9911796707
TMI Blog2015 (8) TMI 335X X X X Extracts X X X X X X X X Extracts X X X X ..... ector Per: Justice J.P. Devadhar (Majority view) 1. In these three appeals dispute relates to trades that were executed on National Stock Exchange on October 5, 2012, wherein these three appellants as well as respondent nos:4 to 9 are parties to the trades. Hence these three appeals are heard together and disposed of by this common judgment. APPEAL NO. 64 OF 2013 2. Appellant herein is aggrieved by the decision of National Stock Exchange of India Limited ("NSE" for short) dated April 29, 2013 whereby, application made by appellant on October 7, 2012 for annulment of trades executed by appellant's dealer on October 5, 2012 has been rejected. Although appellant had claimed annulment of all trades executed by appellant's dealer on October 5, 2012, at the hearing of this appeal before us, counsel for appellant has restricted claim for annulment of only those trades wherein respondents no. 2 to 9 are counter parties to the trades. 3. Case of the appellant in nutshell is that the trades executed on October 5, 2012 constitute "material mistake in the trade" under Bye law 5(a) framed by NSE and hence those trades are liable to be annulled. NSE however, has rejected the claim on ground ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uted. Sagar Shah tried to cancel pending orders but could not do so as orders had already hit the exchange server. J) At 09:50:58 A.M. Sagar Shah reported the error to Mr. Kalpesh Parekh and to the IT Department. K) By 09:51:00 A.M., Rs. 650 crores worth of NIFTY Basket order got executed and cash segment of NSE halted. L) At 09:54:00 A.M. Mr. Prakash Kacholia, Managing Director of appellant called the then Deputy Managing Director of NSE, Ms. Chitra to inform her about the error at the appellant's end. M) At 10:01:00 A.M. Mr. Sandeep Singal, Co-Head Institutional Equities with a view to mitigate the possible losses on account of error trades, gave necessary instructions to the dealing team to buy NIFTY futures and options at suitable strike prices to hedge short error position of NIFTY Basket as cash segment of NSE alone had halted and futures and derivative system of NSE was operational. Thereupon the dealing team of the appellant bought: i) 3,01,750 Qty. of Nifty Oct futures ii) 50,000 Qty. of Nifty 5800 CALL iii) 24,000 Qty. of Nifty 5900 CALL and iv) 63,000 Qty. of Nifty 6000 CALL. All these positions were squared off within an hour's time. The appellant incurred fin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on Committee ("DAC" for short) constituted by NSE imposed monetary penalty of Rs. 25 lakh by holding that the trades executed on October 5, 2012 were the outcome of an error. U) On October 7, 2012 appellant made an application for annulment of erroneous trades executed on October 5, 2012 in terms of bye-law 5(a) of Chapter-VII of bye-laws framed by NSE inter alia on ground that the trades were outcome of a material mistake in the trade. V) By impugned order dated April 29, 2013, NSE has rejected the annulment application made by the appellant. Challenging aforesaid order of NSE, present appeal is filed. 6. Mr. Khambata and Mr. Modi, learned Senior Advocates appearing on behalf of appellant have submitted that the impugned order passed by NSE cannot be sustained for the following reasons:- a) For determining the question as to whether a mistake is a material mistake or not, one has to look at the magnitude of the mistake as also the size/volumes and the scale of impact. In the present case, erroneous action of appellant's dealer led to a basket order of 17 lakh NIFTY 50 units being placed as opposed to the intended sale of NIFTY 50 stocks worth Rs. 17 lakhs. Owing to the errone ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... trades in question in view of the error in the placement of the order on part of appellant's dealer. Therefore, such a contract being not enforceable, NSE ought to have annulled the trades in question. d) Erroneous sell order led to execution of erroneous trades for approximately Rs. 660 crores within 6 seconds of the market opening, which is far in excess of the total daily turnover and trading in the first hour after the market opened. Thus, it is clear that there occurred an extraordinary substantial and material mistake and therefore the trades in question ought to have been annulled. e) Committee on Model Bye-laws of Stock Exchanges constituted by SEBI way back in May 1997 had, inter alia, recommended in its report for annulment of trades initiated by mistake. In the present case, trades were outcome of a material mistake in the initiation of trade owing to a mistake by appellant's dealer in placing an order for sale of 17 lakh NIFTY 50 units instead of order for sale of Rs. 17 lakh worth of NIFTY 50 units and hence the trades executed thereunder were liable to be annulled under the Bye-laws framed by NSE. f) Section 72 of the Contract Act provides for restitution of any mo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... breaker system of NSE failed to trigger market halt after the NIFTY 50 fell below 10%, which was in violation of SEBI Circular dated June 28, 2008. As a result whereof, loss caused to the appellant escalated to Rs. 51 crores from approximately Rs. 19 crores. Thus, in the facts of present case, where erroneous trades took place on account of respondent nos. 2 to 9 purchasing NIFTY 50 beyond their capital adequacy and on account of failure of NSE's trading system to halt the trading after NIFTY 50 fell below 10%, NSE is not justified in rejecting the annulment application of the appellant. j) As per NSE Circular dated April 24, 2012 every broker has to confirm availability of adequate capital before proceeding with trades in excess of specified threshold. Since counterparty brokers in the present case that is, respondents no. 2 to 9 had confirmed about capital adequacy but in fact there was no capital adequacy for the trades, it is clear that respondents no. 2 to 9 had misrepresented and therefore, respondents no. 2 to 9 cannot be permitted to profit unjustifiably when the trades in question are vitiated on account of their willful misrepresentation. k) Admittedly, SEBI has issued ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... A.M. with a standby computer. Part of sell order received from the client was placed into the NSE's trading system at 9:50:54 A.M. Thus, there was clear gap of more than one hour for appellant to set up on the said stand-by computer the checks and risk management measures which ought to have been necessarily set up on the computer used at the dealer's level. Moreover, no risk parameters were set up even on the CTCL Server level, NEAT