9911796707
TMI Blog2015 (8) TMI 335X X X X Extracts X X X X X X X X Extracts X X X X ..... against Appellant. Violation of Margin money norms - Whether respondent nos:2 to 9 placing buy orders far away from market price and violating margin money norms laid down by NSE vitiated trade – Held that:- NSE vide circular dated January 20, 2004 warns that disciplinary action may be initiated against those members who place orders far away from normal market price – Violating margin money norms was liable for expulsion or suspension or withdrawal of all or any of membership rights and/or to pay fine and/or censure, reprimand or warning – Trades executed due to erroneous sell orders and buy orders placed by respondent nos:2 and 3 in violation of norms, affected adversely NIFTY index, causing loss of appellant and huge profits to respondent nos:2 and 3 – Violations committed by respondent nos. 2 and 3 were serious violations and NSE ought to have appreciated imposing penalty against profits running into several crores wrongfully earned by respondent nos: 2 and 3 – Matter remanded back for fresh consideration in accordance with law. - Appeal No. 64 of 2013, Miscellaneous Application No.80, 81 of 2014 & Appeal No.86, 87 of 2013 - - - Dated:- 26-8-2014 - J.P. Devadhar, Jog S ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of present case, appellant being grossly negligent, trades in question cannot be considered as material mistake in the trade and consequently the said trades cannot be annulled. 4. Facts relevant for purpose of this appeal are that appellant is a public limited company and is engaged in the business of providing financial services i.e., the business of stock- broking and advisory services. Appellant claims to have significant market share across all the market segments and claims that its average daily cash market turnover is approximately ₹ 139 crores. 5. Events that took place on October 5, 2012 and follow up action taken thereafter in relation to the trades in question have been summarized by the appellant as follows:- A) At 08:30 A.M. appellant s dealer Mr. Sagar Shah, reported to the appellant s Information Technology Department ( IT Department for short) that the operating system of his computer has crashed. B) At 08:45 A.M. IT Department replaced Sagar Shah s system with another system and installed a fresh copy of the OMNESYS Order Management Software ( Omnesys for short), which is used for placing orders. C) At 09:00 A.M. pre-market opens. D) A ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NSE at prices which were the first traded price when the error took place. The appellant then cancelled the pending orders in the system from the admin terminal of the institutional desk. The appellant also started to buyback the NIFTY Basket in the cash segment with a view to square off the existing position. O) At 11:45:00 A.M. Mr. Prakash Kacholia, Mr. Krishna Kumar Karwa and Mr. Anish Damania, Head of Institutional Equity s Business of the appellant went to NSE to explain exactly as to what transpired and also requested the officials of NSE including the then Deputy Managing Director to annul the error trades. P) At 12:00:00 P.M. the appellant s system were put into square off mode. As orders were not going into the system even in square off mode, the appellant s trading terminals were reverted back from square off mode. NSE communicated the appellant to square off the error position into appellant s error account. Following these instructions, as the appellant started buying into its error account, it attracted, margin and the appellant s trading rights were disabled. On the appellant s request, the trading terminal was reactivated for about 10 minutes by NSE to square ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... been ever placed on NSE. Therefore, mistake on part of appellant s dealer being manifest and no reasonable person would have placed a single basket order for sale of NIFTY 50 worth ₹ 980 crores, NSE ought to have annulled the trades in question. b) NSE erred in holding that appellant was guilty of gross negligence by not installing requisite checks and balances in the computer at the dealer s terminal. In fact in para 24 of the impugned order it is recorded that there were multiple checks and balances installed at the dealers terminal however, same was not followed by the dealer. In the present case, punching erroneous sell order was one off instance arising out of a human error and it was not a case of gross negligence. Moreover, the limited purpose inspection conducted by NSE immediately on execution of erroneous trades on October 5, 2012 revealed that it was a case of one off instance and not a systemic issue. Very fact that the trading rights of the appellant suspended on October 5, 2012 have been allowed to be resumed on October 10, 2012 bears testimony to the fact that the appellant s risk management system were in place and it was only a one off incidence of an extr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing formation and implementation of contracts ought to be given a full run by annulling the trades in question. g) Annulment of trades in question is in the interest of the integrity of the market. The principle of protecting market integrity entails ensuring that erroneous trades are dealt with in accordance with the bye-laws and trades with manifest material mistakes are treated as if they were never executed. Integrity of the market would in fact be hurt adversely if the trades in question are not annulled because, all market players would have then to believe that regardless of how serious an error they may make, the market system would never follow the principle of annulment. h) Respondents no. 2 and 3 who are the two largest beneficiaries of erroneous trades have admittedly violated the regulatory frame work by placing orders several times in excess of available margins. Margin requirements are mandatorily required to be met under the rules and regulations framed by NSE. In the present case respondent no. 3 had margin of only ₹ 2.88 crores which could have enabled it to take trade positions approximately worth ₹ 25 crores, whereas, respondent no. 3 had place ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as required under the securities laws as the trading system had not come to a halt when the index fell by 10%. ii) NSE failed to keep the market system shut for two hours and decision of NSE to resume trading within a period of fifteen minutes was in violation of the norms laid down by SEBI. iii) NSE failed to put in place order/ trade limit controls and risk management at its end and has rather put the onus for erroneous trades solely on the broker and iv) the counter party brokers could enter large purchase orders at unrealistic market prices without even posting sufficient margins and thereby they could cause a systemic risk and the NSE did not have systems to prevent such market abuse. l) In its reply to the above show cause notice NSE has admitted that the market fell below 10% due to the erroneous order from a single dealer of the appellant. NSE has further admitted in its reply that the system audit report of the appellant did not reveal any lapses. In these circumstances, it is contended that even the prima facie view of SEBI as also reply of NSE filed before SEBI supports the contention of appellant and therefore, it would have been just and proper for NSE to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ty tab or value tab) is displayed prominently at the bottom of the screen. (iii) Where the order comprises of more than one scrip, the value of each scrip is displayed prominently in actual figures against such scrip. (iv) The order of the dealer enters the NSE s system only if the OK button is pressed by the dealer. Thus, in the present case, the dealer could have prevented the transaction from going through/ corrected the same by (i) checking that he had chosen the correct tab viz. value instead of quantity; (ii) checking the abnormally high quantities of each scrip which appeared next to the name of the chosen scrips- this would have alerted him to the fact that the quantity tab had been chosen and not the value tab; (iii) checking the abnormally high total value of the entire transaction appearing at the bottom of the screen- this also would have alerted him that wrong tab had been chosen; and (iv) pressing OK button only after confirming all the above details. Ignoring these basic checks which permitted the dealer at 4-5 stages in the order placing process to cancel/correct the order, amounts to sheer negligence. It shows that the conduct of the Appellant/ its dealer was c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trades entered in to the trading system including orders entered on behalf of its constituents. As per Circular dated July 15, 2005 issued by NSE, appellant ought to have incorporated suitable validation mechanism as part of the risk management system to avoid erroneous orders with large quantities being transmitted through CTCL system in to the NSE s trading