing an unauthorized vendor to provide P2P connectivity to its TMs. For this negligent act, direction under Section 11 and 11B of the SEBI Act other than disgorgement could be issued. 111. The WTM issued the following directions :- a) NSE is directed to deposit a sum of Rs. 62.58 crores as determined at para 70.3 above alongwith interest calculated at the rate of 12% p.a. from September 11, 2015 till the actual date of payment, to IPEF of 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 t....
X X X X Extracts X X X X
X X X X Extracts X X X X
....he connection directly in the rack placed inside NSE colo which was contrary to the normal practice followed by NSE. Further, in the case of Millennium and other brokers, Sampark was asked by NSE to install the MUX in NSE MMR. b. Non-verification of license of Sampark by NSE. c. Preferential treatment given to W2W and GKN by :- i. Facilitating laying of cable for W2W so as to give latency advantage to W2W over other stockbrokers. ii. Allowing W2W and GKN to continue to avail Sampark's connectivity even after finding that Sampark did not have the requisite license. iii. Conducting site inspection of office of Millennium, GRD and Sampark for P2P connectivity while not following the same procedure for W2W and GKN. d. Millennium was unable to avail P2P connectivity on account of fraud policy on the part of NSE which only allowed P2P connectivity of W2W and GKN by installing MUX in their rack and denying the same to the Millennium and, therefore, followed discriminatory policy. e. Non-transparent mode of communication to stockbrokers. The existing circular of 2009 was modified in 2013 without referring to the earlier circula....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ny activities committed by the subordinate officers. The WTM further came to the conclusion that the liability and accountability of a MD is onerous in nature and, therefore, it is not open to the appellant noticee nos. 3 to escape from her responsibility as the MD & CEO of the company. 116. The WTM having found that NSE did not verify the license of the service provider and adopted a non-transparent mode of communication to the stockbrokers and further allowed W2W and GKN to establish P2P connectivity through Sampark while denying permission to others and that NSE did not have the transparent policy for taking due diligence of service providers and followed certain discriminatory policies against other stockbrokers and gave preferential treatment to certain stockbrokers, held that the appellant Chitra Ramkrishna, noticee nos. 3 violated Regulation 3(d) and Regulation 4(1) of the PFUTP Regulations read with Section 12A of the SEBI Act and Regulation 26(2) of the SECC Regulations. 117. We have already held in the earlier paragraphs that most the charges levelled against NSE which are common to the appellant have not been proved. We have exonerated NSE of those charges and, the....
X X X X Extracts X X X X
X X X X Extracts X X X X
....r the alleged violation. It cannot be denied that all the departments / divisions of NSE were under her supervision and control and all the functional heads were reporting to her. Thus, by virtue of the office of the MD and CEO, we are of the opinion that being in-charge and responsible for the conduct of the business of NSE, the liability and accountability falls on her head with regard to an action or lack of action of any activities committed by the subordinate officers. 121. In Sayanti Sen vs. SEBI [2019 SCC Online SAT 132], this Tribunal held :- "12. The usual pattern in economic legislations is that when an offence is committed by a company, the liability is not imposed on all the officers of the company en bloc. Those who are guilty are generally sorted out from those who are not guilty. The Companies Act, however, makes a slight departure from this conventional pattern. It gives an opportunity to the board of directors to distribute the work as between the members of the board or to appoint a managerial person like managing director or whole time director or manager. If nothing of this sort is done, only then the whole board is liable to be prosecuted." ....
X X X X Extracts X X X X
X X X X Extracts X X X X
....s of NSE's policies are handled by responsible functional heads. When a violation is committed by the company, the liability cannot be imposed on all the officers of the company and the penalty is imposed upon a person who is found guilty. The Companies Act makes a departure from this conventional pattern. It gives an opportunity to the board of directors to distribute the work between the members of the board or to appoint managerial personnel like MD or whole time director, etc. It is, therefore not necessary under the Companies Act that every director is required to be penalized merely because he is a director but being a managing director, he is an officer in default as per the Companies Act and is over all responsible for the affairs of the company and in the larger context is morally responsible for any violation committed of its own policies. 123. Thus, given the lack of due diligence and negligence committed by NSE in not verifying the license, we are of the opinion that in the given circumstances, it is presumed that when the matter came to the light that Sampark did not have a valid license, it must have brought this fact to the knowledge of the MD. In any case, the ap....
