“The direction to disgorge, in our opinion, cannot be sustained,” said presiding officer Justice Tarun Agarwala and Justice MT Joshi in their order. “The direction to disgorge must be in relation to any transaction or activity which is in contravention of the provisions of the Sebi Act or its regulations. The directions to disgorge can be done when it is found to be engaged in illegal acts, and not necessarily in every case should a direction to disgorge be passed because some provisions of the Act have not been adhered to.”
Sebi had passed the disgorgement order in the co-location case after complaints surfaced that a broker used NSE staffers to gain unfavourable server access and benefit monetarily. To be sure, the tribunal has directed NSE to deposit ₹100 crore to the investor protection and education fund created by Sebi. “The direction for disgorgement was unwarranted, but the appellant NSE cannot be allowed to go scot-free and is required to pay a price for lack of due diligence on account of human failure to comply with the circular in letter and spirit,” the tribunal said in its order.
‘Can’t Recover Money from Salary’
It said this amount will have to be adjusted by Sebi pursuant to the deposit already made by NSE.
“The excess amount along with the interest accrued shall be refunded by Sebi within six weeks,” SAT said.
The appellate body, however, has approved Sebi’s directions prohibiting NSE from accessing the securities market, directly or indirectly, for a period of six months. It has also directed the bourse to carry out system audits at frequent intervals after a thorough appraisal of the technological changes introduced from time to time.
Co-location refers to traders being able to place servers in close proximity to those of an exchange, thus giving them a time advantage that translates into massive profits.
In 2015, Sebi received complaints alleging that a trading member OPG Securities used NSE’s system to its advantage by having an arrangement with an NSE staff-member. The first one to connect to the lowest load server would get advantage in terms of receiving the data faster than others.
In 2019, Sebi passed a series of orders against the NSE and its former chief executives, Chitra Ramkrishna and Ravi Narain, in the co-location case.
The tribunal has set aside Sebi’s direction to disgorge 25% of the salary from Narain and Ramkrishna, saying it is patently erroneous.
“The power under Sections 11 and 11B for disgorgement cannot be extended to recover money from salary. Salary is a periodical payment for one’s labour,” SAT said.
“Salary is given to a person as a remuneration for the work that he does in an organisation. Salary is not a profit nor can it be termed as an unfair gain for the work which the person has done in the organisation. If the person is not in service/employed, the question of disgorgement from the salary does not arise,” the tribunal said.
The tribunal has also quashed Sebi’s direction prohibiting Narain and Ramkrishna from associating with any listed company or a market infrastructure institution or any other market intermediary for five years.
It has affirmed the violations committed by OPG as found by Sebi. However, the direction of Sebi directing OPG and its directors to disgorge Rs 15.57 crore was set aside.
SAT has sent the matter back to Sebi to decide the quantum of disgorgement afresh in the light of the observation made by it within four months.
It has also directed the whole-time member of Sebi to consider the charge of connivance and collusion of OPG and its directors with any official of NSE.
“…we must observe that when serious allegations were made against a first level regulator, namely, NSE, Sebi should have been proactive and should have conducted the investigation seriously. We find that Sebi had adopted a slow approach and, in fact was placing a protective cover over NSE’s alleged misdeeds. It is only when questions were placed on the floor of Parliament that Sebi woke up and instituted an investigation,” SAT said.
“In our opinion, considering the gravity of the alleged charges, Sebi should have itself conducted an investigation/enquiry instead of delegating it to NSE. It is strange and it does not stand to reason as to how Sebi directed NSE to conduct an investigation against itself. It is clear that a casual approach was adopted,” the tribunal said.
The appellate body also said that although two separate orders were passed by the same whole-time member of Sebi in the co-location case, there were contradictions in the findings arrived at on the same issue.
“…we find that all the charges leveled in the show-cause notice has not been proved. Many of the charges were dropped by the WTM (whole-time member) himself while passing the impugned order. The WTM held that the charge of fraud and unfair trade practice by NSE under PFUTP (Prohibition of Unfair Trade Practices) Regulation is not made out. The charge that NSE and its employees have colluded with TMs (trading members), especially OPG, has not been made out. The allegation of suppression of material facts and non-cooperation by NSE with the investigating authorities has not been made by the WTM,” the tribunal said.
The tribunal also said early login by brokers did not create any advantage with regard to dissemination of data.
“…May be a probabilistic advantage is obtained by a TM on account of early login, but in the absence of any further evidence on this aspect, no adverse orders can be passed. We also hold that there was randomness in the dissemination of data in the TBT (tick by tick) architecture and, therefore, there was no requirement to add a randomiser to the existing TBT architecture,” the tribunal said.