system. As the appellant had violated the above provisions, NSE was justified in rejecting the annulment application. (g) Each Trading Member including the appellant has submitted an undertaking in writing to NSE to abide and adhere to the bye-laws, Rules and Regulations framed by NSE and also abide by the Code of Conduct as laid down from time to time. By NSE Circular dated May 12, 2000, computer to computer link ( CTCL ) facility was offered to members wherein the members could use their own software running on a suitable hardware/software instead of NEAT front end software. CTCL facility was made available only to approved persons after obtaining prior consent of NSE. Such approved persons were mandatorily required to have an inbuilt facility for online surveillance and risk management features like trade by trade positi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o unnecessary panic and further fall in the market and accordingly the market was reopened within 15 minutes of the market halt. Therefore, in the facts of present case, NSE cannot be faulted for reopening the market within 15 minutes. j) Disciplinary Action Committee ( DAC for short) by its order dated October 29, 2012 had noticed various lapses on part of appellant and accordingly imposed monetary penalty of ₹ 25 lakh which the appellant has paid. Therefore, having accepted the findings of DAC that appellant has committed various violations, it is not open to the appellant to find fault with the decision of NSE in rejecting the annulment application of the appellant. k) Reliance placed by appellant on the proceedings initiated by SEBI against NSE is devoid of any merit, because, firstly, the allegations set out in the show cause notice are only prima facie observations which are yet to be adjudicated in the light of replies filed by NSE. Secondly, expressing any opinion on the merits of the case pending before SEBI would seriously prejudice case of the appellant which is pending before SEBI. 8. Mr. F. Divitre, learned senior Advocate appearing on behalf of respond ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ent on account of fraud or willful misrepresentation or material mistake in the trade. (b) Notwithstanding anything contained in clause (a) above, the Exchange may, to protect the interest of investors in securities and for proper regulation of the securities market, suo motu annul deal(s) at any time if the relevant authority is satisfied for reasons to be recorded in writing that such deal(s) is/ are vitiated by fraud, material mistake, misrepresentation or market or price manipulation and the like. (c) Any annulment made pursuant to clauses (a) and (b) above, shall be final and binding upon the parties to trade(s). In such an event, the trading member shall be entitled to cancel the relevant contract with its constituents. (emphasis supplied) 11. Appellant seeks annulment of trades in question on ground that the said trades constitute material mistake in the trade under Bye law 5(a) framed by NSE basically on three grounds:- a) Punching erroneous order to sell 17 lakh NIFTY 50 units instead of punching order to sell ₹ 17 lakh worth NIFTY 50 units was an unintended error committed by the appellant s dealer and such an error being one off error never committed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s a material mistake or a non material mistake is a question that would depend upon facts of each case. Bye Law 5(a) does not contemplate every mistake to be a material mistake. 15. Bye law 5(a) postulates that all dealings on the Exchange shall be inviolable. Expression inviolable as per Oxford Dictionary of English (Second Edition) means never to be broken, infringed or dishonoured . Thus, Bye law 5(a) envisages that all dealings on the Exchange shall be honoured and shall not be broken. Bye law 5(a), however, carves out exception to the above inviolability by providing that the Exchange may annul trades which according to the Exchange are fit for annulment on account of fraud or willful misrepresentation or material mistake in the trade. Thus, reading Bye law 5(a) as a whole it is evident that all dealings on the Exchange shall have to be cleared and settled in accordance with Bye laws, Rules and Regulations framed by NSE except those trades which according to the Exchange are fit for annulment on account of fraud or willful misrepresentation or material mistake in the trade. 16. Since dealings on the Exchange are inviolable, it is obvious that both parties to the trade ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... igent mistake constitutes material mistake in the trade. 18. Had the appellant set up suitable validation mechanism as part of risk management system not only at dealer s computer level but also at the CTCL server level, NEAT CTCL USER ID level and at the Corporate Manager level, error if any at the level of the dealer s terminal would have been noticed at these levels and requisite steps for correcting the error could have been taken. Failure on part of appellant to install suitable validation mechanism as part of risk management system at all these levels was in violation of SEBI Circular dated 30th January, 2000 and NSE Circulars dated 12th May, 2000 and 15th July, 2005. Since erroneous trades took place not only due to mistake in punching erroneous sell order but also due to breach of duty in not installing suitable validation mechanism as part of risk management system on the standby computer as also at various other levels, before dealing on the Exchange, appellant is not justified in contending that the mistake committed in punching erroneous sell order constitutes material mistake in the trade. Bye-law 5(a) does not permit annulment of trades executed by mistake, but per ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eg: against ITC the quantity shown is 2920767 and against Reliance the quantity shown is 889483. e. Thereafter the dealer is required to approve the proposed order by clicking the OK button; only on clicking the OK the order enters into the trading system of the NSE for execution. The Committee in this case, noted that a. The dealer had used the last choice namely Based on Quantity , when the first choice namely Based on value was actually the applicable choice. b. Once the order is placed as such it still does not get into trading system leaving an opportunity for a second level check i.e., entering 1700000 in the tab wherein it is mentioned based on quantity. c. The net quantity of the basket order showed 19744895 and net value of the basket order showed ₹ 9742872733.55 at the bottom of the screen. d. The quantity and value for each of the scrip shows huge figures against each scrips and had been again ignored by the dealer. e. The Committee also noted that only on clicking the OK the order enters into the trading system of the NSE for execution. This is the fifth check. Inspite of all these checks and balances appearing on the order sc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fter exercising due care, caution and diligence. In other words, a trading member who is guilty of breach of duty and is also guilty of negligence cannot claim annulment of trades on grounds that erroneous trades constitute material mistake in the trade. No doubt that inadvertent mistakes may occur in spite of exercising due care and caution. To take care of inadvertent mistakes that may occur inspite of reasonable care, caution and diligence exercised by a Trading Member, NSE requires that every Trading Member shall install suitable validating mechanism in the risk management system before placing sell/buy orders and further, the system adopted by NSE ensures several levels of checks on the screen so that inadvertent error if any in placing the sell/buy order is rectified before the sell/buy order is transmitted into the trading system of NSE. In the present case, it is seen that apart from punching erroneous sell order, appellant is guilty of breach of duty/negligence and in such a case, appellant is not justified in contending that erroneous trades executed inspite of breach of duty/negligence ought to be treated as material mistake in the trade. 22. A mistake whether committ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gree of negligence is higher. Under Bye law 5(a) it cannot be said that higher the degree of negligence higher the chance of annulment. Therefore, interpretation of Bye law 5(a) put forth by appellant which defeats the object with which Bye-law 5(a) is enacted cannot be accepted. 24. It is true that expressions used in Bye-law 5(a) being clear and unambiguous, it is unnecessary to refer to the provisions contained under the Contract Act. In a screen based trading system trades take place anonymously i.e., the party entering sell orders into the trading system does not know as to who could be the counter party whose buy order would get matched and the trades get executed. In such a case, there is no scope for the counter party to ascertain as to whether sell order is placed under mistake or not. That is why Bye-law 5(a) provides that the trades executed on the Exchange shall be inviolable except where the trades are liable to be annulled on ground of fraud or willful misrepresentation or material mistake in the trade. In other words, Bye-law 5(a) provides that the trades executed on the Exchange shall be inviolable irrespective of the fact there are inadvertent errors or grave er ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... saction under Section 16(2) of SCRA and hence liable to be annulled. 