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TMI Blog2023 (8) TMI 1388X X X X Extracts X X X X X X X X Extracts X X X X ..... Securities Pvt. Ltd. noticee nos. 12 - With regard to other noticees, a restraint order has been passed for different periods restraining the said noticees / appellants directly or indirectly from holding any position or being associated with any listed company. HELD THAT:- As on a reading of the provisions of Section 12A of the SEBI Act and Regulation 3 4 of PFUTP Regulations, it is apparently clear that the object of Section 12A PFUTP Regulations is to curb market manipulations . The manipulative and deceptive devices must be in relation to securities and must be by a person dealing in securities . The Supreme Court has enlarged the scope of fraud under the PFUTP Regulations to cover an action or omission even without deceit if such act or omission had the effect of inducing another person to deal in securities. Thus, inducement became more significant where fraud was required to be proved. The Supreme Court held that fraud can be inferred on a preponderance of probabilities. However, the inferential conclusion must be arrived at from proven and admitted facts. Further, fraud cannot be proved only on alleged negligence, as amounting to collusion and connivanc ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ing, namely profit obtained by illegal or unethical acts. It is a repayment of ill-gotten gains by the wrong doer. Disgorgement is also an equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not necessary that in each and every case there should be a direction to disgorge profits merely because the provisions of the Act or Regulations have been violated. Disgorgement should be ordered only where persons have made gains or averted loss/losses as a result of their illegal / unethical acts. The disgorgement can be of an amount equivalent to the amount earned or gain made or loss averted by such contravention. Before an order of disgorgement could be issued, the WTM has to arrive at a specific finding that NSE had made a wrongful gain. In the absence of any finding that NSE had made a wrongful gain, the question of disgorgement does not arise. In the instant case, the WTM in paragraph nos. 70.1 without giving any finding that NSE had made a wrongful gain through P2P connectivity deemed it proper to direct NSE to deposit a reasonable portion of the revenue earned through its colo facility which has nothing ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se of unfair trade practice or where fraud is proved. In the instant case, the above is lacking and debarring the noticee would be clearly punitive and violation of Article 19(1)(g) of the Constitution of India as it takes away the fundamental right to carry on its business.Thus, the direction to debar the appellant noticee nos. 3 cannot be sustained and is quashed. At best penalty could be imposed upon appellant noticee nos. 3. Mr. Ravi Varanasi (Noticee nos. 5), Mr. Nagendra Kumar SRVS (Noticee Nos. 6) and Mr. Deviprasad Singh (Noticee Nos. 7) - non-verification of Sampark s license and, therefore, there was lack of due diligence and negligence on their part - The direction that the appellants shall not hold any position either directly or indirectly or be associated directly or indirectly with any stock exchange, clearing corporation or depository or any intermediary registered with SEBI for a period of two years is harsh and excessive and cannot be sustained and is quashed. Such direction if implemented would lead to automatic termination of their services which can never be the intention of the Regulator. In addition to the aforesaid, the additional direction against Mr. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... . Rahul Gupta noticee nos. 15 - As already held that preferential treatment was not given by NSE to GKN nor latency advantage was given in the P2P connectivity. Further, inspite of knowing that Sampark did not have the requisite license, it does not point out to collusion between GKN and NSE and, therefore, the finding of preferential treatment, discrimination to others and collusion between NSE and GKN cannot be sustained and, to that extent, the charges cannot be sustained. In view of the aforesaid, the question of disgorgement of unlawful gains does not arise and for the reasons stated aforesaid, while considering the case of NSE, the direction to disgorge unlawful gain of Rs. 4.9 crore against GKN does not arise and cannot be sustained. However, the direction restraining the noticee from accepting new client for a period of one year and not to undertake any trades in its proprietary account for a period of two years is justified. Appropriate penalty, if any, can be imposed. Appeal is partly allowed. The direction to disgorge an amount of Rs. 62.58 crore alongwith interest cannot be sustained and to that extent the order is quashed. Other directions passed by the WTM unde ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... substantial increase in a turnover during April to August 2015. 