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TMI Blog2023 (1) TMI 1323X X X X Extracts X X X X X X X X Extracts X X X X ..... rge jointly and severally a sum of Rs.15.57 crores alongwith interest at the rate of 12% p.a - HELD THAT:- The show cause notice alleged that OPG gained materially by being the first logger as well as by connecting to the secondary server. In this regard, NSE had appointed ISB to calculate the profits earned by TMs including OPG especially on days when they logged in first to the PDC either from the primary server or from the secondary server. The ISB in its report took 30 days on sample basis and analysed the same for the period 2012 and 2013 which were the days when OPG had consistently logged in first. ISB in its report submitted that OPG made higher profits close to Rs.25 crores when they logged in early. Based on this ISB report, the show cause notice directed OPG to show cause as to why the profit of Rs.25 crores should not be disgorged. The ISB report used First-In-First-Out (FIFO) methodology to calculate both intraday and overnight profits. Intraday profits are profits generated through positions that are opened and closed on the same day. Overnight profits are profits generated through positions opened on a prior day and closed on that particular day A perusal of the term ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... r load balancer in the TCP IP dissemination protocol, cannot be categorised as breach of the principles of fairness and equity attracting the provisions of PFUTP Regulations. The WTM held that the dissemination of information which is in breach of the stipulation contained in SECC Regulations cannot automatically attract the rigors of PFUTP Regulations, without there being any proof to indicate fraud. The WTM held that in the absence of any fraud or collusion or connivance the possibility of fraud was non-existent. Charge that NSE has violated Regulation 41(2) and 42(2) of SECC Regulations is not proved. NSE provided a level playing field for TM subscribing to the TBT data feed of NSE and provided equal, unrestricted and fair access from the TBT architecture. We, however, found that the circular of 30th March, 2012 was not followed by NSE. WTM exonerated OPG and its Directors on issue of first login and crowding out other TMs. We, however, affirm the findings of the WTM that OPG gained an unfair access and advantage by consistently log in to the secondary server and made unlawful gains. We, however, find that for violation of the circular, there can be no disgorgement by NSE or by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... w of the reasons given in the preceding paragraph: a. We set aside the order of the WTM directing disgorgement of an amount of Rs.624.89 cores alongwith interest at the rate of 12% p.a. against NSE. b. Directions given by the WTM prohibiting NSE from accessing the securities market, directly or indirectly, for a period of six months and, further, directing NSE to carry out system audit at frequent interval after thorough appraisal of the technological changes introduced from time to time is affirmed. c. We direct NSE to deposit a sum of Rs.100 crores to the Investor Protection and Education Fund created by SEBI. This amount will be adjusted by SEBI pursuant to the deposit already made by NSE vide our interim orders dated 22nd May, 2019 and 17th May, 2021. The excess amount alongwith interest accrued shall be refunded by SEBI within six weeks. The appeal of NSE is partly allowed. d. The direction to disgorge 25% of the salary from Mr. Ravi Narain and Ms. Chitra Ramkrishna is set aside. e. The direction prohibiting Mr. Ravi Narain and Ms. Chitra Ramkrishna from associating with any listed Company or a market infrastructure institution or any other market intermediary for a period of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ideration the changes in the technology. d. NSE to reconstitute its Standing Committee on Technology at regular intervals. e. NSE to frame a clear policy on administering whistle blower complaints. f. Mr. Ravi Narain, noticee No. 2 to disgorge 25% of the salary drawn for Financial Years 2010-11 to 2012-13 to the IPEF. g. Mr. Ravi Narain shall not associate with any listed company or a Market Infrastructure Institution or any other market intermediary for a period of five years. h. Ms. Chitra Ramkrishna, noticee No. 3 to disgorge 25% of the salary for Financial Year 2013-14. i. Ms. Chitra Ramkrishna shall not associate with any listed company or a Market Infrastructure Institution or any other market intermediary for a period of five years. j. NSE shall initiate an enquiry under its Employees Regulations against Mr. Mahesh Soparkar (Noticee No. 10) and Mr. Deviprasad Singh (Noticee No. 11) with respect to the findings contained in paragraph 8.4.7.6 of the impugned order and submit a report within 6 months. k. Mr. Anand Subramanian (noticee No. 4), Mr. Ravi Apte (noticee No. 8), Mr. Umesh Jain (noticee No. 9), Mr. R. Nandakumar (noticee No. 5), Mr. Mayur Sindhwad (not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e assisted by Dr. Poornima Advani, Mr. Manish Chhangani, Mr. Ravishekhar Pandey, Ms. Prerna Sharma and Ms. Samreen Fatima, Advocates the respondent and Mr. Nithyaesh Natrajan, Advocate for the Intervener in appeal nos.333 of 2019, 331 of 2019 and 336 of 2019. 6. Before we deal with the rival submissions of the parties, it is necessary to deal with the intervention application and the appeal filed by Mr. A. Kumar. Mr. A. Kumar is an advocate practicing in the Madras High Court and has filed an appeal praying that the order of the WTM dated 30th April, 2019 be set aside and that the respondents should be directed to undertake a comprehensive investigation into the NSE Colocation scam and initiate appropriate proceedings against the NSE management who intentionally did not cooperate and provided false and misleading information to the Technical Advisory Committee (hereinafter referred to as "TAC") and Deloitte Touche Tohmatsu LLP (hereinafter referred to as "Deloitte") and to take appropriate proceedings against the directors, principal officers, key managerial persons of NSE and further pass appropriate orders for disgorgement under Section 11B. The appellant prayed for other direct ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... estigation should also be made by SEBI with regard to the role of the IT Company which had a business relationship with NSE. 9. It was also alleged that Mr. Sanjay Gupta, owner and promoter of OPG abused the TBT architecture in connivance with the officials of NSE on the basis of which it allowed OPG to be the first one to log in the exchange server of NSE and, which resulted in unlawful gain to OPG and loss to other brokers. It was also alleged that Mr. Ajay Shah alongwith his wife Ms. Susan Thomas had collected NSE trade data which was subsequently passed on to private unknown persons and was used to develop algo software called "Chanakya". It was alleged that this software was sold to brokers including OPG, who in turn benefitted it by exploiting the TBT architecture of NSE. 10. It was also urged that SEBI should also examine the relationship of Ms. Susan Thomas" sister with former Head of Surveillance, NSE and the role played by Ms. Susan Thomas and Mr. Ajay Shah. It was also alleged that OPG had various vested interest and had some connection with Mr. Ajay Shah and all these facts were available with SEBI which forms part of the appellant"s representation as well as the writ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d be issued to SEBI to reinvestigate the matter and pass fresh orders thereafter. It was, thus, contended that the appellant should be permitted to interfere and should be impleaded as a party. 13. The appeal and the intervention application was vehemently opposed by the appellants contending that the interveners are not necessary parties nor are interested parties and are unnecessarily poking their nose in which they have no stake in the matter. The respondent urged that Mr. A. Kumar has no locus standi to file the intervention application or to file an appeal as he is not a person aggrieved under Section 15T of the SEBI Act. The applicant Mr. A. Kumar is neither a proper or a necessary party for adjudication in the appeal and, consequently, has no locus standi to file the appeal. 14. Insofar as SEBI is concerned, it was urged that they would abide by the decision of this Tribunal and in the event the Tribunal directs reinvestigation in the matter they would comply with the said directions. 15. Considering the submissions made by the parties, we are of the opinion that Mr. A. Kumar is neither a necessary party nor is an interested party. 16. Section 15T of the SEBI Act provide ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Nothing has been stated as to how the appellant is aggrieved by any finding of the WTM in the impugned order. Shri A. Kumar has not produced any new material or evidence which would necessitate an intervention by the applicant in the present appeal. Mr. A. Kumar admittedly had not availed any Colocation service and, therefore, he is not an aggrieved person as an investor or user of NSE services. The applicant has no connection with NSE nor is otherwise interested in the functioning of NSE and, therefore, we are of the opinion that the applicant Mr. A. Kumar is not aggrieved by any action of NSE let alone Colocation facilities. 