27. We see no merit in the above contentions as such. Trades in the present case have been admittedly executed on Stock Exchange recognized by SEBI as mandated under above circular dated 1st March, 2000 and hence it cannot be said that there is violation of Section 16(1) of SCRA. Once it is held that there is no violation of Section 16(1), then question of declaring trades to be illegal under Section 16(2) of SCRA does not arise. Violating margin money norms would mean violating Bye-laws and/or circulars issued by SEBI or Stock Exchange. Violating Bye-laws would not amount to violating Section 16(1) of SCRA, because Section 16(1) of SCRA prohibits execution of trades in contravention of circular dated 1st March, 2000 and in the present case, it cannot be said that the trades are in violation of section 16(1). Hence argument of appellant that the trades in question are liable to be declared as illegal under Section 16(2) of SCRA cannot be accepted. 28. Question then to be considered is, whether the appellant is justified in contending that the sanctity of the trades in question are lost on account of violatio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t of respondent nos:2 to 9 placing buy orders far away from the market price and in some cases in violation of margin money norms laid down by NSE. Although appellant had claimed annulment of all trades executed where respondent nos:2 to 9 were counter parties, at the hearing of appeal, claim for annulment was restricted to the trades on account of violating margin money norms where respondent nos.2 to 9 are counter parties to the trades. 31. For appreciating above argument of appellant it would be necessary to state facts relevant to the issue. According to NSE, on October 5, 2012 respondent No.3 had placed total buy orders worth ₹ 416.71 crores which was 144 times the available margin provided by respondent No.3 with NSE. Out of the above buy orders, orders worth ₹ 300.61 crores were placed on proprietary account and orders worth ₹ 116 crores were placed on client s account. Out of the buy orders worth ₹ 416.71 crores, orders worth ₹ 260.24 crores were placed 18.15% below the last traded price of shares. The buy orders exceeded respondent No.3 s net worth of ₹ 27.78 crores by approximately 11 times and client s net worth also exceeded multip ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he Prevention of Money Laundering Act. 34. NSE circular dated January 20, 2004 depricates the practice of trading members in placing orders far away from the normal market price and warns that disciplinary action may be initiated against those members who place orders far away from the normal market price. According to NSE, for violating margin money norms, laid down in the circulars/Regulations, trading members are liable for expulsion or suspension or withdrawal of all or any of membership rights and/or to pay fine and/or censure, reprimand or warning. 35. Thus, in the peculiar facts of present case, trades executed due to erroneous sell orders placed by appellant and buy orders placed by respondent nos:2 and 3 in violation of the norms laid down by NSE, NIFTY index fell by 15.5% and market halt took place within few seconds of the market opening. It is not in dispute that as a consequences of such violations appellant had to incur loss of more that ₹ 51 crores and respondent nos:2 and 3 gained huge profits running into several crores of rupees. 36. On an application made by appellant seeking annulment of trades, NSE while rejecting claim for annulment on ground th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... is not in dispute that respondent nos:2 and 3 have made huge profits running into several crores of Rupees by selling NIFTY 50 purchased under unrealistic trades, on October 5, 2012, because, NIFTY 50 which fell by 15.5% on account of unrealistic trades, bounced back immediately on reopening of the market after market halt on October 5, 2012. 39. In our opinion, violations committed by respondent nos. 2 and 3 were serious violations and since respondent nos.2 and 3 have admitted to have been committing such violations regularly, NSE, before imposing penalty against respondent nos.2 and 3 ought to have considered arguments of appellant that the trades were vitiated on account of violations committed by respondent nos:2 and 3. 40. NSE ought to have appreciated that imposing penalty of ₹ 20-25 lac against respondent nos.2 and 3 as against profits running into several crores wrongfully earned by respondent nos: 2 and 3 by violating the norms, instead of acting as deterrent, in fact embolden respondent nos:2 and 3 to commit such violations regularly. Before passing any order NSE ought to have weighed gravity of the violations committed by appellant on one hand and respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at period executable/ matchable orders existing within the system got executed. It is further stated that when circuit breaker had triggered in the past on May 18, 2009 it had taken 13 seconds for the trading system to come to a complete halt, whereas in the present case it took 6 seconds for the system to come to a complete halt. It is also stated that trading was resumed within 15 minutes of the market halt, after ascertaining that the market fall was due to negligent order emanating from the appellant which did not affect other segments of the market in NSE as also BSE-Sensex. It is further stated that NSE in consultation with SEBI and after intimating BSE arrived at a conclusion that a market halt for two hours would lead to unnecessary panic and further fall in the market and accordingly the market was reopened within 15 minutes of the market halt. These factual statements are being investigated by SEBI and decision is awaited. Admittedly, pending adjudication of show-cause notice, SEBI has not restrained NSE from continuing with the existing trading system which clearly shows that SEBI has found that arguments of NSE cannot be summarily rejected and require deeper considerati ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d 3 placing buy orders far away from the market price and in violation of margin money norms laid down by SEBI/NSE and if so, pass order either to annul trades in which respondent nos. 2 and 3 are counter parties (in full or part) or take steps either for expulsion or suspension or withdrawal of all or any of the membership rights of respondent nos. 2 and 3 or take any other steps as deemed fit and proper. b) Orders impugned in Appeal no:86 of 2013 and Appeal no:87 of 2013 are set aside by way of remand and NSE is directed to pass fresh order on merits after taking into consideration our decision in Appeal no:64 of 2013. c) Till fresh orders are passed on all the remanded issues, amounts/payouts withheld by NSE shall continue to be withheld. d) NSE is directed to pass fresh orders on the remanded issues as expeditiously as possible, preferably within a period of three months from today. Both parties shall co-operate in disposal of remanded issues expeditiously. e) No order as to costs. Appeal No. 64 of 2013 Per : A.S. Lamba 1. Present Appeal has been filed by M/s Emkay Global Financial Services Limited (Appellant) against National Stock Exchange of India Li ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Respondent No. 1 in institutional mode, which allowed squaring off of transactions of Appellant. Further at 01:00:00 p.m. Appellant was allowed to square off nominal open positions, to make error trade net quantity NIL and a loss of ₹ 51 crore was incurred, on account of all trades connected with placement of erroneous order. 