3. Based on the said complaint, a Cross Functional Team (hereinafter referred to as CFT ) was constituted by SEBI. Based on the preliminary findings given by the CFT and thereafter on the basis of the recommendations given by the Technical Advisory Committee (hereinafter referred to as TAC ) of SEBI, an Expert Committee was constituted to further examine the allegations made in the complaints. The Expert Committee submitted a report which was accepted by the TAC. The recommendations of the TAC was communicated to NSE based on which Deloitte Touche Tohmatsu India LLP (hereinafter referred to as Deloitte ) was appointed to conduct a forensic investigation. 4. In this backdrop, a detailed investigation was undertaken by SEBI to find out possible violation pertaining to dark fibre connectivity provided by Sampark in connivance / collusion with employees of NSE, with the stockbrokers and the role of the stockbrokers who allegedly benefited from the preferential access to colo facility by way of P2P connectivity from an un-authorised service provider. 5. The investigation revealed various irregularities, based o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ommunications Ltd. (hereinafter referred to as Reliance ) were facilitated by NSE to regularize their irregular Sampark connectivity. 7. The show cause notice further alleged that the application received by NSE from Mansukh Securities and Finance Ltd. (hereinafter referred to as Mansukh ) and from Millenium Stock Broking Pvt. Ltd. (hereinafter referred to as Millenium ) were denied P2P connection through Sampark citing that Sampark was not an authorised vendor. On the other hand, the same kind of activity through Sampark was allowed to W2W and GKN and that Sampark was even allowed to provide services to W2W and GKN till September 2015 even after knowing that Sampark was an unauthorized service provider on July 28, 2015. Consequently, the allegation against NSE was of meting out preferential treatment to some stockbrokers which was unbecoming of the Market Infrastructure Institution. The show cause notice, thus, alleged that NSE failed to provide equal, unrestricted, transparent and fair access to all its TMs. 8. The appellants and other noticees filed their respective replies and raised various objections which were considered. The WTM after considering the submissions of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... choice, was effected in a non-transparent manner. 12. After considering the material evidence on record and after considering the submission of the party, the WTM held as under :- (i) that the mode of communication with brokers allowing the use of all telecom service providers for availing P2P connectivity was not communicated transparently. (ii) that NSE imparted preferential treatment of certain stock brokers in relation to P2P connectivity (W2W and GKN) and not to others (Millenium and Mansukh). (iii) NSE wrongly permitted Sampark to continue its connectivity to GKN and W2W. (iv) NSE had wrongly permitted Sampark to install a MUX at the NSE MMR, while denying the same opportunity to others (Microscan). (v) The cabling arrangement of W2W s leased line conferred on it a latency advantage. (vi) The eventual shift of W2W and GKN s Sampark line to Reliance was actively facilitated by NSE such that W2W and GKN s latency advantage remained intact. (vii) NSE adopted discriminatory policies on site inspections when authorizing P2P connectivity. 13. On the basis of the above, NSE was found guilty of the following :- (i) Violating Securities Contracts (Regulat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... certifying that the network architecture and connectivity at its Colo facility and its linkages to the trading infrastructure are in conformity with SEBI s regulatory norms to provide fair, equitable, transparent and non-discriminatory treatment to all the market intermediaries registered with the Noticee No. 1. Such report shall be submitted within 30 days after every six months (ending on June 30th and December 31st) for the next three years. First such report shall be filed for the six months ending on June 30, 2019, by July 31, 2019 based on the existing system and practices, pending compliances to directions issued at b) and c) above. e) NSE 1 is directed not to introduce any new derivative product for next six months from the date of this order. 15. Before proceeding to consider the charges levied against the appellants, it would be appropriate to place the background facts for a proper appreciation of the issues involved in the present appeals. 16. Before 2008, TMs used to place orders for trading through their terminals which were located at their offices. These orders would be transmitted to NSE trading system via fibre optic cables of service providers. The marke ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... erest of buyers and sellers in a particular security at any point of time). 22. On account of the growth of the Colo facility and an increase in its demand, in 2013, NSE reviewed the TBT architecture and planned the introduction of Multi-cast Tick-By-Tick (hereinafter referred to as MTBT ) because MTBT could handle higher volumes and users, more efficiently. 