CTCL USER ID level and at the Corporate Manager level of the appellant. Thus, apart from placing erroneous sell orders, appellant is guilty of gross negligence/ non compliance as the appellant failed to set up checks and risk management measures in to the trading system of the appellant before entering deals on the Exchange. (b) When a dealer logs into the system of NSE to place a basket order, following procedure is followed-(i) The dealer has three choices for placing an order namely based on value, based on value (in lakhs) and based on quantity. Based on value is the first choice and based on quantity is the last choice. The dealer has to first select whether the order is "Based on Quantity" or "Based on Value". (ii) Having made the above selectio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y order will remain and the appellant may end up with a profit on the said square off buy order as the market rose subsequently. Thus annulment of trades in question, if granted, would benefit appellant who is guilty of gross negligence, which is undesirable in the interests of securities market. (f) Bye-law 5(a) framed by NSE provides for annulment of a transaction on the Exchange only if the relevant authority i.e. NSE is satisfied that such transaction ought to be annulled on ground of fraud, or willful misrepresentation or material mistake in the trade. Any and every mistake made by a party cannot be classified as a material mistake in the trade. Failure to install adequate and required checks and balances before a computer is used for trade does not and cannot amount to a mistake and in any event cannot be considered as material mistake. Even after erroneous tab was selected, appellant's dealer had 4 to 5 opportunities to rectify the error before placing the sell order, but the appellant's dealer failed to utilize those opportunities. As per regulation 3.2.5 and 4.2.1(a) of the Capital Market Regulation (Part A) framed by NSE, trading members are required to establish, mainta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uter system and even SEBI has acknowledged the same in its 'note on market halt' dated May 18, 2009. In the past, time lag between triggering the circuit breaker and complete halt was 13 seconds. However, in the present case, on circuit breaker triggering at 09:50:58 complete shutdown took place by 09:51:04 A.M. i.e., within just 6 seconds. In between circuit breaker triggering and complete shut down, executable and matchable orders existing within the system at that time got executed. Therefore, it is incorrect to state that market wide circuit breaker did not trigger at 10% NIFTY fall. (i) Allegation that after circuit breaker system triggered, cash segment of the Exchange was erroneously halted for only 15 minutes and not for the period mandated by SEBI is also without any merit, because immediately on circuit breaker system triggering it was ascertained that (i) the fall in the market was only due to the negligent order emanating from the appellant (based on the communication received from the appellant) (ii) NSE's Equity derivative markets did not reflect a similar fall and were trading normally and (iii) the BSE Sensex was not affected by the above fall in the NSE'S market. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gainst those orders are pending before this Tribunal. In any event appellant who has violated the mandatory norms laid down by NSE and has been grossly negligent in placing the sell orders cannot claim that there is material mistake in trade and consequently the trades in question cannot be annulled and the amounts due to the respondents which are withheld by NSE must be directed to be released to the respective respondents forthwith with interest at such rate as this Tribunal deems fit and proper. 9. We have carefully considered submissions made by counsel on both sides. We have also considered submissions made by applicants in Miscellaneous Application nos. 80 and 81 of 2014. 10. Since the dispute herein relates to interpretation of Bye-law 5, we may quote Bye law 5 framed by NSE which reads thus:- " 5 Inviolability of Trade (a) All the dealings in securities on the Exchange made subject to the Bye Laws, Rules and Regulations of the Exchange shall be in-violable and shall be cleared and settled in accordance with the Bye Laws, Rules and Regulations of the Exchange. However, the Exchange may by a notice annul the deal(s) on the application by a Trading Member in that behalf, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... below 10% but halted when NIFTY index fell by 15.5%. Apart from above failure, decision of NSE to resume trading within 15 minutes of the market halt was also erroneous and contrary to aforesaid SEBI circular dated June 28, 2001, which led to execution of some more erroneous trades. If the market halt was continued for the period specified under the aforesaid circular dated June 28, 2001, additional erroneous trades could have been avoided and erroneous trades to the extent of Rs. 660 crores would not have taken place. Therefore, the trading system of NSE being faulty and decision of NSE to resume trading within 15 minutes of the market halt being erroneous, it is just and proper to hold that the NSE was not justified in rejecting the annulment application of the appellant. 12. First question, therefore, to be considered is, whether appellant is justified in contending that mistake committed by appellant's dealer in punching erroneous sell order constituted 'material mistake in the trade' under Bye law 5(a) framed by NSE. 13. Expression 'material mistake in the trade' is not defined under Bye laws framed by NSE. Hence, that expression has to be understood by giving common parlanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to ensure sanctity of the dealings on the Exchange by making the trades inviolable. With a view to facilitate inviolable trades, NSE has inter alia issued a circular on July 15, 2005 requiring members using CTCL facility to incorporate suitable validation mechanism as part of risk management, if not already provided to avoid erroneous orders with large quantities being transmitted through CTCL system into Exchange's trading system. In the present case, it is not in dispute that the dealer's terminal did contain risk management system, however it did not contain suitable validation mechanism as a part of risk management system. As a result, when one of the computer in the dealer's terminal crashed on October 5, 2012, IT Department of appellant installed a standby computer and when erroneous order for sale of 17 lac NIFTY 50 instead of Rs. 17 lac worth NIFTY 50 was entered on the said standby computer, erroneous trades to the extent of Rs. 660 