18. A perusal of the memo of appeal and the intervention application indicates that he is espousing a public cause, namely, to ensure that the market is transparent, fair and equal access is given to all participants. In this regard, the applicant has already made a complaint to SEBI which is pending consideration and has also filed a writ petition before the Madras High Court seeking a direction to SEBI to pass appropriate orders on his complaint. The complaint and the writ petition filed before the Madras High Court by Mr. A. Kumar is in the nature of a pu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... o data and price feed helps in swifter execution of a trade (which results in a high daily turnover and high order-to-trade ratio). When a member-broker avails Colo, trading or data vending systems of the broker are allowed to be "co-located" i.e. physically located within the very premises of the stock exchange. 23. In 2009-10, in line with international best practices, NSE decided to provide its Colo facility. This service was available to any desirous member-broker, for a fee. The member-broker would rent a physical rack space within the Colo facility in the premises of NSE, and place their servers therein. 24. The technology for dissemination of data in the Colo facility is through the "Tick-By-Tick (TBT)" mechanism. TBT comprises dissemination of "ticks". A "tick" is a fundamental unit of data dissemination in the TBT architecture. In other words, ticks comprise order entries, order modifications, order cancellations, trades arising from the orders, and every other piece of data related to the market, on a real-time basis. The dissemination of such data builds for the trading members, their order book (the list of orders that indicates the interest of buyers and sellers in a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an change the order book as they happen. The member-brokers" trading systems which are co-located in the exchange premises connect to the Ports (as defined hereinafter) through IPs, for the receipt of disseminated data from NSE"s trading systems. 31. A diagrammatic representation of the TCP/IP system architecture in the Cash Market segment, with the Secondary Server shown as "POP 4 Receiver" in the diagram, is produced herein below for easy reference: The data comes from the trading system of NSE. Primary Data Source ("PDC") 32. The first part or tier of the TCP/IP architecture is the Primary Data Source ("PDC") which is connected to the trading system and receives the TBT data from the trading system. The "Epsilon script" (a type of software) automatically starts the TBT application in the PDC as the first step. 33. The three Receivers i.e. Receiver 1, Receiver 2 and Receiver 3 receives the information which comes from the trading system. The information which is received in these three Receivers is received randomly and not in a chronological order that is to say "Tick 1" which is sent from trading system may be received by "Receiver 1" whereas "Tick 2" may be received by "R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Secondary Server 38. The term "Secondary Server" is a nomenclature used for an additional/alternate/backup POP Server provided by NSE. The secondary server was meant to act as a back-up server in the event of a primary POP Server failure in which case the Secondary Server would allow continuous access without disruption to the TBT market feed. Each trading member was also given an IP address for connecting to the Secondary Server, and it was expected and indeed instructed that members must only connect to the Secondary Server only when they were unable to connect to the primary POP Servers. The purpose was to ensure that trading members could easily connect to the Secondary Server in case of primary POP Server failure. 39. Much after the "TBT architecture" was upgraded to MTBT in April, 2014 which system was adopted in a phased transition, and entirely with effect from December 3, 2016 that SEBI received certain complaints dated January 8, 2015, August 10, 2015 and October 3, 2015 from Mr. Ken Fong against NSE with regard to its Co-location facilities alleging: a. TBT data feed, which provides information regarding every change in the order book, was disseminated over TCP/IP. U ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hat it provided quicker order dissemination to those who managed to login early, i.e, if one entity is ahead of the other while logging in the morning, it gets information ahead of the other throughout the day. Further, it is not important to be absolutely the first one to login. It simply gives you probabilistic advantage to log-in as early as possible. b. OPG tried to exploit this architecture by not only logging in first on select servers but it even tried to crowd out others by occupying 2nd, and 3rd positions on those servers. c. OPG was always consistently logging in first on servers with better hardware in terms of Memory/ Front Side Bus (FSB) speeds. d. It also appears plausible that OPG and some other brokers were given preferential access to backup servers of NSE TBT system. e. OPG gained materially from the exploitation of TBT architecture, in that, once MTBT was introduced, OPG"s success in getting Unique Multi-Leg Option ("UMLO") trades executed reduced dramatically, while it did not fundamentally change for other brokers. Thus, OPG"s earlier success in UMLO trades can be causally attributed to its exploitation of the weaknesses in the TBT architecture. 41. Th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e benefits/ profits to the TMs who logged in first. EY submitted its report on May 18, 2018 and ISB submitted its report on November 14, 2017. TAC after considering the EY report recommended: a. "The architecture of NSE with respect to dissemination of TBT through TCP/IP was prone to manipulation/market abuse. b. Some trading members were given preferential access to backup servers at NSE. c. Brokers having an access to backup servers were having a potential access advantage over other trading members. d. Trading members having multiple IPs have a potential access advantage over other trading members. e. As the IPs were manually allocated and given the fact that the servers were not equally loaded and configured, selective manual distribution/allocation of IPs could present potential access advantage over other trading members. f. TAC agreed with the conclusion of EY that randomization was not implemented in TCP/IP TBT architecture and in absence of a randomizer, dissemination on each Port of a TBT server was sequential based on login time of a member. Therefore, such sequential dissemination could result in a potential advantage to preferred trading members. g. TAC m ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lement a load balancer and did not adhere to its policy for allocation of IPs, and more than 30 IPs were allocated on some ports in breach of the NSE"s policies. This put members who were on more crowded ports at a disadvantage and provided an unfair advantage to members on less crowded ports; d. NSE allegedly did not have defined policies and procedures with regard to Secondary Server access, and the guidelines were not issued as a circular. By selectively reprimanding some brokers connecting to the Secondary Servers (and not others), and allowing some brokers to continue connecting regularly to the Secondary Servers, NSE allegedly showed differential treatment to brokers; e. NSE allegedly failed to maintain backups or records for: (i) The configuration file (which captured parameters like IP address, Port number and vendor file, and sequence in which ports would receive TBT data); or (ii) Requests for change of the configuration file by members. f. There were allegedly no policies and procedures for allocation/mapping of the IPs of members to the dissemination servers, nor was there a Standard Operating Procedure ("SOP") to deal with requests for change in IP mapping to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d that by assigning multiple IPs to OPG to a single Port by NSE allowed crowding by OPG enabling OPG to establish first, second, third and even fourth connection to the server and thereby in this regard OPG gained advantage over other stock brokers and, therefore, alleged NSE has acted in a fraudulent manner and had indulged in fraud and unfair trade practices in the securities market. f. It was further alleged that the manner in which OPG gained preferential access day after day on select servers indicate complete laxity and dereliction of duty on the part of NSE officials and employees and failed to prevent manipulation of the system and failed to ensure equal, fair and transparent access. It was alleged that by not taking preventive as well as curative measures proactively Mr. Ravi Narain and Ms. Chitra Ramkrishna facilitated fraud and manipulation by OPG. 49. The supplementary show cause notice further alleged a. that NSE gave inconsistent replies to Deloitte with respect to the identification of Primary and Secondary Servers and the data relating to the same; and b. that in view of absence of proper documentation and recording, NSE and its officials had given varied res ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... system. 56. At the relevant time, TCP/IP technology was the standard protocol that the market was familiar with. On the other hand, MTBT was a more complex technology, and its implementation needed extensive programming. 57. At the relevant time, TCP/IP was used by exchanges across the world (such as Chi-XJapan, BATS, NYSE LIFFE and NSE). 