6. Following facts, as per Appellant are noteworthy: Erroneous trades were executed by Appellant s dealer on a standby computer, which did not contain specific checks and risk management measures. Dealer made punching error and placed order for 17 lakh units of NIFTY, worth ₹ 980 crore, instead of for ₹ 17 lakh worth of NIFTY and within 4 seconds dealer realized his mistake but could not rectify the situation since order had hit NSE trading system and within 6 seconds of placing order, i.e. at 9:51:00, orders worth ₹ 660 crore got executed and cash segment of Respondent No. 1 was halted. Circuit breaker system of Respondent No. 1did not halt market when NIFTY index fell by 10%, as required under relevant circular of SEBI, but trading halted when NIFTY had fallen by 15.5%. Trading halted for only 15 minutes which was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Exchange made subject to the Byelaws, Rules and Regulations of the Exchange shall be inviolable and shall be cleared and settled in accordance with the Byelaws, Rules and Regulations of the Exchange. However, the Exchange may by a notice annul the deal(s) on an application by a Trading Member in that behalf , if the relevant authority is satisfied after hearing the other party/parties to the deal(s) that the deal(s) is /are fit for annulment on account of fraud or willful misrepresentation or material mistake in the trade. (b) Notwithstanding anything contained in clause (a) above, the Exchange may, to protect the interest of investors in securities and for proper regulation of the securities market, suo motu annul deal(s) at any time if the relevant authority is satisfied for reasons to be recorded in writing that such deal(s) is/are vitiated by fraud, material mistake, misrepresentation or market or price manipulation and the like. (c) Any annulment made pursuant to clauses (a) and (b) above, shall be final and binding upon the parties to trade(s). In such an event, the Trading Member shall be entitled to cancel the relevant contracts with its constituents. 11. It is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . 1 did not have systems to prevent such market abuse. No order has yet issued by SEBI with respect to their SCN as above (dated April 18, 2013). . 15. Now coming to impugned order dated April 30, 2013 of DAC in NSE, main points arising of order are that erroneous trade of Appellants was with 665 trading members and 14,000 clients were counter parties, out of which 8 counter-parties were responsible for 70% of total trade. These 8 counter party trading members are: 1. Inventure Growth and Securities Limited 2. Prakash K Shah Shares and Securities Limited 3. Labdhi Finance Corporation Private Limited 4. Adroit Financial Services Private Limited 5. Religare Securities Limited 6. Mesh Stock Brokers Private Limited 7. Focus Shares and Securities Private Limited 8. CNB Finwiz Private Limited 16. Main submissions of Appellant before Respondent No. 1, are the same, as in above paragraphs, with following additions:- (a) Usual checks and filters are usually in place to prevent such errors but were inadvertently missed out when trading software was replaced in Sagar Shah system, as his system had crashed in morning of October 5, 2012; (b) NSE conducted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ng on stock exchange know that they carry this risk and are eligible to rewards of favourable movement in value of securities as and when it arises; (c) At the time of execution of trades CPTMs clients were not aware, as to whether these trades are result of orders entered by a CP is erroneous as there is fall in market and CPTMs client did not know whether they will be able to sell these shares at a profit or loss. If markets had fallen further, clients would have suffered huge losses; (d) There was no need for Appellant to place orders in a hurry, since market was bullish and in a rising markets, sellers are not in a hurry to place sell orders and dealer / Appellant had enough time to place sell orders; (e) Default setting of OMNESYS is based on value of basket and it was changed to Quantity and placing of sell order for 17 lakh units of NIFTY scrip, was not erroneous; (f) OMNESYS system gives detailed view of basket and shows total value and quantity of basket being entered. How did dealer of Appellant not see this, at time of entity of order; (g) Limits of user are stored in server and all orders that are placed from any terminal are filtered and validated agains ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rokers and their clients; (o) Risk Management and Surveillance Team and IT team of Appellant did not set limit from 8:45 am to 9:50 am on October 5, 2012, then how sell order was an error, since there was complete lack of seriousness towards risk management system; (p) Appellant did not have documented and implemented process for a computer which is to be replaced including hardening and profiling process that needs to be carried out before putting a computer to use in live trading system and Appellant failed to ensure putting limits for orders placed by its dealers thereby giving dealers unlimited access to place orders; (q) In light of grave lapses by Appellant in basic controls as stipulated by NSE and failure to exercise due diligence, CPs object that negligent acts that put entire financial system to crises, cannot be categorized as an error or mistake; (r) Conduct of Appellant in placing large and unrealistic order of ₹ 980 crore without any checks and gross negligence of risk management system, is not expected from any prudent broker and posed grave systematic risk to trading system and exchange and was in blatant non-compliance of Exchange / SEBI circula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing to trade under reference; 19. Appellant have submissions on above submissions of Counter Party Trading Members, out of which the following, considered relevant, are mentioned:- Sagar Shah (the dealer) s system had crashed and was replaced with a new system, which was allotted IP address, ending with 155 by system administrator as this IP address was listed as unused at that time. However, this IP was allotted to another computer when user tried logging on the system reported IP address conflict. Accordingly, the IP system was changed. Therefore, the allegation that Sagar Shah placed an order from a different system based on change in IP address is absurd and untenable. An IP address can be manually assigned to a computer system and therefore a change in IP address does not necessarily imply that the system had changed; 20. Findings of DAC of Respondent No. 1 on request of Appellant for cancellation of erroneous trade:- Regarding Appellant s allegation that CPTMs violated regulations of NSE, DAC was informed that disciplinary action proceedings have been initiated where violations were noticed. Outcome of these proceedings was not considered relevant to proceedin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gures against each scrip and was ignored by dealer, yet order enters trading system when dealer presses OK, which is fifth check and dispute all those checks and balances appearing on screen, order was okayed. Order could have been corrected at least 4 stages, with exercise of required care and skill but dealer was grossly negligent; If Appellant had complied with regulatory requirements, prudent risk management practices and order management practices, no mistake would have arisen and any erroneously placed order would not have left CTCL and reached NSE trading system. Multiple checks are incorporated in order placement system, which provide ample opportunities to verify and rectify the order and erroneous orders could have been corrected but order was not remedied due to negligence, lack of vigilance and furthermore not corrected, at earliest opportunity, are not fit to be corrected, in retrospect by seeking annulment; Appellant claims that it worked hard for salvaging the situation and remedying the error and explored all possible measures to mitigate what transpired, but Appellant did not use trade cancellation facility provided by Exchange with consent of CPTM, as po ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... supervise activities of its employees and Appellant has failed to do so; Appellant stated that it was already punished for his mistake / error and therefore, if his annulment application is not allowed, it will suffer trading losses and CPTMs will make unfair and huge profits, at his expense. DAC noted that levying of penalty on Appellant, is not a mitigating circumstance and present annulment proceedings are completely different from earlier proceedings resulting in penalty. DAC has further stated, in case Appellant has suffered losses on account of these trades, the losses were caused by his own gross negligence and his least regard for regulations and risk management practices. DAC is of the view that annulling of trades would act as a perverse incentive for Applicant and also for other such members, who may disregard regulatory requirements and risk management practices, while placing orders; DAC also examined effect of annulment of trade, if carried out, on CPTM, their clients and market place; will effect 60,000 trades executed and 665 counter party trading members and more than 14000 clients in respect of first instance. CPTMs have also represented that they had cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... version of Appellant regarding happenings in their work station on October 5, 2012 can be believed at its face value. In this regard it may be mentioned that NSE conducted examination of Appellant s systems on October 5, 2012, later in the day, and what came out is Appellant s version and has to be examined. 