23. Thus, in keeping with the development of technology and the advancement of the market, NSE began upgrading its system architecture to MTBT in April 2014. The architecture was migrated from the TCP/IP-based TBT system architecture to the MTBT system, in a phased transition, and with effect from December 3, 2016 it had completely migrated to the MTBT architecture. 24. The very concept of a co-location facility was to provide latency advantage to brokers who paid and subscribed for the service. They were permitted to install their algo servers in the colo rack in NSE building itself, so that the algo trading servers would receive data faster and could instantly shoot out orders to the stock exchange trading system faster than brokers who were trading from their offices. If the P2P connection to the brokers office ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... aced in these racks would receive the live market data feed disseminated by the exchange, process the data, and accordingly place their orders to the exchange. P2P connectivity P2P relates to the point-to-point connectivity between two points provided by a telecom service provider whereby a leased line connects two designated points, namely, a) One end is the TMs rack at NSE colo; and b) The other end is a location designated by the TM, c) The B end point outside NSE premises. Dark fibre A dark fibre or unit fibre, with respect to network connectivity, refers to an already laid but unused / passive optical fibre, which is not connected to active electronics / equipments and do not have other data flowing through them and available for use in fibre-optic communication. DoT recognizes Dark Fibre as part of the telecommunication infrastructure and categorizes it as passive infrastructure or inactive elements of the telecom network. As per DoT, companies which have Infrastructure Provider Category I (IP-1) registration can provide assets such as Dark Fibres, etc. for the purpose ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... premises and algo trading. Amongst other things, TMs were required to note the following :- Members may take one or more leased line to the co-location facility from MTNL, TATA, Bharti or Reliance for the purpose of setting up or modifying parameters, trading related activities and hardware, software, network related access, software download / upload and monitoring and data downloads. 32. Subsequently, NSE issued a notification in October 2013. The relevant extracts is quoted hereunder :- Members may take one or more leased line to the Colo facility from different telecom service providers for the purpose of setting up or modifying parameters, trading related activities and hardware, software, network related access, software download / upload and monitoring and data downloads. 33. The aforesaid circular and notification was posted on the website of NSE. The charge against the appellant on this issue is, that NSE did not follow a uniform practice for bringing a change in its circular dated August 31, 2009. It was alleged that the circular dated August 31, 2009 should have been amended by another circular instead of a notification. The show cause notice alleged t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hange provided infrastructure. 3.4. ensure that the size of the co-located / proximity hosting space is sufficient to accommodate all the stock brokers and data vendors who are desirous of availing the facility. 3.5. provide the flexibility to avail rack space in the co-location / proximity hosting so as to meet the needs of all stock brokers desirous of availing such facility. 3.6. expeditiously decide on the request of the desirous stock brokers / data vendors for availing co-location / proximity hosting and communicate the decision within fifteen working days from the receipt of the request from the stock brokers / data vendors. In case of a rejection, stock exchanges shall also provide reasons in writing to the stock brokers / data vendors. 3.7. facilitate stock brokers to receive data feeds from other recognised stock exchanges at the co-location facilities and allow routing of orders to other recognised stock exchanges from the co-location facilities. 3.8. make available on their websites description of the co-location / proximity hosting, including requirements to be fulfilled by stock brokers / data vendors who avail the facility, details on fees / charges as ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a perusal of their statements, it is apparently clear that there was no mention of the fact that they were unaware of the notification of 2013. 39. We find that SEBI circular dated May 13, 2015 expressly provides that the stock exchange must make available on their website the proximity of co-location facility and the requirements to be made by brokers and data vendors availing colo facility. The circular as well as the notification of 2013 was admittedly posted on NSE website. There is no requirement that circular / notification are required to be sent physically to the TMs. Therefore, it is for the TMs to access NSE website and acquaint themselves of the circular and notification. Further, the circular of 2015 is prospective in nature and cannot apply retrospectively to a notification which was issued in 2013. 