58. Therefore, the MTBT architecture was not chosen simply because it would not provide assurance of every single tick disseminated actually being received. It is pertinent to note that a key element of the MTBT system was that it could handle large volumes of data (several tens of thousands of ticks per second), which at a fledgling/nascent stage was considered less important than assuring integrity of data receipt. 59. Additionally, there was no regulatory guidance issued by SEBI as to what technology should be adopted. We find that SEBI has not raised any issue with regard to the choice of the TBT architecture over MTBT architecture. No fault has been found either by SEBI or in any of the forensic report with regard to the choice of the architecture. Issue No. 1 60. Whether TCP-IP architecture for TBT data feed provided a fair and equita ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... here was some randomness in the sequence of the POP servers connecting to the PDC, namely, that the sequence of dissemination of data from PDC to the POP servers was not predetermined. The flow of data from PDC to the POP server is in a random sequence. c. However, dissemination of information at the sender Port level of a particular POP server was in a defined sequence, i.e. Port 1, then Port 2, then Port 3. Thus, a trading member who logs in first to Port 1 would be the first to get the disseminated data at the start of the day. The dissemination order would remain static throughout the day and a TM who received the data first would continue to receive the data packet first from the rest of the day. d. There was no mechanism to shuffle the order of ranking of a TM in front of a Port in which he has logged in first and, thus, that TM gained an advantage as the first connect against other TMs who logged in late. e. A software script known as Epsilon was used to start the TBT application every morning. The POP servers connect randomly depending upon the time sequence in which the TBT application processes get started in each server. Therefore, POP servers get connected to the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nths of August 2012, October 2013, November 2014, and October 2015 to show that the time gap between the various POP servers connecting to the PDC was in fact minimal, and often far less than 60 seconds. This is relevant because it demonstrates that there is no manual intervention or interference in this process, and that the server process did not afford individuals any opportunity to give preference to particular members or pass on information regarding the order of servers start up to allow particular members to connect ahead of others. iii. In any event, the sequence of connect of various POP servers to the PDC did not affect the time for dissemination of ticks to any member. The absolute time for dissemination of ticks (absolute latency) would always be in terms of microseconds to all members. The sequence or order in which the POP servers connect to the PDC would impact the sequence or order of dissemination of ticks. No other dissemination or receipt of ticks is impacted by the sequence or connect of the various POP servers to the PDC. iv. Moreover, even the order of dissemination of ticks did not determine the sequence/order in which ticks were received by the POP/Port/ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onnect required overt action by the broker and could not be manipulated by NSE. xvii. Annexure 20 of the 2018 SCN (at page 708, Volume IV of the Appeal), showed that the top 5 brokers for first/early connect in each segment varied only 1 overlap among 15 names. The EY Reports shows that a very high proportion of members logged in first on at least 1 day. xviii. This shows that everyone had a fair and equitable opportunity to connect first/early. xix. NSE equitably allowed all members to take multiple IPs and there was no prohibition even by SEBI in this regard. Members took multiple IPs for their own business/strategic reasons, and were often distributed across servers. xx. EY found that more than 50% of members had accessed multiple servers/Ports, indicating that NSE treated all brokers fairly and equitably. 67. The undisputed facts, as held in the impugned order itself, are as follows: i. The flow of data from the PDC to the POP servers follows a random sequence. The Impugned Order has noted that there is no dispute on this fact of random login sequence of POP servers to the PDC in any of the expert reports of the SEBI Investigation Report. ii. Data dissemination fro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , the member who logs in first receives the data first and continues to receive subsequent ticks/data/feed before other TMs during the course of the day. This is on account of sequential dissemination of data. 70. Before we look into the dissemination of data from the Port Server to the Colo rack server of a TM, it would be necessary and essential to trace the path of the ticks/data that is disseminated from the trading system. 71. On the basis of the statement made by NSE and the analysis made by Deloitte and EY in their reports, it is clear that the data comes from the trading system of NSE and is received by the PDC. The Epsilon script starts the three receivers in the PDC. As per Deloitte report, the TBT application is started manually by a member of the Production Support and Management Team (PSM) at around 7.30 a.m. on trading days followed by the application at POP Servers. There are no logs or records to show the process or sequence in which the three receivers and the POP Servers were started, namely, whether it started simultaneously or sequentially one after another. EY in its report stated that on 96% of the trading days the three POP Servers started within 60 seconds ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, it is clear that the sequence of dissemination of data from PDC to the POP Server is not predetermined. The flow of data from PDC to the layer of POP Server is in a random sequence. The finding of the WTM that such randomness was not on the basis of a system characteristic or a built in design but was a matter of chance based on unpredictable circumstances is based on surmises and conjectures. In fact, the process of dissemination indicated by NSE and anlaysed by EY in its report clearly indicates that the TBT architecture had an inbuilt randomiser in the dissemination of the Ticks/Data/feed starting from the Trading system and disseminating upto the POP Server. There was no predetermined sequence as to which tick would be received first by Receiver 1, Receiver 2 or Receiver 3 at the PDC level. Further, the information disseminated from the Processor to the POP Receiver was also random. The information packet disseminated from the Processor could be received first by POP 1 Receiver, then POP 2 Receiver, POP 3 Receiver and then POP 4 Receiver on a particular trading day and this sequence could change on the next trading day. This randomiser was dependent on the starting of the TB ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... code, dissemination after a batch was received from PDC to each Port was sequential (i.e. dissemination first to Port 10980, followed by Port 10981 and Port 10982). The source code defined the order of dissemination of batches but not that of their receipt at each Port within the same POP. For example, batch 1 may be received first by Port 10980 while batch 2 may be received first by Port 10981. ii. There are nine independent dissemination queues and dissemination on each Port is sequential based on login time of a member. iii. NSE provided members access credentials to a Port of a POP which could then be used to access TBT market data feed. Based on our review of source code of POP, each Port was an independent dissemination queue and dissemination from a Port to members was sequential based on their login ranks on a port (login rank was determined based on the login time of members on that Port). Such sequential dissemination on the Port was on account of an array that was designed based on login time of member"s IP. The reason for designing the array based on a login time of a member"s IP could not be ascertained. iv. Also, a member may not have knowledge of his rank in an ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sis of the EY Report clearly indicates that there was variability in order of receipt of data at the Port level from the POP Receiver. Thus the Port that disseminated the data first did not receive all the data first. EY report indicates that dissemination of a batch of information was received from PDC to each Port sequentially, i.e. dissemination first to Port 10980, followed by Port 10981 and Port 10982. The source code defined the order of dissemination of batches but not that of their receipt at each Port within the same POP. For example batch 1 may be received first by Port 10980, while batch 2 may be received first by Port 10981. d. EY in its report further found that TM Mr. A even if he logs in at 8:45 a.m. and TM Mr. B logs in at 8:50 a.m. respectively on Port 10980 and TM Mr. C and Mr. D logs in at 7:30 a.m. and 7:40 a.m. on Port 10981, each one of them will be ranked first and second in their respective Ports. If Port 10980 disseminates the first tick then member Mr. A and Mr. B who have logged in later than member Mr. C and Mr. D will receive the tick first. The EY report further analysed that there were three POP Servers. Each POP Server had three Ports. Therefore, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ort