23. In this regard events which took place on October 5, 2012 in Appellant work-station have been stated in paragraphs above and need not be repeated, but it will be worth mentioning that these are as per Appellant and have not been verified, in details, by an independent expert body. It may be stated that a few happenings are difficult to believe, which are:- Order for execution of 17 lakh units, based on quality, was placed at 9:50:54, instead of NIFTY BASKET of ₹ 17 lakh value, due to error on part of Sagar Shah and he realized his mistake at 9:50:58, when he tried to cancel pending orders, but could not do so, as orders had already hit the exchange server. In this connection, it has not been stated as to how Sagar Shah realized that he had made a mistake in placing orders within 4 seconds of placing orders. It was clarified by Learned Senior Counsel for Appel ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dealer logged on and off twice before logging on from machine IP 221 at 9:37:55 when conflict of IP did not allow dealer to log in from machine IP 155. Statement of Appellant that order was placed from replacement machine and hence order checks, limits were not installed in machine with IP 155 become difficult to believe, which in other words means order was placed from a regular machine with IP 221, which also did not have order checks , limits on it. Consequences of such an eventuality happening will be very adverse to Appellant for his appeal before this Tribunal and possibility of such an happening should have been looked into during inspection by Respondent No. 1, but unfortunately inspection by Respondent No. 1 of Appellant after events of October 5, 2012, was misconceived and did not bring many material and important facts. 24. Now coming to inspection carried out by NSE of Appellant, in afternoon of October 5, 2012, it is not clear as to what emerged during inspection, whether NSE found the limits placed on all other terminals, except the replaced one. Since this inspection report is not available in records. Appellant has stated that NSE inspection revealed that everyth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s had referred to disputed trades on October 5, 2012 as erroneous and hence they are bound for all times, in future, to term these trades as erroneous. In this context, it may be stated that Appellant was most affected by these trades and were the first to call these as erroneous and wrote to all concerned with subject matter as regarding erroneous trade. Since all others were reacted to this and in their references called these as erroneous and hence no more significances should be placed on referring these trades as erroneous, by all concerned except Appellant. It may also be mentioned that Appellants have gradually shifted / changed to term the trades as mistake, significant mistake, material mistake, etc., depending on what usage will take their case forward. For instances, when it came to requesting for annulment of these trades, Appellant called these trades, as arising out of material mistake. Similarly, when it came to taking up their trades for purposes of Contract Act, they called these trades as arising out of a mistake, since that is the term used in Contract Act. 29. It may also be stated that Appellant have tried to impress, at every time and place, that their trad ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ber 29, 2012, as per decision of Disciplinary Action Committee (DAC) of Respondent. In this it is only stated that Respondent conducted a limited purpose inspection of Appellant to verify facts of the case. Thereafter facts of the case, regarding crashing of computer, its replacement, replaced computer not having limits, etc., are narrated, as has been stated by Appellant without any variations-, and violation observed are the same, as stated in paragraphs above i.e. a series of errors and replaced computer not having limits. Thereafter various Respondents circulars have been stated, which were violated by Appellant, followed by submissions of Appellant not significantly or materially different from as in present proceedings, personal hearing, when same submissions are repeated. Thereafter conclusions of DAC are available to the effect that replaced computer did not have appropriate controls, validation processes and due diligence and that Appellant had left setting up of alerts of scrip level, value level, quantity level and that setting up limits is left to dealer without any maker checker mechanism and in case dealer omits to put limits or posts wrong limits irreparable d ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant is that when they have been penalized for this Act; they will be subjected to further penalty / double jeopardy if this request for annulment of trade with 655, counterparties, involvement 14000 clients, arising out of a erroneous order placed by them on October 5, 2012 resulting in loss of ₹ 51 crore to them, is not annulled by Respondent No. 1, who have already rejected this request and this decision of Respondent No. 1, not reversed in present appeal before this Tribunal. 36. It may be noted that Respondent No. 1 have not held counterparties, as violative of any provision contained in their bye-laws, regulations, circulars; in their decisions, as decided by their DAC, vide letters dated October 29, 2012 imposing penalty of ₹ 25 lakh on Appellant and dated April 30, 2013 rejecting Appellant s request for annulment of trade dated October 5, 2012, thereby not compensating them fully or partially for their loss of 51 crore suffered due to this trade. 37. Next important aspect of Respondent s version has to be seen from this Respondent imposing penalties on Respondent No. 2, cases against other Respondents is similar, in impugned appeal in Appeal No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... chase orders at unrealistic market prices, without even posting margins and therefore were able to cause a systemic risk and Respondent No. 1 did not have systems to prevent such market infer; 40. In reply to various counts in paragraphs above, it is stated with regards to member (broker) trading in excess of margin, that Respondent No. 1 generates broadcast alerts messages, in case members reach margin utilization as percent of his effective deposit from 70% onwards i.e. at utilization levels of 70%, 85%, 95% and 100%, but on several occasions, members overshoot collateral level above 100% on execution of big orders, because margins are calculated and levied after execution of these orders, as a result of which members is disabled, after execution of that order. It may be noted that NSE has a facility of voluntary close out to facilitate members who have been disabled owing to margins violations automatically, to close out their outstanding positions. 41. On October 5, 2012, consequent to placement of basket order by Appellant, all four members named in SEBI letter were disabled. Immediately they squared off their position or brought in required collateral before getting dis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d unprecedented situation, is giving rise to dissatisfaction to all concerned; especially when, as mentioned earlier also, when facts underlying placement of order, have not been gone into any depth by an uninterested third part, which has the requisite expertise and competence to deal with the situation, since NSE actions have been questioned by SEBI now and SEBI s decision / action against NSE, in yet to be received. However, it may be mentioned that shortcomings in NSE system had been questioned by Appellant and Respondent No. 2 3 earlier also, which have not be answered to satisfactorily by NSE. 47. It has been mentioned earlier that it is Appellant version of happenings on October 5, 2012 in placing of single order for sale of 17 lakh units of NIFTY BASKET worth ₹ 980 crore, which started process and Appellant version cannot be relied on since it is an interested party and secondly there are flaws in its version as to how the dealer came to know of his order placed at 9:50:54 as being erroneous, within 4 seconds of his placing the order i.e. at 9:50:58, whereas trade of ₹ 660 crore out of order for ₹ 980 crore sale order, was executed at 9:51:00. How dea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... alleged to have also traded by placing orders far away from last traded price or realistic prices, allowed clients to trade with taking adequate margin, did not verify antecedents of their clients and allowed them, exposure far beyond their incomes, etc. and this destabilized the market. 51. We will deal with each of these allegations, along with rule position and prevalent practice of dealing with the situation, as and when it arose previously. Regarding margin, it has been brought out that trading member are required to put up VaR margin upfront and for this purpose SEBI had issued necessary guidelines to all stock exchanges and based on these guidelines, stock exchanges, (including Respondent No. 1) issued guidelines to their members. Instructions for collection of VaR margin, is that it will be collected on upfront basis, based on gross open position, no netting of position across different settlements, VaR margin rate of each security is disseminated at end of each trading day and applicable on position for next trading day, VaR margin so collected shall be released on completion of pay-in of settlement and most importantly VaR margin intends to cover largest loss that can ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n in these cases. 