crores took place. If suitable validation mechanism in the risk management system were installed such an error could have been avoided. Failure to install suitable validation mechanism within the risk management system was due to negligence o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e screen itself constitutes failure to exercise due care, caution or diligence. Para 24 of the impugned order reads thus:- "24. The trading terminal that is used for placing a basket order, by design and default provides for the following checks for a basket order:- a. As the first level check, in the order entry screen, there are three choices for placing an order namely based on value, based on value (in lacs) and based on quantity. Based on value is the first choice and based on quantity is the last choice. b. As the second level check, while placing the order of Rs. 17 lacs the dealer had entered the figure "1700000" in the screen which shows-"Based on Quantity". c. The third level check is that the quantity and value of the proposed order is shown at the bottom right corner of the screen. In this case, the screen shot provided by the Applicant during inspection, of a sample basket order of same quantity shows net quantity of 1,97,44,895 shares of all NIFTY scrips and net basket order of Rs. 9,74,28,72,733.55 at the bottom of the screen. d. As the fourth level check, the screenshot further shows for all the scrips in the basket individually, the quantity and value for each ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... NSE. In these circumstances, having committed breach of duty by not installing risk management parameters before entering sell order and having been negligent in ignoring four to five level checks that were displaced on the screen before transmitting the erroneous sell order from dealers terminal to the trading system of NSE, appellant cannot escape liability arising out of such trades even if it amounts to incurring huge losses. 21. In a bid to overcome above difficulty, appellant claims that the trades in question, deserve to be annulled on ground that the mistake committed by appellant constitutes material mistake in the trade under Bye law 5(a). Under Bye-law 5(a) inviolability of trades is a rule and annulment of trades is an exception. Where a trading member entering erroneous order is guilty of breach of duty as well as negligence, annulling trades of such trading member would amount to defeating the object of inviolability of trades specified in Bye-law 5(a). Since Bye law 5(a) contemplates inviolability of dealings on the Exchange, it is evident that the expression 'material mistake in the trade' in Bye law 5(a) would be attributable to such trades which affect sanctity o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... magnitude of the mistake, size of the volumes and the scale of impact. There is no merit in the above contention as can be demonstrated from the following illustration. Suppose, a Trading Member by mistake enters sell order for sale of NIFTY 50 Basket worth Rs. 100 crores instead of an order for sale of NIFTY 50 Basket worth Rs. 10 crore. Similarly, suppose another Trading Member by mistake enters sell order for sale of NIFTY 50 Basket worth Rs. 1000 crores instead of an order for sale of NIFTY 50 Basket worth Rs. 10 crore. In such a case, if both sell orders gets executed on the Exchange, to hold that trades of the Trading Member who had erroneously entered sell order for Rs. 1000 crores are liable to be annulled on ground that there is material mistake in the trade in view of magnitude, size and scale of mistake and to hold that the Trading Member who has erroneously placed order to sell NIFTY 50 Basket worth Rs. 100 crore must comply with his obligation would be wholly unjustified. Accepting such a contention of a Trading Member who has erroneously placed sell order for sale of NIFTY 50 Basket worth Rs. 1000 crores would mean that Bye-law 5(a) contemplates annulment of trades w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approved by NSE. In fact, in the Bye-laws finally approved by NSE, recommendation of the committee for suo motto annulment of trades initiated by mistake has been expressly omitted. In these circumstances, first contention of the appellant that punching erroneous sell order which led to fall in NIFTY index by 15.5% and consequent market halt constitute 'material mistake in the trade' under Bye-law 5(a) cannot be accepted. 26. Second contention of the appellant is that apart from erroneous sell order placed by appellant, erroneous trades took place because respondent Nos. 2 to 9 had placed unrealistic orders to buy NIFTY 50 at a price far away from the market price and that too in some cases without adequate margin money which was in violation of the norms laid down by SEBI/NSE and therefore unrealistic trades executed would constitute 'material mistake in the trade' and hence liable to be annulled. Relying on notification dated 1st March, 2000 issued under Section 16(1) of SCRA, it is contended on behalf of appellant that the trades of respondent Nos. 2 and 3 executed in violation of margin money requirements specified under Bye-laws framed by NSE would constitute illegal transac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on account of violations committed by the buying trading member and accordingly claims annulment of trades inter alia on ground of material mistake in the trade, whether the Stock Exchange can refuse to consider that argument is the precise question that needs consideration. In other words, in an unprecedented case like the present one, where NIFTY index crashed by 15.5% and market halt took place within few seconds of market opening, can it be said that the trades have vitiated market sanctity due to violations committed by both parties to the trades and if so, whether, imposing penalty of Rs. 20-25 lac on both parties to unrealistic trades and allowing respondent nos:2 and 3 who gained several crores of rupees from unrealistic trades to retain such gains, would act as deterrent or boost the morale of respondent nos:2 and 3 who admittedly have violated the norms laid down by SEBI/NSE regularly, is the question which deserves consideration. 30. In the present case, apart from seeking annulment of trades on ground that the trades are vitiated on account of erroneous sell order placed by the appellant, appellant had also claimed that the trades are vitiated on account of respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... res thus leading to a margin shortfall of 87%. Respondent No.2 had also placed sell orders on behalf of Ankit Financial Services for Rs. 555.81 crores out of which orders worth Rs. 392.16 crores were placed 21.88% above the last traded price of the shares. The buy limits set on Respondent No.2's terminal was Rs. 36 to Rs. 71 crores and the sell limits set on the Respondent No.3's terminal was Rs. 37 to Rs. 75 crores. There was no link between the above set limits to the margin/collateral. 