40. We are of the opinion that the notification of 2013 merely widens the pool of vendors which the TMs could avail their services. Regulation 41(2) of the SECC Regulations required a stock exchange to provide equal, fair, transparent and unrestricted access to all persons without any bias towards its associates and related entities. There is no allegation that the 2 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... feasible. Around July 15, 2015, NSE gave approval to Millennium to commence pilot testing of the fibre optic link. In the meanwhile, NSE started getting more requests for similar P2P connectivity from other TMs. NSE started exploring to deploy a MUX in the NSE MMR. Sampark sought permission on June 25, 2015 to host common infrastructure to provide connectivity to multiple TMs, based on which, permission was given to Sampark on July 17, 2015 to commence work of installing a common MUX in the NSE MMR. 44. At this stage, NSE, on July 22, 2015 sought in writing a copy of Sampark s DoT licenses which was supplied by Sampark on July 27, 2015. It was at this stage that NSE realised and discovered that Sampark had an Infrastructure Provider - 1 license (IP-1) which only allowed Sampark to install the P2P connectivity to other telecom service providers but was not authorised to provide P2P connectivity directly to end-use customers, namely, the TMs. Consequently, on July 28, 2015, NSE directed Sampark not to provide any connectivity through its MUX to any other TM till further notice. 45. In the meanwhile, the TM Shastra Securities introduced Microscan who was another P2P service pro ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s IP license was discovered by NSE, NSE could have directed disconnection of its connectivity but chose not to make any disconnection and, on the other hand, sought to rectify the situation by informing Sampark that it should provide services to the license service providers of DoT. Sampark chose Reliance as it had previous business relationship and thereafter handed over the entire infrastructure to Reliance. Reliance thereafter provided P2P connectivity through the MUX installed in MMR to W2W, Mansukh and Millennium at the earliest opportune moment. This sequence of events does not indicate any preferential treatment to W2W or to GKN on one hand or discrimination to Mansukh or Millennium. 49. In this regard, we also find that NSE had immediately asked W2W to shift its P2P connectivity to any other service provider who was entitled to service the end-use customers and eventually Reliance provided P2P connectivity to W2W. 50. We are also of the opinion that NSE did not discriminate Millennium and Mansukh in relation to Sampark because at the relevant moment P2P connectivity could not be given to Millennium and Mansukh due to sheer lack of duct space and a process was adopted ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... h cannot be reconciled. If NSE had permitted Sampark to provide connections to Millennium and Mansukh after discovery of its licensing deficiencies, such an act could have been assailed as NSE perpetuating a wrong in the name of equality. Negative equality is no equality. This would not be setting a wrong right but would be perpetuating another wrong. 54. We find that NSE took a conscious and bonafide decision in not disconnecting the connectivity of W2W and GKN and further took remedial steps immediately to correct the irregularities which were rectified within a short span of 24 days. The procedure adopted by NSE has not been considered nor any cognizance has been taken by the WTM. Thus, without considering the aforesaid, the WTM has fallen in error in penalizing NSE in coming to a one sided conclusion that NSE ought not to have allowed continuation of Sampark connectivity without considering the cascading effect it could have had to that TM by stopping the P2P connectivity. The WTM has ignored various factors such as consideration of feasibility and practicality in exercise of choosing the service provider, addressing the problem of multiple cables being drawn through limited ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... dence on record establishes that NSE only gave a list of service providers to Sampark. In our view, the transitioning of the infrastructure from Sampark to Reliance follows all norms or fair and equitable access nor is the same fraudulent. We find that Sampark had itself volunteered to work with Reliance. Further Reliance had upgraded its infrastructure around the same time as Sampark was installing its MUX in the NSE MMR and, therefore, the same could have been a reason for Reliance to take over the infrastructure of Sampark. Thus, in our opinion, we do not find any shred of evidence to show that NSE was actively associated with and facilitated the process of transition from Sampark to Reliance so that W2W and GKN could continue to enjoy connectivity of Sampark under the banner of Reliance without any loss to their latency advantage. 