57. In view of above imperatives of practicability, Exchanges (including NSE) have a system of imposing penalty of ₹ 5000 for first violation of margin, ₹ 10,000 on second violation, during the day and trades, being inviolable is allowed and penalty is with a view to deter members from violating margin requirement but at the same time allowing them to trade, when margin requirement is fulfilled, while allowing the trades which are executed when shortfall in margin exists but made good later. 58. Now coming back to what happened on October 5, 2012, margin upto normal was, in place, for all counter-parties, to see trading upto normal expectations; but on that day with coming into existence of a huge sale order from Appellant many trades were executed which were not foreseen by Appellant and counter-parties and which resulted in severe shortfall of margin of all counter-parties, but Appellant was not affected in this respect, since it had placed order for institutional client, requiring no margin. 59. It is only of academic interest, whether shortfall in margin was 760% or with available margin only 14% of trade was to be allowed, but fact of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ig orders in the past, hence it was an acceptable practice of Trading Members to place such order and as per Respondent Nos. 2 to 9, most of these orders are passive order and get deleted at end of the day, without execution and only 2% of their order get converted into trade on an average, on a normal working day. This has also not been refuted by NSE and hence may be accepted as a practice. Moreover, since NSE (Respondent No. 1) has not objected to placement of passive order, in the past, it should have no hesitation to these orders as per existing practice. 63. Respondents have stated; with regard to charge of bringing markets into disequilibrium, that by placing such orders which were layered, and brought stability in market since they placed some orders at 2% below market, some upto 5% below market, some below 7 % below market, some 10% below market and their last order was only 17 % below market, which is allowed by NSE since it is within 20% bandwidth allowed by NSE for placing orders. It is further represented by Respondent Nos. 2 to 9 that it was Appellant order on October 5, 2012, placed in a negligent manner, which brought instability to market and their orders broug ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... after necessary due diligence. This argument, since based on reason, logic and on law, is accepted. 65. Next question dealt with is of placing orders at unrealistic price or far away from market, taken up by Appellant against Respondent Nos. 2 to 9. Rule position in this regard is contained in circular of NSE dated February 22, 2005 wherein members are advised to ensure due diligence while entering orders and these should not be far away from normal market price / theoretical price. It may be mentioned that NSE has left field wide open by issuing this circular, since no limit has been put in quantitative terms and leave matter to discretion of individuals. As a matter of fact NSE should have been more careful in issuing this important circular, by putting reasonable, unambiguous directions for everyone to understand and follow, but it seen that NSE has observed a mere formality by issuing this circular, without having much relevant to the subject matter and according this circular deserves only, as much respect, which everyone concerned has accorded, by interpreting as they can and doing the needful, in this regard. 66. In above context, it may be added that as per Detailed C ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... were in NSE s system for every single day since long and hence NSE was aware of these order and if NSE had any problem with Respondent s placing orders since long, NSE should have objected, and by not objecting or taking action on matters such on placing orders for buy / sell in layered manner since long time by Respondents, the same has becomes a practice and its legality and acceptance has to be recognized, but, however, if one day the same passive orders gets converted into trade, it cannot be held that entities placing such orders have indulged in Prejudicial Business or Unwarranted Business. Strangely, this matter was not raised by NSE, but by Appellant and it can be presumed that NSE have no objection to such business by Respondent Nos. 2 to 9. 69. Another point raised by Appellant will be dealt now i.e. Failure to provide margin deposit and / or Capital Adequacy Requirements, which reads The relevant authority shall require a trading member to suspend its business when it fails to provide the margin deposit and / or meet capital adequacy norms as provided in these Bye-laws, Rules and Regulations . . Margin deposit and capital adequacy is defined in NSE s Detailed Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s in security market; but it is a matter of regret, that NSEs circulars, bye-laws, rules are drafted in a manner, which do not lead to clarity and un-ambiguity, since there was no requirement to bring in concept of capital adequacy while dealing with adequacy of margin, when what constituents margin had been spelt out explicitly. NSE, as a matter of fact, should not bring out new terms, without adequately defining them and material mistake is one such term. 73. Most of the arguments, counter-arguments, pleading of Appellant and replied thereto, have been dealt, but what has not been dealt with, is most vital to the matter and goes to the root of the issue. The issue is whether systems, rules, bye-laws, regulations of SEBI/NSE are adequate to deal with situations, which arose due to punching in of an order of ₹ 980 crore, due to error /mistake / negligence of Appellant, when it wanted to sell ₹ 17 lakh worth of NIFTY BASKET at market rate but punched in sale order for 17 lakh units of NIFTY BASKET worth ₹ 980 crore. 74. Within 4 seconds of order for sale of ₹ 980 crore worth of sale order, trade worth ₹ 660 crore got executed, leading to 10% fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 11:55:33 76. In narration, it is stated that, in earlier instance of market-wide circuit filter triggered on May 18, 2009 and NSE system brought market to halt in 13 second, where BSE system took 43 seconds to halt market, with further falls in NSE and BSE, between trigger and halt. When markets resumed functioning, after halt on above triggers, markets had to be closed a second time and it took 7 second for NSE system to halt after trigger, while BSE system took 13 seconds to halt after trigger. This time BSE trading was not halted, after NSE system halted after 6 seconds of trigger. It further stated that time taken by system to bring market to halt, depends on level of activity on the market when triggered. SEBI have agreed to this contention and recorded, in this matter as : Difference between circuit trigger time and last order acceptance time on the exchanges as due to system taking finite time to complete their internal process of stoppage of acceptance of fresh orders from brokers terminals and shuttling down matching NSE further states that entire process of halting market is automated, with no human intervention. 77. Hence, the entir ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... argin is exceeded, whether NSE was justified in pass the buck to members and whether it was possible to have a tab in their trading system, which will disable members, trading terminals on exhausting available margin. NSE is definitely not justified in passing the responsibility of stopping trading on exceeded available margin to members and should have tried to implement this in their trading systems and if it was not possible, due to some reasons, should have brought this to notice of SEBI. This was not done and to resolve this SEBI and stock exchanges should consider what has to be done to address this problem. 82. The last question to be considered is whether NSE is justified in turning down Appellant s request for annulment of trade of October 5, 2012, in terms of Chapter VII : Dealings of Clearing Members para (b) regarding cancellation of impugned trades allegedly vitiated by fraud, material mistake, misrepresentation or market or price manipulation. 83. Before we deal with this, let us consider, as to what is being asked for by Appellant. Appellant are asking for cancellation of trade between Appellant and 665 counter-parties, involving 14,000 clients, which happened ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iggered and from which computer order was placed, whether it had address end 221 or 155 the replacement of crashed computer and whether explanation of Appellant , is plausible, that IP 155 of computer was changed to IP 221; without change of computer, which was done in 18 seconds, when experts say this will take at least 180 seconds. 