for that trading day. Thus, TM Mr. A would receive the information first and TM Mr. B would receive the information thereafter. The time difference appears to be a fraction of a microsecond to a nano second. Thus, a TM who is ranked last on a particular Port would always be disseminated a batch of information last on that Port for that trading day. k. EY in its report further found that a member would need to be first on all the nine Ports to receive the first batch of information on that trading day. l. There were nine Ports on which data/information was disseminated. A TM would get the information first if he logged in first in all the nine Ports on that trading day. No such instances were found in any of the reports. m. A TM had no knowledge of his rank in the queue on a particular Port. A TM was also not aware of the order in which POP Server would connect to the PDC on a particular trading day nor was he aware whether he was logged in on the first Port of a particular server or was first on a particular Port. A TM also did not know the order of connection of each TM to a Port. n. Thus, we find that the flow of data from the PDC to the POP Server followed a random s ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d in first in a Port of a POP Server which connected first to the PDC it would not guarantee that such TM would receive the data first. The WTM concluded that the employment of a randomiser in the normal data feed dissemination would have upset the pre-determined sequence of IPs based on early logins and would have brought in much needed element of unpredictability in the sequence of data packet (dissemination). 83. As we have concluded earlier that the flow of data from the PDC to the POP Server is in a random sequence. The dissemination of data from POP Server to the Port is sequential but the receipt of the information at the Sender Port is not sequential, namely, that batch 1 of information may be received first by Port 1 but batch 2 may be received by Port 2. Thus, we find that till the stage of Port there is some randomness in the dissemination of data already from PDC level to Port level. We further found that there was variability in the order of receipt of data on the Port and even the Port that disseminated the data first did not necessarily receive all the data first. 84. In view of the aforesaid finding given by us, the WTM has erred in coming to the conclusion that a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cross TBT Servers which has been tabulated in table XI of the impugned order. The show cause notice further contended that the limit of 30 connections for each Port of POP Server exceeded 30 IPs and, consequently, there was significant variation in terms of total number of IPs allocated to each POP Server. This variation in the allocation of IPs across each POP Server was known to the PSM Team. This fact is on the basis of an analysis of emails of the members of PSM Team. 89. EY in its report made the following observation: a. "A Port of a POP server was prescribed a limit of 30 connections. b. For configuring a new member IP for TBT access, the operator used to manually configure an IP to a Port based on availability. Availability was decided based on number of active connections made on that Port on that particular day. c. Member TBT IP was given access on the Port that had less than 30 connections. d. Each TBT IP was then configured on the same Port of Secondary Server as well. e. On multiple trading days, connections on the ports of the primary servers of CM segment had exceeded 30. Based on the login logs, it is observed that on 275 trading days, all the six ports o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... that implementation of the load balancer would have resulted in the IPs being mapped to the load balancer which would then equitably distribute the connection across the POP Server thus eliminating the allocation of IPs being done manually and also eliminating the time lag in receipt of data packets experienced by members on account of having connected to a more loaded POP Servers exceeding 30 connections. 93. Before us, the contention of NSE is, that as and when NSE received requests from TMs for allocation or shifting their IPs to a different Port then NSE would take efforts to accommodate such requests, unless there were feasibility issues regarding non-availability of Ports on a particular server etc. NSE contended that no preferential treatment was shown to any particular broker and, in case any broker complained about any latency issue, such requests was considered and IPs were shifted after considering the evidence. It was alleged that the lack of load balancer did not make the TBT architecture prone to manipulation. According to NSE, the load balancer was initially suggested as an automation measure to address server failures and avoid manual IP movement by the TBT team to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OP Server. The shifting of the IPs from one Port to another Port was also done manually. Evidence has further come to the effect that load balancing of IPs on a given trading day was also done manually. We find that the absence of load balancer appears to have created an advantage to certain TMs due to manual intervention. The PSM/Colo teams were aware that the shifting of IPs from one Port to another Port was increasing the down time which was inconvenient to most of the TMs. The PSM/Colo teams were also aware that the manual distribution of IPs created an operational risk while balancing the load on the servers continually and the process of shifting the IPs from one Port to another especially when the number of connections started increasing. Ms. Mamatha Rangaprasad in her statement dated 1st August, 2017 stated that a load balancer is used to balance the actual connects on the servers and the solution of load balancer was suggested to avoid manual reconnection and auto connect these members to other server. Mr. N. Murlidharan in his statement of 20th April, 2018 stated that any additional device would create an additional hop and that the minimisation of device was a critical f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ation of load at each Port resulted in varied time lag for distribution of data under sequential data distribution process. 103. Though NSE claimed that load balancing was done manually where members were allocated to servers based on existing load, actual number of IPs allocated varied significantly across the ports. The variation was even more pronounced in terms of number of IPs actually connected. This resulted into significant variation in crowding at different ports. 104. We are of the opinion that in a system where a Load Balancer was employed, the Trading Members would not be mapped to any particular server or port, but rather to the Load Balancer itself. The function of the Load Balancer would be to allocate the TBT IPs of trading members evenly to the servers and ports at the time of login itself. Once the trading members have logged in, they would have been mapped to the load balancer, which will automatically allocate the trading member a lesser crowded port vis-à-vis other port. 105. Consequently, if a Load Balancer was installed, it would distribute the load at the start of the trading day across the ports. It would also distribute the load at every stage wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as per the decision taken by NSE. There were overcrowding of IPs on one server as compared to other server. There was inequal distribution of IPs on the same server and there was no laid down SOP for allocation of IPs to a TM. NSE should have implemented a load balancer which would have distributed the IPs equally across all servers and norms of fair access would not have been breached. Failure to implement the load balancer has failed to ensure fair, transparent and equal access by NSE to its TMs. Issue No. 2 110. Whether access of secondary server had advantage of receiving information early and what was the mechanism in NSE to monitor the secondary server misuse. 111. The show cause notice is based on TAC report, Deloitte report and the EY report. The show cause notice alleges that NSE did not have any defined policies and procedures with regard to accessing the secondary server and that guidelines were not issued as circulars. It was also alleged that NSE was selective in reprimanding only some brokers who had connected to the secondary server and allowed other brokers to continue connecting regularly to the secondary server and, thus, showed differential treatment to broker ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecided to move the TBT infrastructure from the PDC to a separate Colocation data centre. This migration of TBT server to the new colocation data centre was undertaken in the first six months of 2012 and, during this period, in order to ensure that the secondary server was free in the event that the primary server went down, during the migration period with the PSM team performed some limited check with regard to connections to the secondary server. It was further contended that the PSM Team, upon checking, found certain members were connected to the secondary server, and were reprimanded and were further directed to disconnect from the secondary server. It was contended that there was no discrimination and warning was issued uniformly to all the members who were connected to the secondary server during the migration period. It was vehemently contended that at no point of time NSE ever developed a mechanism to continuously or automatically monitor connections to the secondary server and only periodic checks were carried out by the PSM team during the migration period. 