57. The impugned order alleges that NSE did not have any documented policy for verification of prospective service providers. The impugned order finds that NSE permitted an unauthorized service provider to provide P2P connectivity. The impugned order finds that it was NSE s duty to verify Sampark s license before permitting access to brokers from t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ot lie in the trading path of NSE as it was not directly connected to NSE s trading system. 62. It was contended that if TMs wanted to avail P2P connectivity, NSE merely facilitated the same by allowing the members (and/or their service providers) to enter the co-location facility to lay cables, and physically access the co-location data centre to set up such P2P connectivity. The non-prescriptive stance of NSE is evident from the following. (i) NSE did not and even today does not, regulate the type of infrastructure a TM wishes to install in the racks allocated to a TM. These are matters left to the commercial wisdom of the members. (ii) Choices of service provider, equipment specification, connection bandwidth and connection quality, etc. are left entirely to the choice and discretion of the member. The contract of P2P connectivity is entered into between the telecom service provider and the member. NSE is not a party to the contract, or privy to the commercial arrangement between the telecom service provider and the member; and (iii) TMs were free to avail of a P2P connection initially from a specified list of service providers in NSE colo as provided in the NSE circ ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ccordance with its circulars and notifications. In our opinion, verification was required for deployment of TMs infrastructure inside NSE premises. NSE has failed to regulate the infrastructure installed in member s infrastructure which was being done by an unauthorized vendor. 67. We are of the opinion that in this regard, NSE has failed to carry out due diligence in not verifying the license of Sampark. However, by not doing so, we do not find that there was a deliberate attempt on the part of NSE to play a fraud upon other TMs in order to give advantage to W2W and GKN. In fact, the investigation report finds that there was no undue benefit or advantages derived by W2W and GKN while availing Sampark s P2P connectivity. This fact was further confirmed by EY in its report. We are of the opinion that no fraud was played nor was there any violation of Regulations 3 and 4 of the PFUTP Regulations or violation of Regulation 41(2) of the SECC Regulations. 68. For the same reason, NSE could not allow Sampark to access the racks of the TMs in NSE s colo facility. Since Sampark did not have the requisite license, it could not allow an illegible vendor to install MUX in its MMS and al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... W2W gave advantage of a minimum latency as compared to other brokers. Further, the path of source cable which went from the W2W s rack in Sampark s MUX in MMR instead of going to the MUX first also gave connectivity benefit to W2W with lower latency. The WTM further found that Sampark had promised W2W that if they choose Sampark s P2P connectivity, it would give latency less than one milisecond, based on which, the WTM concluded that latency advantage was given to W2W. 71. Having heard the learned counsel for the parties on this issue, we are of the opinion that the installation of MUX by Sampark was totally unauthorized. We have dealt this issue in the earlier part of this judgment and we have found that there was lack of due diligence on the part of NSE in allowing an unauthorized vendor to make such connection and, therefore, it is not necessary to dwell on this aspect any further. 72. However, we find that the finding given by the WTM to the effect that NSE facilitated W2W in getting P2P connectivity through Sampark in order to give a latency advantage is patently erroneous and is based on surmises and conjunctures. It was alleged that the source cable for W2W s P2P conn ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... facilitated laying of cable for W2W by Sampark so as to provide latency advantage to W2W over other stockbrokers. This finding, in our opinion, is patently erroneous and based on surmises and conjunctures. Once a finding has been given that W2W was deliberately misled NSE, the question of NSE facilitating W2W or Sampark for the purpose of giving latency advantage to W2W does not arise. 