33. It is relevant to note that DAC of NSE in its orders both dated April 30, 2013 has held that respondent Nos. 2 and 3 are guilty of violating the margin money norms by committing breach of following Circulars/Regulations:- (a) NSE Circular dated 9th May, 2005. (b) SEBI Circular dated 23rd February, 2005. (c) NSE Circular dated 23rd March, 2007. (d) NSE Capital Market Segment Regulation 4.5.4.c(i) and 4.6.1 (e) NSE Capital Market Circular dated 21st January, 2004. (f) SEBI Circular dated 18th January, 2006. (g) Various circulars issued under the Prevention of Money Laundering Act. 34. NSE circular dated January 20, 2004 depricates the practice of trading members in placing orders far aw ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lation of margin money norms was the regular practice followed by respondent nos.2 and 3, then surely it was a case for taking more stringent action against respondent nos:2 and 3 as there was constant danger of their buy orders disturbing the market equilibrium as well as sanctity of trades compared to the erroneous sell orders placed by appellant by failing to install suitable validation mechanism in the risk management system and by ignoring four to five level checks displayed on the screen. 38. NSE ought to have appreciated that between the two violators who deserved to be more disciplined. In other words NSE ought to have appreciated that for violations committed by appellant whether imposing penalty of Rs. 25 lac in addition to the loss of more than Rs. 51 crores was appropriate or for violations committed by respondent nos:2 and 3 whether imposition of penalty of Rs. 20-25 lac on respondent Nos:2 and 3 as against huge unauthorized profits running into several crores made by them would be appropriate. It 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n NIFTY index fell below 10% and secondly, decision of NSE to resume trading within 15 minutes after the market halt took place when NIFTY index fell by 15.5%, was in violation of SEBI circular dated June 28, 2001 and therefore trades in question are liable to be annulled. 45. No doubt that SEBI has issued a show cause notice to NSE on the above issues. NSE has replied to the said show cause notice and the matter is still pending adjudication before SEBI. Since the above issues are pending for decision before SEBI it would not be proper for us to comment on the merits of the issue raised herein. However, for the purposes of this appeal, we may consider the prima facie view of SEBI in the show cause notice as well as the reply filed by NSE before SEBI. In its reply, NSE has stated that on NIFTY index falling below 10% the circuit breaker system did trigger and entry of fresh orders into the system was stopped instantaneously and it took 6 seconds to shut down the system completely and within that 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 second ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... above, since issue relating to taking action on account of respondent nos.2 and 3 placing buy orders far away from the market price and in violation of margin money norms is remanded for the reasons set out in paragraphs 33 to 43 above, without going into merits of rival contentions, we set aside the orders impugned in both appeals and direct NSE to pass fresh order on merits and in accordance with law after hearing both parties. 50. In the result, all the three Appeals as well as Miscellaneous Application Nos.80 and 81of 2014 are disposed of in the following terms: a) Appeal No.64 of 2013 is partially allowed by remanding the issue relating to annulment of only those trades in which respondent nos. 2 and 3 are counter parties to the trades. On remand, NSE shall rehear both appellant as well as respondent nos. 2 and 3 on the question as to whether the trades in which respondent nos.2 and 3 are counter parties are vitiated on account of respondent nos:2 and 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , out of Rs. 980 crore sale order, Rs. 5 crore got executed, since they were pending in the system, instead of being returned by trading system of Respondent No. 1 and rest of pending orders of Appellant were cancelled. 4. At 11:45:00 Appellant reached Respondent No. 1 office and explained what transpired, i.e. their version, and requested Respondent No. 1 to annul these "error" trades. At this juncture, it is stated that the term 'error trade' will be used subsequently also, since this term has been started by Appellant and all others are referring to these trades as 'error trade', but the undersigned will not be bound by 'error trade' as representing an actual error, at any point up now or in future. 5. At 12:00 noon, Appellant's system were put on square off mode, but due to problems of margin, the trades could not be squared off and thereafter Appellant's terminals were re-activated by 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 Rs. 51 crore was incurred, on account of all trades connected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Rs. 5 crore only took place, between fall of NIFTY INDEX from 10% to 15.5% of opening mark. 9. It is also stated by Appellant that Respondent No. 1 conducted immediate inspection of system and risk management of Appellant and issued SCN, which was replied and Disciplinary Action Committee (DAC) of Respondent No. 1 imposed monetary penalty of Rs. 25 lakh on Appellant after holding trades executed on October 5, 2012 was outcome of an error, vide order dated October 29, 2012. 10. On October 7, 2012, Appellant applied before Respondent No. 1 for annulment of trades of October 5, 2012 in terms of buy-law 5(a) of Chapter-VII of buy-laws of Respondent No. 1, on grounds that trades were outcome of a material mistake. Bye-law 5(a) reads: "CHAPTER VII: DEALINGS BY CLEARING MEMBERS INVIOLABILITY OF ADMITTED DEALS (a) All the dealings in securities on the 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... proceedings against NSE, in regard to erroneous trade of Appellant on October 5, 2012, and issued show cause notice to Respondent No. 1 on following points:- (a) systems of Respondent No. 1 did not work as required under the provisions of securities laws by not coming to a halt when the index fell by 10%; (b) Respondent No. 1 erred in not keeping the market system shut for two hours, and instead resumed trading within a period of fifteen minutes; (c) Respondent No. 1 failed to put in place order / trade limit controls and risk management at its end and has rather put the onus for the same solely on the broker; and (d) counterparty brokers had been able to enter large purchase orders at unrealistic market prices without even posting margin, and therefore were able to cause a systemic risk and the Respondent No. 