117. The WTM found that there was no defined policy with regard to accessing the secondary server and that only a g ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n the three servers and not in the secondary server. Certain mechanism was placed by NSE for balancing the load on the three Ports but no mechanism of balancing the load was placed in the secondary server and the reason is not far to see, namely, that TMs were not allowed to access the data from the secondary server and that the secondary server was only to be used in the event of an emergency upon failure of the primary server. 121. It was, thus, found that any TMs who logged in through the secondary server had an added advantage as there was no mechanism to monitor the load factor and since there was less load on the secondary server it became advantageous to access the data faster ahead of other TMs. 122. The guidelines issued by NSE were clear that the secondary server could only be used by a TM for accessing data only in the event of failure of the primary server. A TM could only use the secondary server upon a prior intimation and permission given by NSE Colocation team. 123. Thus, it was imperative for NSE to have a defined policy for use of secondary server and a mechanism ought to have been placed for monitoring connection by TMs on the secondary server and reprimanding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lso connected to the first, second and third Port of secondary server for majority of the trading days thus, getting information prior and faster to other TMs. In this regard, detailed discussion will be made in the latter part of the judgment. 129. In view of the aforesaid, we are of the opinion, that NSE did not have any defined policy and procedure regarding access to the secondary server except those which were mentioned in the NSE guidelines which were basic and inadequate. Further, there was no documented policy or procedure regarding monitoring of unauthorized access by TMs on the secondary server which resulted in the misuse of the secondary server with impunity by some of the TMs. Issue No. 3 130. Liability of NSE under SEBI PFUTP Regulations, 2003 and SECC Regulations, 2012. 131. The show cause notice alleged that NSE had violated Section 12A(a) of the SCRA Act read with Section 11(1), 11(2)(a), 11(2)(j) and 11B of the SEBI Act read with Regulation 3(a), 3(b), 3(c), 3(d) and Regulation 4(1) of the PFUTP Regulation, 2003 read with Regulation 41(2) and Regulation 42(2) of the SECC Regulations, 2012 read with Clause 4(i) of the SEBI Circular dated 30th March, 2012 and Cl ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equitable access to information as provided under Regulation 41(2) of the SECC Regulations, 2012 and, therefore, came to the conclusion that NSE did not comply with the provisions of Regulation 41(2) of the SECC Regulations in "letter and spirit" and, accordingly, violated the said provision as well as Regulation 42(2) of the Regulations. 135. While arriving at the aforesaid conclusion, we find that the WTM has taken into consideration the circular of 13th May, 2015, which in our opinion has nothing to do with the present controversy in as much as the alleged violation is for the period 2010 to April, 2014 as during this period NSE had used the TBT architecture for dissemination of data before introducing MTBT system. 136. Before we proceed further, it would be appropriate to refer to Section 4 of the SCRA Act, 1965 which provides as under: "4. Grant of recognition to stock exchanges. (1) If the Central Government is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require,-- (a) that the rules and bye-laws of a stock exchange applying for registration are in conformity with such condit ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fair and equal access to facilities and data feeds provided by the stock exchange. 3.3. ensure that all stock brokers and data vendors using co-location/proximity hosting, experience similar latency with respect to exchange provided infrastructure." 141. Under this circular, a stock exchange was required to ensure that all participants which avail Colocation facility have fair and equal access to facilities and data feeds provided by the stock exchange. 142. Based on the aforesaid provisions, regulations and circulars, the WTM came to the conclusion that NSE has violated Regulation 41(2) and 42(2) of the SECC Regulations, 2012. 143. Admittedly, the WTM found that NSE has not violated any provisions of the PFUTP Regulations and has not committed fraud. In this regard, the WTM observed that the charge leveled under Regulations 3 and 4 of the PFUTP Regulations were not only vague but were unsubstantiated. None of the ingredients as provided under Regulation 2(c)(1) and 2(c)(9) of the PFUTP Regulations applied to NSE. There was no "knowing misrepresentation", "active concealment", "false promise", "representation made in a reckless and careless manner", "fraudulent act or omission ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ady held that there was no requirement of a randomizer to be installed, namely, after the Port and before the Colo rack as there was randomness in the dissemination of the data. Even otherwise, such addition of a randomizer had nothing to do with the existing architecture or the distribution of its data. Similarly, installing a load balancer was an additional hardware/software to be installed in the architecture for better distribution of the IP allocation but the same had nothing to do with the dissemination of the data by the TBT architecture. Similarly, failure to monitor frequent connection to the secondary server was a human failure and had nothing to do with the functioning of the dissemination of the data by the TBT architecture. 148. Thus, the finding of the WTM that because of inequitable distribution in the allocation of IPs, absence of load balancer and non-inclusion of randomizer and failure to monitor frequent connection to the secondary server did not ensure a level playing field for TMs subscribing to the TBT data feed of NSE and, consequently, NSE failed to provide equal, unrestricted and fair access is wholly erroneous. 149. The choice of architecture chosen by N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lace the TBT architecture does not arise. We are of the opinion that Regulation 41(2) of the SECC Regulation cannot be invoked for placing the TBT architecture which had already been placed in 2010. The Regulation is prospective in nature and cannot have retrospective application. 152. The charge is violation of Regulation 42(2) of the SECC Regulations. This provision relates to maintenance of books of accounts and records by the recognised clearing corporation and has nothing to do insofar as NSE is concerned. Thus, finding of the WTM that NSE has violated Regulation 42(2) is patently erroneous. Similarly, the circular of 2015 is not applicable. The period when the TBT architecture was in use was from 2010 to 2014. The circular of 2015 is prospective in nature and cannot apply retrospectively. 153. However, the circular of 30th March, 2012 is applicable which stipulates that the stock exchange while promoting algorithm trading will ensure that all arrangements, procedures and system capability to manage the load on their systems in such a manner so as to achieve consistent response time to all stock brokers and shall continuously study the performance of its systems and, if nece ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... allocating IPs to TMs of various Ports and that there was inequitable distribution of IPs. In this regard, a load balancer should have been placed in the system to ensure equitable distribution of the IPs. We also find that there was a human lapse in putting the system in place to monitor frequent connection to the secondary server by certain TMs whereby these TMs bypassed the load in the primary servers. Issue No. 4 157. Liability of employees of NSE for violation of PFUTP Regulations and SECC Regulations. 158. 16 employees were issued notice and were charged for violating Section 12A(a), (b) and (c) of the SEBI Act read with Regulations 3 and 4 of the PFUTP Regulations, 2003, Part A and Part B of schedule II of SECC Regulations read with Regulation 26(1) and (2) of SECC Regulations and clause 3.8.1 of SEBI master circular dated 31st December, 2010. The WTM after considering the replies and the evidence exonerated all the noticees of the charge of violation of PFUTP Regulations. The WTM found that no fraud was committed by any of the 16 employees/noticees and exonerated 12 of the employees from all the charges. The WTM, however, found that Mr. Ravi Narain and Ms. Chitra Ramkris ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... m audit at frequent intervals, after through appraisal of the technological changes introduced from time to time, reconstitute its Standing Committee on Technology at regular intervals to take stock of technological issues, and frame a clear policy on administering whistle blower complaints. The aforesaid direction has been passed under Section 11 and 11B of the SEBI Act. 162. Even though Section 11 had no provision for disgorgement of an amount, the Supreme Court held that the powers given to SEBI under Section 11 included the powers to issue directions for disgorgement. However, Explanation to Section 11B was inserted by Act No. 27 of 2014 which provided a direction for disgorgement of an amount equivalent to the wrongful gain or loss averted. For facility, the explanation to Section 11B is extracted hereunder: "11-B. Power to issue directions and levy penalty. …………. Explanation.