75. The finding on latency advantage is based on the diagram given in the show cause notice as well as in the impugned order. In our opinion, the conclusion drawn that the cabling in the NSE colo rack was depicted in the diagram gave lower latency to W2W compared to other stockbrokers connected through Sampark s MUX in NSE MMR is based on no evidence. The investigation report of SEBI finds that W2W and GKN who availed Sampark s P2P connectivity between May 15, 2015 to September 2015 did not receive any undue benefit. The fact that through this connectivity directly from NSE colo rack to BSE colo rack resulted in increase of turnover of W2W cannot lead to a conclusion that W2W was given latency advantage and that marginal increase in turnover was attributed through Sampark s P2P connectivity. The ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... was not necessary to conduct another onsite inspection. Similarly, the site visit for GKN was not undertaken at the time as NSE was informed that the connection would terminate at the BSE Edge router. The explanation has been disregarded by the WTM and a finding of discrimination has been given solely on the ground that a site inspection was carried out for GRD Securities (hereinafter referred to as GRD ) and SMC Global Securities (hereinafter referred to as SMC ) before permitting the services of P2P connectivity. In this regard, we find that GRD and SMC were availing colo facilities for the first time and, therefore, a site inspection was carried out which, in our opinion, conformed to the NSE policy. Similarly, in the case of Millennium, the office address which was provided by them was identical to the address for GRD and, therefore, led to a doubt as to whether two TMs who had asked for two separate P2P connections had the same office. These were all the more reasons for NSE to carry a site inspection. 78. For the reasons stated aforesaid, the finding that in relation with W2W and GKN, NSE had waived its policy of site inspection and due diligence was not carried which le ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f live data ends at the colo rack of the TM. The P2P connectivity starts beyond this path and connects post-trade and pre-trade connectivity to the members premises. There is nothing to indicate that P2P connectivity has two live points in the trading system. b. P2P connectivity is not part of the infrastructure provided by NSE to its TMs which is admitted by the respondent. P2P connectivity is the infrastructure provided by third party service providers who are directly engaged by the TMs. The NSE has no involvement in the P2P connectivity being offered by third party service providers to the TMs. c. There is no finding that the P2P lines were used for transmission of market data from and to the NSE colo facility. In fact, the investigation report suggests otherwise. There is no material to support the contention raised by SEBI before us showing that P2P connectivity was used for transmission of live market data especially when SEBI concedes that the statement of the employees of NSE categorically stated that no trading occurred on P2P connectivity. d. The data that was transmitted to the P2P lines was, thus, not live trade orders but were post-trade data or pre-trade da ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... also found that there was no intentional negligence on the part of the NSE by waiving physical inspection of the office site of W2W. 84. Therefore, finding of collusion and / or fraud on the part of NSE in the given circumstances cannot be sustained. In this regard, the provisions of Section 12A(c) of the SEBI Act, Regulations 3(d) and 4(1) of the PFUTP Regulations and definition of fraud as defined under Regulation 2(c) of the PFUTP Regulations are extracted hereunder :- 12A(c). Engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person, in connection with the issue, dealing in securities which are listed or proposed to be listed on a recognised stock exchange, in contravention of the provisions of this Act or the rules or the regulations made thereunder. 3(d). Engage in any act, practice, course of business which operates or would operate as fraud or deceit upon any person in connection with any dealing in or issue of securities which are listed or proposed to be listed on a recognized stock exchange in contravention of the provisions of the Act or the rules and the regulations made thereunder. 4(1). With ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Regulation 2(c) of the PFUTP Regulations and includes such act which induces another person or his agent to deal in securities with his connivance. 86. In Securities and Exchange Board of India Vs. Pan Asia Advisors Limited and Another, [(2015) 14 SCC 71], the Supreme Court has set out the scope of Section 12A of the SEBI Act. The Supreme Court held :- 78. Section 12-A of the SEBI Act, 1992 creates a clear prohibition of manipulating and deceptive devices, insider trading and acquisition of securities. Sections 12-A(a), (b) and (c) are relevant, wherein, it is stipulated that no person should directly or indirectly indulge in such manipulative and deceptive devices either directly or indirectly in connection with the issue, purchase or sale of any securities, listed or proposed to be listed wherein manipulative or deceptive device or contravention of the Act, Rules or Regulations are made or employ any device or scheme or artifice to defraud in connection with any issue or dealing in securities or engage in any act, practice or course of business which would operate as fraud or deceit on any person in connection with any issue dealing with security which are prohibited. By ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns, apart from taking required penal action against those who are involved in any fraud being played in the creation of securities. 