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 cou ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... heir own wrong or to benefit or profit from the same would amount to unjust enrichment; (i) October 5, 2012 is not peculiar to India and whenever human intervention is possible, there is possibly of human error and if error happens, stock exchanges may annul trades since these were patently erroneous; 17. Counter Party Trading Members (CPTMs) have submitted as follows:- (a) Trading on stock exchange is faceless trading where Exchanges and its Clearing Corporations act as a counter to both buyer and seller and guarantee settlement of trades executed through its trading system; (b) Business of dealing in stock markets is a business which carries inherent risk, which includes sudden increase or decrease of value of securities bought or sold. Entities transacting 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 marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d, when sale order came into trading system. Hence, no un-intention benefit has been obtained from sell order of Appellant; (l) Appellant has stated that it took all possible mitigating action, but one important such action for sending CP, trade cancellation request, was not undertaken; (m) Locally and internationally, trades have been annulled due to fraud / misrepresentation / manipulation, and are differentiated from facts of present case, since present trade occurred due to an alleged error; (n) Large number of trades in F&O segment are undertaken in a large number of cases to hedge their arbitrage position in cash segment and in case cash segment trades are annulled, there will be significant financial implications on concerned brokers 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 puttin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n that day as well; * Exchange, on regular basis, put Members terminals on square off mode, due to insufficiency of margin and Members have to bring addition margin or square off trade to bring margin written limits and for this, Members are subjected to pre-defined penalty and interest for overnight shortfalls; * Annulment request is frustrated from practical stand point by impossibility, since reversal of trade would impact across the market, since trades were squared off by them and have gone to buyers who might have taken delivery or further traded in market and to annul such trades would be impossible, since de-mated shares are fungible and it is virtually impossible to track the shares, pertaining 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 I ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation Part A - Trading Member will be solely responsible for accuracy of details of orders; NSE's circular dated July 5, 2005 - incorporate suitable validation mechanism as part of risk management system to avoid erroneous order with large quantities and despite all this; Appellant did not comply with these regulations, and circulars of SEBI / NSE; * Regarding mechanism of placing orders, DAC noted that dealer deliberately choose "Based on Quantity, entered 17 lakh in tab wherein it was mentioned based on quantity, net quantity showed 1,97,44,895 and net value at Rs. 9,74,28,72,733.55 - which was not noticed by dealer, quantity and value of each of the scrip showed huge figures 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 pla ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime. Market recovered within seconds of reopening and value of trade, arising out of Rs. 980 crore sell order constituted only 3.35% of trading value of cash segment of NSE and 0.33% total traded value of that day on NSE; * Risk Management and control facilities provided in CTCL software, were not made use of by Appellant and Appellant tried to shift blame partially to dealer, but DAC finds this unacceptable. Since dealer is employee of Appellant and hence Appellant is responsible for all acts and omissions of the dealer, since Regulation 4.2.1 requires Trading Member (Appellant) to establish, maintain and enforce procedures to supervise its business and to 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 suf ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arise are:- How authentic is the version of Appellant in narration of what happened in their work station, resulting in market fall and its consequences; Whether CPTM are justified in their claims that these orders were in conformity to NSE rules, bye-laws and circulars; Whether Appellant is justified in asking for annulment of trade arising due to their erroneous order of October 5, 2012; Whether decision of DAC / NSE i.e. Respondent's refusal to request of Appellant for annulment of trade justified; * Whether it is possible to annul the trade of October 5, 2012; 22. The first issue that requires examination is whether 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 det ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... pellant that due to conflict of IP with 155, the replaced machine was given IP 221, but from opinion of experts, it can be inferred that to change IP of a machine, it takes at least 180 seconds and the same cannot be done in 18 seconds, which is the time shown in Sagar Shah switching from machine with IP 155 to machine 221. But this explanation of Appellant that IP of crashed replacement machine was changed from 155 to 221, due to conflict of IP and if did not allow dealer to log in from IP 155, but it has not been explained as to how dealer was working on IP 155 from 9:11:24 to 9:13:0, from 9:18:15 to 9:37:37, where 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 an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... contract, about the subject matter and hence contract was void, but this Contract Act cannot be imported to present case, since laws governed securities market are adequate to deal with the present case and Contract Act, 1872 came into existence, when present day securities market did not exist or were even contemplated and also since Appellant / CPTMs did not plead Contract Act before Respondent No. 1/ DAC and hence we may not take cognizance of pleadings of both the parties, based on Indian Contract Act, 1872. 28. Another fact that is canvassed by Appellant is that everyone, including Respondents and CPTMs 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n called upon to take informed decisions, which will have serious repercussions on market and may give rise to further litigation; when actual facts of happenings on October 5, 2012, are not available before this Tribunal. 