--For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who made profit or averted loss by indulging in any transaction or activity i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... with the TMs no violation of the provisions of PFUTP Regulations is made out. It was also contended that the charge of discrimination against any specific TM or accrual of any monetary benefit or unjust enrichment was also not proved and, consequently, contended that NSE did not indulge in any specific discrimination towards any specific TM which was in contravention of the SEBI Act, Rules or the Regulations. It was contended that issues surrounding the functioning of a technology, namely, the TBT architecture cannot be considered either a transaction or an activity inviting directions under Section 11 and 11B of the SEBI Act. It was contended that since the TBT architecture was not under challenge no direction for disgorgement could have been passed. 166. It was also urged that before a direction of disgorgement could be passed it was necessary for the respondent to give a finding of ill-gotten gains or unfair profit or unjust enrichment made by NSE by the ill-gotten or unethical acts. It was contended that only a wrong doer who had made gains from the wrong doing can be asked to disgorge. In support of his submission, NSE relied upon the decision of this Tribunal in Karvy Stock ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... n has failed to demonstrate the appropriateness of such a drastic remedy here. It is not necessary to decide the precise nature of the causal link which the SEC must show between defendants' violations and the profits in question; in this case plaintiff has failed to demonstrate any reasonably close link between defendants' 1974 and 1975 corporate compensation and their illegal conduct... 35. When the amounts to be disgorged cannot be related with sufficient certitude to defendants' securities law violations, the SEC's disgorgement request takes on the character of a plea for punitive relief. The cases, however, are unanimous in refusing to accede to such a demand. See, e.g., SEC v. Manor Nursing Centers, Inc., supra, 458 F.2d at 1104-05; SEC v. Texas Gulf Sulphur Co., supra, 446 F.2d at 1308." 169. In S.E.C. v. Wyly, 56 F. Supp. 3d 260, the US District Court of the Southern District of New York, set aside a SEC disgorgement order for failure to establish a causal nexus between the alleged wrongful conduct and wrongful gains sought to be disgorged. The Court held: "Here, the SEC cannot satisfy its burden to reasonably approximate a disgorgement amount merely by ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... not a reasonable approximation. Defendants in such cases may make such a showing, for instance, by pointing to intervening events from the time of the violation. In SEC v. MacDonald, 699 F.2d 47 (1st Cir.1983) (en banc), the First Circuit reversed a district court order requiring the defendant to disgorge all profits from an illegal insider trade when the defendant had held on to the stock for more than a year. The court restricted the amount to a figure based on the price of the stock "a reasonable time after public dissemination of the inside information." Id. at 55. Similarly, the Second Circuit in SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir.1972), refused to extend the disgorgement remedy to income subsequently earned on the initial illegal profits. In those cases, the defendant demonstrated a clear break in or considerable attenuation of the causal connection between the illegality and the ultimate profits." 171. It was, thus, urged that the direction of disgorgement has been made in the absence of any finding of any ill-gotten or wrongful gain and that the basis of disgorgement is on the finding of contravention of Regulations 41(1) and 42(2) of SECC Regulation ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... in section 11 and ……. It is clearly made out by a plain reading of the language of the section itself that the SEBI has to protect the interests of the investors in securities and has to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section (2) of section 11 and in due discharge of this duty cast upon the SEBI as a part of its statutory function, it has been invested with the powers to issue directions under section 11B. ……. Thus, so far as the authority of law in the SEBI to issue such directions is concerned, such authority to take measures as it thinks fit is clearly discernible on the basis of the provisions contained in section 11 read with section 11B of the SEBI Act. …... We have to, therefore, consider and interpret the power of the SEBI under the provisions so as to see that the objects sought to be achieved by the Act is fully served, rather than being defeated on the basis of any technicality……... The duty and function had been entrusted to take such measures as it thinks fit and in order to discharge this duty, the power is vested u ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e Court has observed, as under: "It is a well accepted canon of statutory construction that 'it is the duty of the court to further Parliament's aim of providing a remedy for the mischief against which the enactment is directed and the court should prefer a construction which advances this object rather than one which attempts to find some way of circumventing it... In the matter of construction of enabling statutes the principle applicable is that if the legislature enables something to be done, it gives power at the same time, by necessary implication, to do everything which is indispensable for the purpose of carrying out the purpose in view…. It has been held that the power to make a law with respect to any subject carries with it all the ancillary and incidental powers to make the law effective and workable and to prevent evasion." 178. This Tribunal in R.K. Agarwal vs. SEBI, Appeal No. 1 of 2001, held: "One has to view the powers of the Respondent under the provisions of the Act in the context of the objects sought to be achieved by the Act and the duty cast on them in achieving the same. Section 11 and section 11B give enormous authority to the respondent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dominant purpose also makes it clear that the Board has been established for this purpose. This duty is performed under sections 11 and 11B of the Act which are the very soul and heart of it. ….. On the basis of the past experience of the Board, a need was felt to amend the Act to enable it to issue directions, whenever necessary, for the purpose of protecting the interests of investors and the securities market. Parliament by Act 9 of 1995 introduced Section 11B with effect from 25.1.1995. This section enables the Board to issue directions to any intermediary of the securities market or any other person associated therewith if it thinks it is necessary in the interests of investors or orderly development of securities market or to prevent the affairs of any intermediary or any other person referred to in Section 12 from being conducted in a manner detrimental to the interests of investors or securities market or to secure the proper management of any such intermediary. For regulating the securities market and with a view to protect the same, the Board started issuing interim orders/directions under this newly added provision to keep the erring intermediaries or other delinq ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... associated with the securities market." 183. In Karvy Stock Broking Ltd. v. SEBI, Appeal No. 6 of 2007 decided on 2nd May, 2009, this Tribunal held: "5. Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Disgorgement of ill-gotten gains may be ordered against one who has violated the securities laws/regulations but it is not every violator who could be asked to disgorge. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. Since the chief purpose of ordering disgorgement is to make sure that the wrongdoers do not profit from their wrongdoing, it would follow that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity." 184. In Dushyant N. Dalal v. SEBI, Appeal No. 182 of 2009, order dated 12th November 2010, it was argued that without a specific provision, direction to disgorge cannot be issued, but this Hon"ble Tribunal held that no specific provision in the SEBI Act i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... idered and upheld in Securities Exchange Commission v. Texas Gulf [446 F.2d 1301 (2d Cir. 1971)]. 188. In the year 1990, the US Congress conferred statutory sanction on the remedy of disgorgement by the enactment of the Security Enforcement Remedies and Penny Stock Reform Act, 1990, which expressly authorised accounting and disgorgement in securities laws. 189. In SEC v. Great Lakes Equity [775 F. Supp. 211], it was held that unjust enrichment is not merely restricted to what remains in the pockets of the wrongdoer in the aftermath of a fraud, but rather includes the "value of the other benefits" which accrue to the wrongdoer through a scheme. These benefits may be in the form of interest free loans, improved reputation, cost defrayments, etc. Thus, the definition was given a much wider interpretation by the authority. 