87. In N. Narayanan Vs. Securities and Exchange Board of India, [(2013) 12 SCC 152] the Supreme Court held :- 33. Prevention of market abuse and preservation of market integrity is the hallmark of securities law. Section 12-A read with Regulations 3 and 4 of the 2003 Regulations essentially intended to preserve market integrity and to prevent market abuse . The object of the SEBI Act is to protect the interest of investors in securities and to promote the development and to regulate the securities market, so as to promote orderly, healthy growth of securities market and to promote investors' protection. Securities market is based on free and open access to information, the integrity of the market is predicated on the quality and the manner on which it is made available to market. Market abuse impairs economic growth and erodes investor's confidence. Market abuse refers to the use of manipulative and deceptive devices, giving out incorrect or misleading information, so as to encourage investors to jump into conclusions, on wrong pre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and demand and thus undermines the integrity and efficiency of the market. 29. On a comparative analysis of the definition of fraud as existing in the 1995 Regulations and the subsequent amendments in the 2003 Regulations, it can be seen that the original definition of fraud under the FUTP Regulations, 1995 adopts the definition of fraud from the Contract Act, 1872 whereas the subsequent definition in the 2003 Regulations is a variation of the same and does not adopt the strict definition of fraud as present under the Contract Act. It includes many situations which may not be a fraud under the Contract Act or the 1995 Regulations, but nevertheless amounts to a fraud under the 2003 Regulations. 30. The definition of fraud under clause (c) of Regulation 2 has two parts; first part may be termed as catch all provision while the second part includes specific instances which are also included as part and parcel of term fraud . The ingredients of the first part of the definition are : 1. includes an act, expression, omission or concealment whether in a deceitful manner or not; 2. by a person or by any other person with his connivance or his agent while de ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , is arrived at, all these provisions get attracted in a situation like the one under consideration. We are not inclined to agree with the submission that SEBI should have identified as to which particular provision of the 2003 FUTP Regulations has been violated. A pigeon-hole approach may not be applicable in this case instant. 47. Accordingly, non-intermediary front-running may be brought under the prohibition prescribed under Regulations 3 and 4(1), for being fraudulent or unfair trade practice, provided that the ingredients under those heads are satisfied as discussed above. From the above analysis, it is clear that in order to establish charges against tippee, under Regulations 3(a), (b), (c) and (d) and 4(1) of the 2003 FUTP, one needs to prove that a person who had provided the tip was under a duty to keep the non-public information under confidence, further such breach of duty was known to the tippee and he still trades thereby defrauding the person, whose orders were front-runned, by inducing him to deal at the price he did. 54. The definition of fraud , which is an inclusive definition and, therefore, has to be understood to be broad and expansive, contemplates ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... islative intention is that every part of the statute should have effect. While interpreting a provision, the effort must always be made to find out the true intention behind the law. 91. From the aforesaid decisions and on a reading of the provisions of Section 12A of the SEBI Act and Regulation 3 4 of PFUTP Regulations, it is apparently clear that the object of Section 12A PFUTP Regulations is to curb market manipulations . The manipulative and deceptive devices must be in relation to securities and must be by a person dealing in securities . The Supreme Court has enlarged the scope of fraud under the PFUTP Regulations to cover an action or omission even without deceit if such act or omission had the effect of inducing another person to deal in securities. Thus, inducement became more significant where fraud was required to be proved. The Supreme Court held that fraud can be inferred on a preponderance of probabilities. However, the inferential conclusion must be arrived at from proven and admitted facts. 