2023 (8) TMI 1388 - AT - SEBI

Fraudulent use of Colocation facility in NSE - possible violation pertaining to dark fibre connectivity provided by Sampark in connivance / collusion with employees of NSE, with the stockbrokers and the role of the stockbrokers who allegedly benefited from the preferential access to colo facility by way of P2P connectivity from an un-authorised service provider - direction to disgorge an amount alongwith interest and other directions have been issued to NSE - noticee nos. 1, Way2wealth Brokers Pvt. Ltd.- noticee nos. 8 and GKN Securities Pvt. Ltd. noticee nos. 12 - 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. HELD THAT - As 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 securities and must be by a person dealing in securities . The Supreme Court has enlarged the scope of fraud under the PFUTP Regulations to cover an action or omission even without deceit if such act or omission had the effect of inducing another person to deal in securities. Thus, inducement became more significant where fraud was required to be proved. The Supreme Court held that fraud can be inferred on a preponderance of probabilities. However, the inferential conclusion must be arrived at from proven and admitted facts. Further, fraud cannot be proved only on alleged negligence, as amounting to collusion and connivance. The Supreme Court in Kanaiyalal s case 2017 (9) TMI 1269 - SUPREME COURT has categorically held that the element of inducement must exist and should be proved before holding that a person is guilty of fraud. In the instance case, there is no finding that NSE had induced someone and thereby played a fraud in the securities market. There is no cogent evidence to show that the NSE is guilty of inducement . In the absence, of any evidence, the charge of fraud is not proved, nor the provisions of Regulation 3 and 4 of PFUTP Regulations applicable. We find that the charge of fraud is not made out under any circumstances. In order to establish the charge of fraud, SEBI is required 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. 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. 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. 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 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. Order of disgorgement - 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. The disgorgement can be of an amount equivalent to the amount earned or gain made or loss averted by such contravention. Before an order of disgorgement could be issued, the WTM has to arrive at a specific finding that NSE had made a wrongful gain. In the absence of any finding that NSE had made a wrongful gain, the question of disgorgement does not arise. In the instant case, the WTM in paragraph nos. 70.1 without giving any finding that NSE had made a wrongful gain through P2P connectivity deemed it proper to direct NSE to deposit a reasonable portion of the revenue earned through its colo facility which has nothing to do with the alleged P2P connectivity. The two are totally different. There is no finding that NSE has charged an additional fee or revenue for P2P connectivity. 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. 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. In view of the aforesaid, the direction to disgorge an amount of Rs. 62.58 crore alongwith interest cannot be sustained and to that extent is quashed and other directions given under Section 11 and 11B read with Section 12A of the SEBI Act are sustained and are appropriate for the violations found by us. Denial of services to certain stockbrokers resulting in dissemination and non-adherence to principles of fairness - Chitra Ramkrishna Noticee Nos. 3 - As 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 appellant noticee nos. 3 is morally responsible for this lapse which she cannot escape. WTM directed that Chitra Ramakrishna 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. 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.Thus, the direction to debar the appellant noticee nos. 3 cannot be sustained and is quashed. At best penalty could be imposed upon appellant noticee nos. 3. Mr. Ravi Varanasi (Noticee nos. 5), Mr. Nagendra Kumar SRVS (Noticee Nos. 6) and Mr. Deviprasad Singh (Noticee Nos. 7) - non-verification of Sampark s license and, therefore, there was lack of due diligence and negligence on their part - The direction that the appellants shall not hold any position either directly or indirectly or be associated directly or indirectly with any stock exchange, clearing corporation or depository or any intermediary registered with SEBI for a period of two years is harsh and excessive and cannot be sustained 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. 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 - 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 nos. 9 that he was not aware of such irregularities is patently erroneous. Their internal correspondence between noticee nos. 9 and its employee Rima Shrivastav clearly indicates that they were aware of the irregularities. We, thus, find that the broker W2W and its Chief Executive Officer noticee nos. 9 to be guilty of these irregularities. 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 - As already held that preferential treatment was not given by NSE 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. 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. Appeal 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 WTM under Section 11 and 11B read with 12A of the SEBI Act are affirmed and are appropriate for the violations found by us. 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.

Summary

Issues Involved:
1. Non-transparent communication by NSE.
2. Preferential treatment and discrimination by NSE.
3. Verification of Sampark's license.
4. Latency advantage to W2W and GKN.
5. Collusion and fraud allegations.
6. Disgorgement and penalties.

Summary:

Non-transparent communication by NSE:
The Tribunal found that the notification of 2013 did not amend the circular of 2009 but only provided more information. The Tribunal held that the finding that the 2013 notification was vague due to lack of cross-reference to the 2009 circular was erroneous. All circulars and notifications were posted on NSE's website, and it was expected that all Trading Members (TMs) would be aware of such information. The Tribunal concluded that there was no violation of Regulation 41(2) of the SECC Regulations and Clause 3 of the SEBI Circular dated May 13, 2015.

Preferential treatment and discrimination by NSE:
The Tribunal found that when the licensing issue of Sampark was discovered, NSE took remedial measures by transitioning the connectivity to Reliance, which did not indicate any preferential treatment to W2W or GKN. The Tribunal held that the finding of preferential treatment and discrimination against Millennium and Mansukh was erroneous. The Tribunal also noted that the entire issue was resolved within 24 days, and thus the central charge was unfounded.

Verification of Sampark's license:
The Tribunal held that NSE failed to carry out due diligence in verifying Sampark's license. However, it found no deliberate attempt by NSE to defraud other TMs. The Tribunal concluded that there was no violation of Regulations 3 and 4 of the PFUTP Regulations or Regulation 41(2) of the SECC Regulations.

Latency advantage to W2W and GKN:
The Tribunal found that the allegation of latency advantage given to W2W was based on surmises and conjectures. It was noted that no evidence showed that data reached W2W before going to Sampark's MUX in the NSE MMR. The Tribunal concluded that there was no latency advantage given to W2W or GKN.

Collusion and fraud allegations:
The Tribunal found that there was no evidence of collusion or fraud by NSE or the brokers. It held that the charge of fraud under Regulations 3 and 4 of the PFUTP Regulations read with Section 12A of the SEBI Act was not proved. The Tribunal emphasized that fraud cannot be inferred solely based on negligence.

Disgorgement and penalties:
The Tribunal quashed the direction to disgorge Rs. 62.58 crore along with interest against NSE, Rs. 15.34 crore against W2W, and Rs. 4.9 crore against GKN, as no wrongful gain was found. However, the Tribunal sustained other directions under Section 11 and 11B of the SEBI Act. The Tribunal also quashed the directions debarring Chitra Ramkrishna, Mr. Ravi Varanasi, Mr. Nagendra Kumar, Mr. Deviprasad Singh, and Mr. M. R. Shashibhushan from holding positions in any stock exchange, clearing corporation, or depository, but allowed for the imposition of penalties if any violations were found. The Tribunal affirmed the direction restraining W2W and GKN from accepting new clients and trading in their proprietary accounts for specified periods.