190. Further, in an order instituting cease-and-desist in the matter of credit-rating agency DBRS, Inc., SEC dated October 26, 2015 charged the Respondent for misrepresenting its surveillance methodology for ratings of certain complex financial instruments during three years and directed the Respondent to disgorge an amount of USD 2.7 million. In this case, disgor ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t punitive... In our opinion net profit from wrongdoing is the gain made by any business or investment, where both the receipts and payments are taken into account. We are further of the opinion that the appellant will not be allowed to diminish the show of profits by putting in unconscionable expenses or other inequitable deductions even though entire profits of a business may result from the wrongdoings of the appellants and therefore are not entitled for the deductions as prayed by them." 195. It was urged that disgorgement from salary can be ordered. In support of this submission reliance was placed in the matter of SEC v Church of God Inc., 429 F. Supp. 2d 1045, wherein SEC held that: "Disgorgement of illegal profits and unjust enrichment is an equitable remedy available under the federal securities laws. E.g., SEC v. First City Financial Corp., 890 F.2d 1215, 1230 (D.C.Cir.1989). The court concludes that each defendant should be ordered to disgorge one half of his base salary for 2001, plus interest, as proceeds from the securities law violations. That was the last full year of CEG's operations and of these defendants' employment. But for the securities violations, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecurities market. This function is performed under Sections 11 and 11B of the Act. Section 11B was introduced by Parliament to enable SEBI to issue directions if it was necessary in the interests of investors or orderly development of the securities market. The scope of powers under Sections 11 and 11B has been considerably widened through various amendments issued from time to time. The amendments made indicates the legislative intent, namely to arm SEBI with such powers so as to enable SEBI to effectively exercise power and achieve the objects of the Act and to take preventive measure so as to protect the investors and to promote the securities market. 201. Disgorgement is not a punishment but only an equitable remedy to prevent a wrongdoer from unjustly enriching himself as a result of his wrongful acts. As stated earlier, disgorgement should be the amount equivalent to the wrongful gain made or loss averted by such contravention. 202. In the light of the aforesaid, we have already held that the inequitable distribution of IPs had nothing to do with the TBT architecture. The dissemination of information/data from the PDC center to the POP Receiver and thereafter to the Port we ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s holding that no fraud was committed by NSE or its employees. We, therefore, find that the activity of NSE was not in contravention of any provisions of the SEBI Act or the Regulations or circulars made therein and it is only a case of non-adherence of a circular to some extent. No doubt that SCRA Act was framed with the object of preventing undesirable transactions in securities. The Act requires all contracts in securities to be dealt only on a recognized stock exchange. A larger responsibility was placed on the stock exchange to ensure that undesirable transactions do not take place. In the instant case, the information disseminated from the TBT architecture was accessible to everyone through a transparent mode which was equal, unrestricted and gave fair access. The lapse on the part of NSE is not ensuring equitable distribution of IPs can only invite a penalty or a direction under Section 11 and 11B but under no circumstances a direction in the nature of disgorgement could be passed in the facts and circumstance of the present case. In our view, the direction to disgorge an amount was totally unwarranted. 208. In view of the aforesaid, it is not necessary for us to go into th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tly, are not responsible for the alleged violations. 211. The WTM found that Mr. Ravi Narain and Ms. Chitra Ramkrishna were holding the position of MD and CEO during the relevant point of time and having held the senior most management position in NSE and, being in charge of the affairs of the conduct of the stock exchange business, could not abdicate their responsibility by citing limited knowledge on technology issues. The WTM held that being vested with general and overall responsibility of ensuring the implementation of the principle of equal, fair and transparent access, as mandated under Regulation 41 of the SECC Regulations Mr. Ravi Narain and Ms. Chitra Ramkrishna being the MDs during the relevant period are liable for breach of the provisions of the SECC Regulations. The WTM consequently directed Mr. Ravi Narain to disgorge 25% of the salary drawn for the financial years 2010-2011, 2012-13 and prohibited Mr. Ravi Narain from associating with any listed company or a market infrastructure institution or any other market intermediary for a period of five years. The WTM further directed Ms. Chitra Ramkrishna to disgorge 25% of the salary drawn for the financial year 2013-14 p ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... we find that these noticees have given detailed reasons justifying the choice of the TBT architecture. We also find that these two noticees have been expressly exonerated of the charges leveled against them with regard to the choice of the TBT architecture and facilitating fraud and manipulation by OPG, etc. 216. At the same time, we cannot ignore the fact that Mr. Ravi Narain and Ms. Chitra Ramkrishna being the MD and CEO of the stock exchange at the relevant movement of time cannot abdicate their responsibility by citing limited knowledge in certain spheres of the business activities. In the changing scenario in the corporate world the functions are delegated to professionals who become responsible for their acts and conduct. While functions may be delegated, duty of care, due diligence, verification by the top management cannot be abdicated. The MD and CEO are responsible for the day to day affairs in the running of the exchange and cannot pass on the responsibility of non-implementation of the load balancer or non-monitoring of the secondary server. The responsibility at the end of the day falls squarely upon the MD and CEO. The implementation of the Colocation technology was ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... licable. 220. Now we take the appeal of OPG. The charge against OPG and its Directors are as under: i. First Connect/Early Login to POP Servers - OPG was alleged to have consistently logged in first across POP Servers as it was aware of the weakness of the TCP/IP TBT System architecture and the advantage of having first login across various POP Servers in terms of trades. OPG was also alleged to have designed its trading software in such a way that it could manage to connect first on the POP Servers and gain advantage. ii. Crowding out other market participants - OPG was assigned multiple TBT IPs to single Ports of certain POP Servers which enabled it to consistently be 1st, 2nd, 3rd and even 4th connection to the POP Servers. Thus, it tried to crowd out other TMs from the TBT platform. iii. Connection to Secondary/Fall-back Server for TBT data - Since TMs were permitted to Secondary POP Server only in case of disconnections to primary POP Server, the load on Secondary POP Server was generally very low. Therefore, OPG, by connecting to Secondary POP Server almost on a daily basis without valid reasons, gained unfair advantage over other TMs. iv. Connivance/Collusion with N ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... lysis of the evidence also came to a conclusion that advantage accruing to the first connect would not continue throughout the day and depending upon the load factor in front of each Port, it may get diffused and diluted in the course of the trading day to a "probabilistic advantage". This conclusion was drawn considering that while it was possible to identify the POP server that logs in first to the PDC and the Sender Port of that POP Server which receives the data first, at the starting point of the trading day, the subsequent changes in dissemination sequence between the Ports or between the POP Servers cannot be ascertained because of the variance in the load factor at various Ports of different POP servers. This is on account of the fact that the data correlating the early login or first connect at each Port level was not available for the relevant period. The WTM therefore concluded that even though OPG consistently logged in to the POP server it did not gain any preferential access to TBT architecture and, consequently, decided issue No. 1 in favour of OPG holding that even though OPG logged in first across POP server it did not gain any advantage. 