31. Another aspect that needs to gone into in details, is the stand taken by Respondent No. 1 in different situations, in this matter itself, while dealing with different aspects of this issue, while dealing with different parties. 32. The first important aspect that needs to be dealt is imposition of penalty of Rs. 25 lakh on Appellant vide Respondent's letter dated October 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 w ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ting negligently; but Respondent No. 1 carried out a limited purpose inspection, not trying to find out of any relevance but reiterating what was dished out to them by Appellant, which in other words is a routine inspection, where nothing is reported or asked for, but undertaken to show that inspection was carried out for record purposes. 35. However, it may be stated that Respondent No. 1 have held, in brief, the Appellant of violative of various bye-laws, regulations and circulars of Respondent and imposed penalty on Appellant, which has been paid and not appealed against and case of 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 Rs. 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 i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce to NSE, on following counts: (a) Systems of Respondent No. 1 did not work as required under provisions of securities laws by not coming to halt when index fell by 10%; (b) Respondent No. 1 erred in not keeping the market system shut for two hours and instead resumed trading within a period of fifteen minutes; (c) Respondent No. 1 failed to put in place / trade limit controls and risk management at its end and has rather put the onus for the same solely on its brokers; (d) Counterparty brokers had been able to enter large purchase 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 l ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... units of NIFTY BASKET, gave rise to unparalleled and unprecedented situation of such humongous proportion, in such short span of time, that SEBI circular / NSE's circulars, bye-laws and regulations, which deal with normal situations arising on day to day basis in conduct of trade at exchange, proved inadequate to meet the abnormal situation and hence attempts of all concerned, including SEBI and NSE, to apply their regulations - which deal with ordinary situations - to such an unforeseen, unparallel and 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 Oct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 10% and, as per circular of SEBI, NSE cash segment stopped trading and system came to a halt at 9:51:04, when NSE index had fallen to 15.5.%. Trade worth Rs. 660 crore, involved, Appellant, 660 counter-parties and 14,000 clients. 50. Out of 665 counter-parties to the trade, some eight had major contribution amounting to 70% of trade, and most of these eight counter-parties, who executed trade upto Rs. 462 crore or so, allegedly fell short of margin requirement, 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an additional margins. 56. As per Respondent No. 1, trading of members does not stop at 100% utilization of margin, since when margin is on verge of crossing 100% margin utilization level, if a large order of a member is under execution, the same will be completed and any action to put his terminals on compulsory square off made (mode that does not allows further trading); is taken thereafter and invariably results in members overshooting 100% margin in these cases. 57. In view of above imperatives of practicability, Exchanges (including NSE) have a system of imposing penalty of Rs. 5000 for first violation of margin, Rs. 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 f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... stated that it was their practice to put orders in a similar manner which they did on October 5, 2012, before Appellant's sell order came in, from past for a long time and is part of their trading strategy and they have made money or lost on trading, based on this strategy, but have always fulfilled their commitments. 62. Since Respondent No. 1 has not refuted this statement that Respondent Nos. 2 to 9 were not placing such big 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... epresented that this client has been with them for 20 years, has met all his obligation and has never defaulted and otherwise he is very solvent and his net profit is Rs. 57.53 lakh during 2011-12, which was wrongly stated at Rs. 57.53 lakh as income. Respondent No. 2 also stated that their client, AFS, has fulfilled all obligations arising out of trade all these years and by not taking any margin from this client, has been done 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Appellant made a big issue of Respondent Nos. 2 to 9 acting in prejudicial business or unwarranted business, but this has to be seen in background of unforeseen events in NSE on October 5, 2012, where a single sale order of Rs. 980 crore shock the market, which was stabilized to quite an extent due to pre-existing orders of Respondents in a layered manner, which had been their strategy since a long time, where 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... senior counsels / counsels / representative, throughout the discussions of relevant appeal, should have clarified the matters, which concerns them and are arising out of their directives. 72. As a matter of fact, NSE should be careful in drafting their circulars, regulations, bye-laws to make these clear and understandable by all concerned in an unambiguous manner, since these are required by all players 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 entire controversy of market taking time to shut down should rest with understanding that markets are active constituents and when ordered to stop will take time to settle and there will be gap between trigger and halt, which is inevitable. Hence, this settles the issue that market systems will not stop instantaneously and halt only after a small time gap, which is necessary to complete ongoing operations. 78. The other issue is counter-parties trades without adequate margin money, without capital adequacy, many time ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 more than one year and nine months and these trades were mostly either reversed on the same day or in few cases delivery took place. These shares being fungible must have been traded several dozen times and would have been dealt by lakh of trades and hence locating these traded securities, for reversal of trade, will be an impossible task and NSE had admitted this, in so many words. 