X X X X Extracts X X X X
X X X X Extracts X X X X
.... give direct services to other brokers; c) Site visits were conducted for some other brokers, but not for W2W and GKN; d) Cabling for W2W in the colo facility was such that it got latency advantage for trading as compared to all other brokers; e) The NSE, W2W, GKN and Sampark colluded to fraudulently given W2W and GKN trading benefits by providing lower latency P2P connections while depriving other brokers of similar lower latency P2P connections. 129. The findings against these appellants are the same as given in the case of NSE and, therefore, the findings and the contentions are not being repeated here. 130. Mr. Ravi Varanasi, noticee nos. 5 was the Head of Business Development Team at NSE. Mr. Nagendra Kumar, noticee nos. 6 was the Head of the Membership Department which was a part of the Business Development Team at NSE. Mr. Deviprasad Singh was the Head of the IT Operations at NSE. The findings against these appellants of providing preferential treatment to some brokers and discriminating other brokers and not conducting site visits and providing latency advantage to some brokers have also been set aside in so far as the case of NSE and, there....
X X X X Extracts X X X X
X X X X Extracts X X X X
....essing is a vague statement. None of these appellants have named the "concerned department" for processing of the P2P connectivity. The e-mails between the appellants and the two stockbrokers and internal e-mails of the two stockbrokers as well as the internal e-mails of these appellants clearly indicate that they were in-charge of processing the request of the TMs for the P2P connectivity. We find that the appellants had played an active role in the entire matter pertaining to P2P connectivity by Sampark. The contention of Mr. Nagendra Kumar that he had no role to play with regard to the verification of license, etc. is patently erroneous. The e-mails of Mr. Nagendra Kumar clearly indicate that he was involved in the process of granting permission to Sampark for laying P2P connectivity. 134. Noticee nos. 5 Mr. Ravi Varanasi was functioning as the head of the Business Development Team at NSE. The colo support team was reporting directly to him. We are, therefore, of the opinion that Mr. Ravi Varanasi was looking after the operational activities relating to colo requests during the relevant period. The contention of all the appellants that it was not within their role and respons....
X X X X Extracts X X X X
X X X X Extracts X X X X
....ined and is quashed. Such direction if implemented would lead to automatic termination of their services which can never be the intention of the Regulator. In addition to the aforesaid, the additional direction against Mr. Ravi Varanasi of being debarred from holding any position either directly or indirectly or have been associated directly or indirectly with any listed company in any of the stock exchanges recognized by SEBI for a period of three years also cannot be sustained and is quashed. However, for the violation found by us, a penalty, if any, can be imposed. 136. In view of the aforesaid, the contention that there has been a gross violation of principles of natural justice as permission to cross-examine those persons whose reports, statements, mails, letters were considered by NSE becomes immaterial as it does not touch upon the issue in which the appellant has been found guilty. Way2Wealth Brokers Pvt. Ltd., noticee nos. 8 and Mr. M. R. Shashibhushan, noticee nos. 9 137. The appellant W2W, noticee nos. 8 was found to have violated Regulations 3 and 4 of the PFUTP Regulations and Regulation 9 of the Securities and Exchange Board of India (Stockbrokers and Sub-bro....
X X X X Extracts X X X X
X X X X Extracts X X X X
....sion and, therefore, it was all the more necessary for the broker to conduct due diligence and care in finding about the antecedent of the service provider. Without verifying as to whether Sampark was an authorised service provider, the broker introduced Sampark to NSE and allowed NSE to get misled. We find that W2W was at fault in introducing Sampark to NSE. We however find that the appellant was guilty in introducing Sampark to NSE for laying the P2P connectivity. The appellant was a TM since 2010 and was using TATA leased lines. It leads to an irresistible inference that it was the lure of more data speed and more bandwidth that motivated noticee nos. 8 to accept the offer of Sampark to establish a new P2P connectivity. 141. In addition to the aforesaid, W2W had given an undertaking to NSE that the end line of P2P connectivity will terminate at their office which was located in the BSE premises. Instead of terminating at their office the P2P connectivity was directly connected to its colo rack at BSE premises. This direct connection was in violation of the undertaking given by them to NSE. The contention that W2W was unaware is patently erroneous. The contention of noticee no....
X X X X Extracts X X X X
X X X X Extracts X X X X
....E to GKN nor latency advantage was given in the P2P connectivity. Further, inspite of knowing that Sampark did not have the requisite license, it does not point out to collusion between GKN and NSE and, therefore, the finding of preferential treatment, discrimination to others and collusion between NSE and GKN cannot be sustained and, to that extent, the charges cannot be sustained. 146. In view of the aforesaid, the question of disgorgement of unlawful gains does not arise and for the reasons stated aforesaid, while considering the case of NSE, the direction to disgorge unlawful gain of Rs. 4.9 crore against GKN does not arise and cannot be sustained. However, the direction restraining the noticee from accepting new client for a period of one year and not to undertake any trades in its proprietary account for a period of two years is justified. Appropriate penalty, if any, can be imposed. 147. For the reasons stated aforesaid, Appeal Nos. 334 of 2019 National Stock Exchange of India vs. SEBI is partly allowed. The direction to disgorge an amount of Rs. 62.58 crore alongwith interest cannot be sustained and to that extent the order is quashed. Other directions passed by the W....