87. Since this Tribunal has take a view whether request for annulment is justified and practical, it can be held in equity that such a request is not justified, in given circumstances, since it is not possible to believe that buy order of Appellant was result of one punching error and that it is not possible, at this juncture, to annul the trade, due to practical difficulties that will arose and may put counter-parties to grave loss, for no fault on their party and will enrich Appellant, who created all the problem, due to its negligence. 88. Towards the end may be mentioned that modified request of Appellant to give them the pay-out of Respondent Nos. 2 to 9, kept with NSE, to compensate them to extent of 70% of their loss of ₹ 51 crore in the trade of ₹ 660 crore; is not possible or even desirable since NSE s rules permit annulmen ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ; as against margin of ₹ 4 crore, on October 5, 2012 between 9:05:00 a.m. to 9:50:59 a.m.; (R) Regarding placing orders and applicable margin in trading system, of ₹ 1083.42 crore, VaR margin shall be collected on gross open position of the member, as per Clause 11.52 of Circular No. 541/2011 (Download Ref. No. NSE/CMPT/19139 dated October 14, 2011; which in effect means that during Rolling Market, requirement of margin is applicable on open position and not on pending orders entered by members (brokers) in trading system of exchange; Exchange levies margin on pending orders in pre-open session, which means Exchange has mechanism to levy margin based on pending orders, but exchange has not applied this to Rolling Market Session and that requirement of margin is upon execution of trade in Rolling Market Session and this facility has been extended by this Members to its clients; Member did not enter these kinds of orders for first time on October 5, 2012, but has adopted similar strategy for years and Respondent has records of such orders placed on its system and not once, such question has not been raised by Respondent in the past and further Respondent has no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ities and in pursuance of Regulation 2.5 of Part - A of Regulation of Capital Market Segment, Exchange maintains dummy circuit filter (operating range) of 20% of such securities; This in effect means Respondent generally recognizes that orders placed within range of 20% of LTP are not non-genuine and orders placed by Appellant were well within the parameters stipulated by Exchange. Comparison of order price with LTP, which is as per Respondent s letter is 18.64% of some buy orders and 21.88% of some sell orders form LTP is also within framework of 20% price band to previous close, as stipulated by Respondent; (D) Buy orders for huge quantities placed, at a price significantly away from market price were matched and led to steep market fall. Appellant has represented that it had placed all its orders within permissible limits and no order was placed beyond limits set by Exchange and client has always being adopting this strategy of trading in the past. DAC noted that members are advised by Circular No. NSE/INVG/2007/65 dated March 23, 2007 to exercise due diligence and caution, at time of placing of orders, which are away from market price and also advised to put in place appr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... (D) Does not deal with this specifically but, perhaps , assumes that decision in (ii) will apply. (v) (V) As per income proof submitted by client, gross total income for year ended March 3, 2012, was ₹ 57.53 lac and total value of orders, in all scrips for buy / sell, was ₹ 1083.42 crore on October 5, 2012, which shows Appellant provided exposure to client which was hugely disproportionate, with income of client. This exposure was arbitrary, reckless, grossly negligent for exceeded known capabilities of client. (R) Client s net profitability for FY 2011-12 was ₹ 57.53 lac, erroneously shown as gross total income, which is appreciative, considering adverse market conditions in previous FY. Partners of client are High Net Worth Individuals and deal in securities market through Appellant only. Combined financial capability of the client group is much over ₹ 100 crore. Client places such orders on daily basis and all orders placed on trading system do not get executed and hence placement of orders is not allowing exposure. Special case where passive orders of this client got matched with active orders placed by counter-party if fructification of alleg ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ed and result into trade. (D) Buy limits and sell limits placed on terminals used by trading member on October 5, 2012 of between ₹ 36 crore to ₹ 71 crore for buy and between ₹ 37 crore to ₹ 75 corre for sell, without collecting adequate margins or considering client s ability. Therefore, no care and caution had been exercised in setting the limits for the dealers or by linking the same to margins / collateral and such conduct resulted in disablement of Member, which is in violation of Rule 4(d) of Chapter VI of Rule of Exchange and Exchange Circular Reference No. NSE/CMPT/6122 dated May 09, 2005. (viii) (V) Non adherence to prescribed risk management policy and providing high exposure without adequate margins is not in accordance with the Exchange Circular (NSE/CMPT/6122) dated May 09, 2005 and also constitutes violation of the provisions of Prevention of Money Laundering Act, 2002 ( PMLA ) as informed to you vide various circulars issued by the Exchange from time to time including Circular (NSE/INVG/7102) dated January 25, 2006, Circular (NSE/INVG/7307) dated March 24, 2006, Circular (NSE/INVG/11798) dated December 22, 2008, Circular (NSE/INVG/11928) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f Chapter IV of Rules of Exchange); (R) As explained above, Appellants have not violated any Regulations of exchange and deny violation of Rule 3, 4 and 5 dealing with misconduct, un-businesslike conduct and unprofessional conduct; (D) Deals with gross income of client AFS for FY 2011-12 at ₹ 57.53 lac, against exposure of ₹ 1083.42, in placing buy and sell orders by Appellant on behalf of client on October 5, 2012; which was considered arbitrary, reckless, and with gross negligence and far exceeded known capabilities of client and since no margin was collected by Appellant from client, conduct of Appellant indicates un-businesslike conduct; 3. From scrutiny of alleged violations , reply of Appellant and Finding and Decision ; it is seen that matter has been dealt by Respondents and DAC of Respondent in a unprofessional, un-businesslike and ad-hoc manner, without going into any depth of the problem and in a perfunctory manner, not expected of exchange of national level competing with best in India and abroad and most importantly has not done any justice to Appellant or brought out any violation on part of Appellant in any meaningful manner or with a view ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ter circular and relevant PMLA rules and 3 rules of Chaper IV of Rules of exchange, etc.. It is not clear as to how 9 alleged violations have been dealt in 4 para findings by DAC, without giving any credence to reply of Appellant, let alone indicating why replies of Appellant were not considered satisfactory or how these replies did not rebut allegations and why some of the alleged violations in SCN have been accepted or why some of these overlooked / not mentioned. 7. In fairness, it must be admitted that though inspection carried out by team of officials of Respondent was not conducted in a satisfactory manner and had other deficiencies, but still brought out nine violations on part of Appellant in clear terms, but same cannot be said of conduct of DAC of Respondent, which met in all solemness, conducted appropriate proceedings, took oral evidence of Appellant and after examining their written submissions, made some findings in 4 paras for 9 alleged violations, without indicating which para of findings deals with which violations, and on what basis DAC concluded in 4 sub paras of observations, that follow these 4 paras, for holding Appellant violative of so many circulars, bye ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e above table reflects that 43% of the buy sell orders amounting to 33% of the total order value were placed within 5% of the Previous Close Price. Only 7% of the buy orders were placed at the price that was in the range of 15% to 20% of the Previous Close Price. No orders were placed at the upper or lower price band. The average distance of buy and sell orders from the previous close price was 10%, which is placed as per a predefined trading strategy of the client. The same system of order placement where the average distance of all orders is around 10% from the previous close price is being applied since a very long period of time. The Exchange has quoted some figures, selectively taking into account a few orders that are far away from the extreme ends of order log without taking into account the law of averages that is applied in all business. 