84. In case, Appellant wants first of the trade to be reversed, the same will put counter-parties to a huge loss, since they will have to give back ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 Rs. 51 crore in the trade of Rs. 660 crore; is not possible or even desirable since NSE's rules permit annulment of trade, which has become practically impossible, and NSE's rules do not permit withdrawing profits from counter-parties to compensate Appellant to the extent possible. 89. In view of above appeal does not succeed. Appeal No. 87 of 2014 Per : A.S. Lamba 1. This appeal has been filed by M/s. Inventure Growth & Securities Ltd. (Appellant) vs. National Stock Exchange of India Limited (Respondent) against imposition of penalty of Rs. 25,00,000/- vide letter of Respondent No. NSE/INVG/2013/202780-K dated April 30, 2013; for evasion of margin, violation of Rule 5(i) of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ession, 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 not prescribed any limit or prohibition on placement of orders on its trading system; All orders were placed using direct terminals of Respondent, which allowed order placement as it is well within framework of Respondent; Respondent may appreciate market wide order-trade ratio is between 30 to 300 orders per trade and as a result under normal circumstances orders worth Rs. 1000 crore, would have resulted in trade of Rs. 3 crore to 30 crore (both buy + sell and net position will be much less as buy and sell trades would have been knocked out, as member's client carries out inter-day trades, predominantly); ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ties 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 appropriate internal system and procedures for ensuring that such orders are not entered and Appellant has violated the spirit of said circular; (iii) (V) On October 5, 2012 your buy orders for huge quantities, placed at price significantly away from market price, were matched and led to steep market fall. Placing of orders away from market price, violated Regulation 4.5(1)(1) Part A (Capital Market Segment) of Trading Regulation , wherein it is stated that A Trading member will not make bids and/or offers for securities with an intention of creating a false or misleading appearance with respect to the market for, or the price of any security. (R) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing 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 Rs. 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 allegations against Appellant, then since Appellant had deposited only Rs. 4 crore as margin money with Respondent, exposure to client beyond Appellant deposit, was effectively given by Respondent. (D) Income proof of client, shows his gross total income as Rs. 57.53 lac for FY ending March 31, 2012 and total buy/sell orders on behalf of client amounting to Rs. 1083.42 crore on October 5, 2012, show that exposure provided to client was highly disproportionate with his income and exposure granted to client was arbitrary, reckless and with gross negligent and hence conduct of Appellant indicates un-businesslike conduct; (vi) (V) Vide Circular No. NSE/CMTR/4749 dated January 21, 200 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) Alongwith Risk Management System, Appellant also follow proper policy framework, as per guidelines of anti-money laundering measure's - the overriding principle is that their management have taken all proper precaution and have implemented all safeguard measures initiated by them, which are adequate, appropriate and follow spirit of these measures and requirement, as enshrined in PMLA. Appellant's internal mechanism ensure compli ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r 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 to taking action for correction for any violation or for future guidance of Appellant or similarly placed members as Appellant. 4. The less said the better about conduct of Respondent, in conducting inspection of Appellant by a team of officials on October 12, 2012, pursuant to sudden fall in NIFTY on October 5, 2012. Presumably this should have in context of finding the reasons for what happened on that fateful day, who was at fault, whether system of exchange and of members worked properly to meet surge of activity fuelled by erroneous order and how the system responded to same and if any corrective / upgradation of systems / improvements of Appellant or Respondent were required to meet such occurrences in future, but Respondent choose, in their wisdom, to conduct a stand ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... olemness, 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-laws and rules of Respondent. Appellant has been held guilty of evasion of margin, as per first para under heading 'FINDING AND DECISION' This change did not exist in SCN. However, Appellant explained that margin can be evaded by (i) showing a general client as institutional client, who is not required to pay margins, and (ii) trading on behalf of more than one client from one client's account, so that margin requirement gets reduced. Hence, change of Evasion of Margin does not get substantiated. 8. The most important alleged violations relating to fall in market states, which is also repeated in decisions of DAC; states- buy orders for huge quantities placed at a price significantly away from market price were matched and led to steep market fall. This statement has to be seen at what is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... why Appellant is being faulted for steep fall in market, when only buy orders got converted into trade were placed in range of 0-10% of previous close and majority of these trades were in range 0-5% of previous close. Hence, it is not understood as to why Appellant's orders, placed significantly away from market price, are being held responsible for steep fall in market, which were not converted in trades. It may also be mentioned that if buy orders by 8 parties (including this Appellant), were not existing in Respondent's trading system, when order for sale of Rs. 980 crore in NIFTY Scrip was placed by M/s. Emkay, fall would have been much more steep and hence orders of 8 major parties supported the market and provided some equilibrium. How these buy and sale orders of some 8 parties (including Appellant) are being held responsible for steep fall in market, is not appreciated. 