225. On issue No. 2, the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... OPG gained an unfair advantage and access by consistently logging into the secondary server for a large number of days, the show cause notice alleged as under: i. Based on the above events it is alleged that OPG displayed disregard to the norms laid by NSE and yet NSE continued to permit OPG to connect to the secondary server. The reluctance on the part of NSE to prevent OPG from accessing the secondary server ahead of others on continuous basis, allowed OPG to have free access to secondary server in order to gain undue advantage. It is alleged that such regularity of success by OPG would have been possible only with active connivance/collusion of NSE and OPG. ii. Since, stock brokers were permitted to access the secondary server only in case of disconnection to primary server, the load on the secondary server was generally very low. Therefore, by connecting to secondary server almost on a daily basis without valid reasons, it is alleged that OPG has gained unfair advantage over other stock brokers. Further, it is alleged that NSE was aware that OPG has been generally connecting to the secondary server, NSE did not take any steps nor took any action. It was therefore alleged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ted guidelines only advised the TMs to connect to the secondary server as against barring the same and, consequently, the only way to do so was by initiating a secondary server connection and staying connected to it. The learned senior counsel contended that there was no Regulation or norms in relation to usage of the secondary server and for reprimanding or punishing a TMs for accessing the secondary server and, consequently, cannot be charged for connecting to the secondary server. It was urged that NSE itself admitted that there was no restriction, regulation or conditions regarding the usage of connection of the secondary server and that NSE had left the usage of secondary server to the discretion of the TMs. It was contended that since the secondary server was always in active mode, the TMs were free to connect to the secondary servers at all times. It was urged that there was no violation of any norms for using the secondary server. 232. It was also urged that 67 out of 108 TMs were connected to the secondary server and only directions under Section 11 and 11B has been issued to OPG which is arbitrary and discriminatory. It was contended that during September to October, 201 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ows that the load on the secondary server was low and less crowded amongst all the POP servers. The contention of OPG is that business transacted from the secondary server was minimal is not supported by any evidence and, in any case, we refuse to believe this contention when we find that OPG was connected to secondary server 99% of the trading days in 2013 and 95% of the trading days in 2014 and 248 days in 2013 and 232 days in 2014 when OPG was only connected to the secondary server and was not connected to the primary servers on these days. It is therefore hard to believe that business conducted through secondary server was low. It was urged vehemently that OPG was facing disconnection issues from 2012 and there was a total of 35,817 disconnections from primary server on 357 days between 2012-2014 which led OPG to connect and use the secondary server. Such allegation has not been proved and some complaints made in this regard cannot be taken to be the gospel truth regarding disconnection on all these days as from the logs furnished by OPG itself one finds that OPG was connecting to the secondary POP server consistently from 7 a.m. to 7.05 a.m. which disproves the theory of OPG b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the secondary server. Since the delivery of the data can be done only to one recipient at a time OPG connections has to be looked from this aspect and in this background. 239. Admittedly, the circular dated 31st August, 2009 was not the only circular issued by NSE with regard to Colocation facilities. NSE also issued guidelines on 8th August, 2011 and 16th April, 2012 wherein TMs were advised to move to the secondary server in case of non-availability of data from the TBT primary source. Guidelines was clear that TMs were required to access the data from the primary POP server and the secondary POP server connection was to be utilized only when there was non-availability of data from the primary POP server. Emails were written to OPG inspite of which they continued to stay connected with the secondary server. We are of the opinion that OPG displayed complete disregard for the norms laid down by NSE in its circular/guidelines for moving to the secondary server such disregard for the norms and the manner in which OPG was connected to the secondary server amounted to an unfair trade practice which, in our opinion, is violative of Regulation 4(1) of the PFUTP Regulations. In this ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e for the period 2012 and 2013 which were the days when OPG had consistently logged in first. ISB in its report submitted that OPG made higher profits close to Rs.25 crores when they logged in early. Based on this ISB report, the show cause notice directed OPG to show cause as to why the profit of Rs.25 crores should not be disgorged. 245. The WTM after considering the material evidence held that the computation of profit made by ISB in its report is on the basis of early login by OPG. The WTM in paragraph 8.39 of the impugned order held that the computation based on analysis of first login cannot be adopted. In view of the finding given by the WTM in paragraph 8.13 that the first connect early login did not give any unfair advantage to OPG and that only a probabilistic advantage could be gained by TMs on account of early login on such POP servers, the WTM on the aforesaid basis held that the computation of unfair gains as made out in the show cause notice to the extent of first login made by OPG cannot be accepted or adopted. 246. The WTM, however, took into consideration table A11 and A15 of the ISB report and based on the calculations made in table XXI of the impugned order cam ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he WTM cannot be accepted. 253. Admittedly, seven reports of experts were considered while passing the impugned order. OPG submitted a report of another expert which is called the "Pasumarthy Report" which report was rejected by the WTM. OPG submitted that there are infirmities in the investigation carried out by SEBI and there are deficiencies in the report submitted by Deloitte, TAC, EY etc. The appellant contended that the Pasumarthy Report should be taken into consideration. 254. Upon a perusal of the Pasumarthy Report, we find that it deals with several allegations which has been dealt in the impugned order and has been dropped as highlighted in paragraph No. 8.13 and 8.15 of the impugned order. Further, the Pasumarthy Report does not dwell into the unauthorized connection by OPG to the secondary server. Further, in our view, the Pasumarthy Report does not submit its own finding. It only relies on the findings of earlier expert committee"s report. The Pasumarthy Report has not based its findings on independent research and, therefore, in our opinion the WTM rightly rejected the Pasumarthy Report. 255. Before we conclude, we must observe that when serious allegations were ma ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... any advantage with regard to dissemination of data. May be a probabilistic advantage is obtained by a TM on account of early login, but in the absence of any further evidence on this aspect, no adverse orders can be passed. We also hold that there was randomness in the dissemination of data in the TBT architecture and, therefore, there was no requirement to add a randomiser to the existing TBT architecture. 259. We, however, found that there was laxity at the hands of the employees of NSE in the distribution of IPs which resulted in unequal distribution of IPs on the servers. We have opined that a load balancer should have been employed which would have allocated IPs of TM evenly to the servers at the time of log in itself. The load balancer would equally distribute the load at every stage and would have ensured fairness, equality and transparency in the system which NSE was mandated to comply. The decision taken by NSE not to implement the load balancer does not appear to be a bonafide decision. 260. We also found that NSE failed to monitor the secondary server which led many TMs especially OPG to misuse it to their advantage. NSE failed to follow its own norms and guidelines f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the IPs. We also found that there was failure to monitor frequent connections to the secondary server by certain TMs. Even though NSE has not indulged in any unethical act or has unjustly enriched itself the direction to disgorge, in our opinion, cannot be sustained. However, NSE has not adhered to its own norms and guidelines and has not followed the circular. The SCRA Act confers a large responsibility upon the exchange to ensure that undesirable transactions do not take place. Being a first level regulator it has a front line responsibility for regulation of the market and has a mandate to ensure compliance by the TMs of its own norms, guidelines and circulars. NSE has a duty to ensure transparency and fair access to all the TMs. For lapses committed by NSE directions under Sections 11 and 11B could be passed and some of the directions of the WTM were rightly passed. However, the direction for disgorgement was unwarranted but the appellant NSE cannot be allowed go scot free and is required to pay a price for the lack of due diligence on account of human failure to comply with the circular in letter and spirit. Though there are no parameters to quantify the lapse committed by N ..... X X X X Extracts X X X X X X X X Extracts X X X X
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