9. It can be seen from table that orders for purchase of ₹ 531.7 crore were placed by Appellant on October 5, 2012, at different levels, for purchase of NIFTY Scrip and these orders got converted into trades of ₹ 214.83 crore. It may be seen from data in above table and finding that buy orders worth ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ally and it is not revealed by DAC whether these submissions were considered or but DAC repeated some of these nine allegations in four para, without stating which ones are substantiated which are not, consistently not providing any clue why some of allegations are repeated in findings and some not specified in findings; but at the same time Appellant has been found violative of 23 circulars, PMLA master circulars, etc. and how these circulars, rules, master PMLA circulars apply in individual violations, has not been clarified. 13. In other words, DAC totally failed on all counts for what it was constituted. It may also be stated that imposition of penalty on so many entities by Respondent, included Appellant, for occurrences of October 5, 2012; has proved an opportunity in disguise for Respondent to make money by imposing penalty to extent of lac of rupees, know-beat everyone concerned by being held violative of so many of its rules, buy-laws, circulars; without explaining , let alone advising, anyone how to conduct themselves in matters of trading, confusing everyone as to how trade at Respondent s trading system is to be conducted and engaging lots of entities in lot of meani ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... :- (i) (V) Appellant placed orders worth ₹ 416.71 crore on Respondent; as against margin of ₹ 2.88 crore, on October 5, 2012 between 9:02:44 a.m. to 9:50:52 a.m.; (R) Regarding observation pertaining to value of orders vis- -vis available margin orders placed in respect of our own account and that of our clients -, the said orders were placed in normal course of day trading transactions and were placed at various price levels in various scrips all within price circuit limits stipulated by NSE. Margin calls are not based on order placement, whereas same is based on actual executed trades. Further, Appellant did not default on their obligations as a broker. (D) Trading Member has exceeded its exposure by 718% by executing total buy trades worth ₹ 158.87 crore, as against total available collateral of ₹ 2.88 crore i.e. collateral available was 14% of required collateral for execution these transactions. Thus Member has evaded margin in violation of Rule 5(i) of Chapter IV of Rules of Exchange and Exchange Circular ref. no. NSE/CMPT/6122 dated May 9, 2005. (ii) (V) You placed total of 2381 buy orders (for ₹ 264.38 crore) in NIFTY scrips, ou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ented that it has placed all its orders within the permissible limits and no order has been placed by him beyond the limits set by Exchange. However, the members are advised by the circular no. NSE/INVG/2007/65 dated March 23, 2007 to exercise due diligence and caution at the time of placing of orders which are away from market price and also advised to put in place appropriate internal system and procedures for ensuring that such orders are not entered and the member has violated the spirit of the said circular. (iv) (V) Trading regulations is also expressly included by reference in an Exchange circular (NSE/INVG/2007/65) dated March 23, 2007, wherein attention of members was drawn to Regulation 4.5.4(c). Further it was also stated in the said exchange circular that non-compliance with the requirement specified in Trading Regulation shall attract disciplinary action. Additionally, members were advised to exercise due diligence and caution at the time of entering orders which are far away from market price and also advised to put in place appropriate internal systems and procedures for ensuring that such orders are not entered. (R) Same as in (ii). (D) Same as in (iii) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nancial obligations. (D) The income range specified by the clients in the client registration forms and as per the periodic financial review was in the range of ₹ 1 lac to ₹ 10 lac. The total value of the buy orders placed by the clients in all the scrips during the period between 09:23:44 a.m. and 09:50:10 a.m. on October 5, 2012 is ₹ 116 crore (approximately). Thus, it is observed that exposure provided to the clients on October 5, 2012 is highly disproportionate with the income sources / range declared by the clients at the time of registration or periodic financial review. The exposure granted to the clients by the member was arbitrary, reckless, with gross negligent and far exceeded the known capabilities of the clients. Further, no margin was collected by the trading member from the clients. The Committee noted that the said conduct of the trading member indicates unbusinesslike conduct as defined in the Rule 4(f) of Chapter IV of Rules of the Exchange, Exchange circular reference no. NSE/CMPT/6122 dated May 9, 2005 and Exchange circular on PMLA. (vii) (V) As per exchange circular no. NSE/CMTR/4749 dated January 21, 2004 Members are urged to ensure t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and providing high exposure without adequate margins is not in accordance with the Exchange Circular (NSE/CMPT/6122) dated May 09, 2005 and also constitutes violation of the provisions of Prevention of Money Laundering Act, 2002 ( PMLA ) as informed to you vide various circulars issued by the Exchange from time to time including Circular (NSE/INVG/7102) dated January 25, 2006, Circular (NSE/INVG/7307) dated March 24, 2006, Circular (NSE/INVG/11798) dated December 22, 2008, Circular (NSE/INVG/11928) dated January 22, 2009, Circular NSE/INVG/12996) dated September 02, 2009, Circular (NSE/INVG/13784) dated December 30, 2009, Circular (NSE/INVG/14117) dated February 17, 2010, Circular (NSE/INVG/14994) dated June 16, 2010 and PMLA Master Circular (NSE/INVG/16703) dated January 05, 2011 and relevant PMLA Rules. (R) Appellant has robust and well documented margin collection and risk management system, which has been implemented and reviewed frequently and past inspections by NSE have not questioned Appellant Risk Management System. Appellant, on behalf of itself and of its client, did not default in their obligations to Exchange and violation of PMLA 2002 is denied. (D) No mention. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... part in events of October 5, 2012 and found same fault with all concerned and fined everyone of these, irrespective of whether it was Appellant s rational or justified conduct or not, as per Respondent s regulations; 5. Now coming to findings of inspection against Appellant, Appellant s response to findings and proceedings of Disciplinary Action Committee. It is seen that inspection was conducted, in haste, found what Respondent wanted to find - as if it had pre-decided its findings before inspection. Matter was placed before DAC for decisions, based on findings of inspection and reply of Appellant, oral submissions, etc. but surprisingly finding and decision of DAC are same as findings during inspection by Respondent and DAC has not considered the replies of Appellant but come to same conclusions which were alleged in inspection. DAC s finding and decision are stated in 5 paras on pages 5 and 6 of Respondent s communication dated April 30, 2013 and thereafter 6 sub-paras on page 6 and 7 state some observations, which concludes violation by Appellant of various rules, bye-laws, regulations and circulars of Respondent, followed by imposition of penalty of ₹ 20 lac and depos ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rds, DAC totally failed on all counts for what it was constituted. It may also be stated that imposition of penalty on so many entities by Respondent, included Appellant, for occurrences of October 5, 2012; has proved an opportunity in disguise for Respondent to make money by imposing penalty to extent of lac of rupees, know-beat everyone concerned by being held violative of so many of its rules, buy-laws, circulars; without explaining , let alone advising, anyone how to conduct themselves in matters of trading, confusing everyone as to how trade at Respondent s trading system is to be conducted and engaging lots of entities in lot of meaningless litigation. 10. Before concluding, it may also be stated Respondent was asked by the undersigned as what the allegation were, how the Appellant violated its regulations etc. and how the trading on its system was to be conducted, but representatives of Respondent did not clarify any such matters but stated, in brief, what was contained in SCN or findings of DAC and hence did not make the Tribunal, any wiser, to understand the case. 11. Hence, in conclusion it is held that impugned order dated April 30, 2014 imposing penalty of ₹ ..... X X X X Extracts X X X X X X X X Extracts X X X X
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