11. Regarding allegation that client AFS had income of Rs. 57.53 lac for FY 2011-12 and he was allowed to place orders worth Rs. 1083.42 crore and hence action of Appellant was arbitrary, reckless and grossly negligent; has been clarified that Rs. 57.53 lac was not the income but net profit in 2011-12, wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... conclusion it is held that impugned order imposing penalty of Rs. 25 lac and for providing Rs. 25 lac for withholding to ensure compliance of order impugned dated April 30, 2013, is set aside and quashed. Appeal is accordingly allowed with no order as to costs. Appeal No. 86 of 2014 Per : A.S. Lamba 1. This appeal has been filed by M/s. Prakash K. Shah Shares & Securities Private Limited (Appellant) vs. National Stock Exchange of India Limited (Respondent) against imposition of penalty of Rs. 20,00,000/- vide letter of Respondent No. NSE/INVG/2013/202779-S dated April 30, 2013; for margin collection process, in violation of Respondent's Circular No. NSE/CMPT/622 dated May 09, 2005, NSE/INVG/7102 dated January 5, 2006, NSE/INVG/7307 dated March 24, 2006, NSE/INVG/223 dated December 23, 2008, NSE/INVG/11928 dated January 22, 2009, NSE/INVG/12996 dated September 2, 2009, NSE/INVG/13784 dated December 30, 2009, NSE/INVG/14117 dated February 17, 2010, NSE/INVG/14994 dated June 16, 2010; PMLA Master Circular No. NSE/INVG/16703 dated January 5, 2011 and relevant PMLA Rules; Risk Management Policy not in accordance with circular no. NSE/CMPT/6122 dated May 9, 2005; order inflow process ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t on buy and sell side; (R) Buy orders cannot result in falls in price of scrip. Top 5 orders in respect of scrip (in terms of price) are visible on system of NSE and Appellant's pending orders could not have created any misleading appearance in market or that of price of respective scrip, since all pending orders were not visible on NSE's system. Appellant's orders were purely in nature of jobbing transactions and were placed within circuit limits of NSE. Initiation of sale of NIFTY by Emkay triggered market fall. Appellant had placed orders, on behalf of its clients and under proprietary account in NSE's system in normal course of business. Appellant has exercised due diligence and caution at the time of entering orders and have adequate internal systems to ensure that such orders are well within the circuit limits of NSE. (D) Member in its proprietary account placed buy orders with NSE in many scrips on October 5, 2012 for total value of Rs. 300.61 crore, which is 11 times of members Net Worth, which conduct of Member indicates unprofessional conduct as defined in Rule 5(i) of Chapter IV of Rules of the Exchange. (iii) (V) On October 5, 2012 your buy orders for huge quantiti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llant was well within financial net worth and admittedly not in default in respect of trading obligations, vis-à-vis, trades executed. (D) The member in its proprietary account placed buy orders with the Exchange in many scrips during the period 09:02:44 a.m. and 09:50:52 a.m. for a total value of Rs. 300.61 crores which is 11 times (approximately) of the member's Net Worth as on March 31, 2012 i.e. Rs. 27.78 crores (as per records available with the Exchange). This conduct of the Member also indicates unprofessional conduct as defined in the Rules 5(i) of Chapter IV of Rules of the Exchange. (vi) (V) Income range specified by your clients, in client registration forms, was in the range of Rs. 1 lac to Rs. 10 lac. Total buy orders placed by your clients on October 5, 2012 was Rs. 116 crore. Thus, exposure provided to clients was highly disproportionate with income source / range declared by your clients and was arbitrary, reckless, grossly negligent and far exceeded known capabilities of client. No margin / collateral was collected by you from your clients. (R) Denied that exposure granted to clients was arbitrary, reckless, grossly negligent and that it far exceeded know ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, Further, the buy and sell limits set for the terminals used by you for placing orders for your proprietary account was between Rs. 60 crore to Rs. 100 crore and between Rs. 75 crore to Rs. 115 crore, respectively. It appears that no care and caution had been exercised in setting the limits for the dealers or by linking the same to margins / collateral. As is evident, such conduct has led to disturbance in normal functioning of the securities market and also the consequent withdrawal of your trading facility on October 5, 2012. (R) Limits on client's terminal are set cumulatively for all clients put together and Rs. 200 crore limits was for more than one client. Denies that no care was exercised in setting limits for dealers or by linking the same to margins / collateral. Denied that Appellant conduct led to disturbance in normal functioning of securities market. (D) As per the Exchange records, the buy and sell limits placed on the terminal used by the trading member for placing orders pertaining to their clients on October 5, 2012 was at Rs. 200 crore. Further, the buy and sell limits set for the terminals used by the trading member for placing orders for its proprietary acco ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... IV of Rules of the Exchange, violation of Regulation 4.5.4(c)(i) of the Trading Regulation and Exchange circular (no. NSE/INVG/2007/65) dated March 23, 2007. (R) Denies violation of provisions of rule 3, 4 and 5 of Chapter IV of rules of Exchange Appellant has been in business of very long time and has built very strong reputation. (D) Same as in (v). 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 to taking action for correction for any violation or for future guidance of Appellant or similarly placed members as Appellant. 4. The less said the better about conduct of Respondent, in conducting inspection of Appellant by a team of officials on October 12, 2012, pursuant to sudden fall in NIFTY on October 5, 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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 10 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 but made some findings in 5 paras for 10 alleged violations, without indicating which para of findings deals with which violations, and on what basis DAC concluded in 6 sub paras of observations, that follow these 5 paras, for holding Appellant violative of so many circulars, bye-laws and rules of Respondent. Appellant has been held guilty of evasion of margin, as per first para under heading 'FINDING AND DECISION' This change did not exist in SCN. 8. It is not worthwhile dealing with Respondent's or their DAC's conduct in any further details, but to state that SCN contained 10 allegations, which were put to Appellant to explain, Appellant gave their submissions in writing and orally and it is not revealed ..... X X X X Extracts X X X X X X X X Extracts X X X X
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