92. Further, fraud cannot be proved only on alleged negligence, as amounting to collusion and connivance. The Supreme Court in Kanaiyalal s case (supra) has c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sgorgement. The WTM has directed NSE to disgorge a sum of Rs. 62.58 crore alongwith interest at the rate of 12% p. a. from September 11, 2015 till the date of the actual payment. Other directions under Section 11 and 11B of the SEBI Act were also passed. Since we have already held that no violation was committed under Regulation 3 and 4 of the PFUTP Regulations and Section 12A of the SEBI Act, and we have also found that NSE has not violated Regulation 41(2) of the SECC Regulations, therefore, the question of disgorgement does not arise. 98. 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 a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ding 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 Broking Ltd. Vs. SEBI, [2008 SCC Online SAT 74], wherein this Tribunal held :- (5) Before we deal with the contentions of the parties, it is necessary to understand what disgorgement is. It is a common term in developed markets across the world though it is new to the securities market in India. Black's Law Dictionary defines disgorgement as The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion. In commercial terms, disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrongdoers by the courts. 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 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e made gains or averted loss/losses as a result of their illegal / unethical acts. 105. Thus, it becomes essential first to pin point a person and hold him guilty of making illegal gains and only thereafter direct him to disgorge the ill-gotten gains. Further, there must be a finding of ill-gotten gains by illgotten or unethical acts. 106. 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. Equitable direction under Sections 11 and 11B could be issued, but in our view there was no occasion to issue a direction for disgorgement. The direction for disgorgement is patently erroneous since we do not find any unethical act/acts on the part of NSE. 107. We are also of the opinion that the reasoning given by the WTM to disgorge a portion of the revenue earned by NSE through its colo facility is patently erroneous and against the provisions of the SEBI Act. 108. The disgorgement can be of an amount equivalent to the amount earned or gain made or loss ave ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... a for Telecom Service Providers, the norms to be observed by the Stock Brokers and other registered intermediaries. The said documented policy is directed to be issued to the market intermediaries under intimation to SEBI, within three months from the date of this order. d) NSE, is directed to submit to SEBI, a report duly certified by its MD and CEO and with the comments of its Governing Board certifying that the network architecture and connectivity at its Colo facility and its linkages to the trading infrastructure are in conformity with SEBI s regulatory norms to provide fair, equitable, transparent and non-discriminatory treatment to all the market intermediaries registered with the Noticee No. 1. Such report shall be submitted within 30 days after every six months (ending on June 30th and December 31st) for the next three years. First such report shall be filed for the six months ending on June 30, 2019, by July 31, 2019 based on the existing system and practices, pending compliances to directions issued at b) and c) above. e) NSE is directed not to introduce any new derivative product for next six months from the date of this order. 112. In view of the aforesaid, th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... day activities of their respective teams and consequently, the said appellant had no specific role in the matter of permitting members to select the ISP providers or permitting the service provider to set up any equipment in the NSE colo premises or from scrutinizing the eligibility of the service provider. It was stated that such action was required to be taken by the functional heads and these issues were never brought to her level. The appellant categorically contended that none of the functional heads responsible for the issues raised in the show cause notice had brought to the appellant s notice regarding the problem which they faced in the colo facility. The appellant also denied the charge of fraud. 115. The WTM held that since the appellant was functioning as a MD and CEO of NSE, she was in fact an executive head in-charge of day of day operations of the organization. Since the appellant was effectively functioning as a head of the frontline regulator in the securities market and the functional heads were reporting to her, the appellant cannot disassociate herself with the alleged violations to be on the strength that the functional heads are responsible for the alleged ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f due diligence and negligence in not verifying the license of Sampark. We have held that it was the duty of NSE to verify the license, since it was part of their policy. The contention of the appellant noticee nos. 3 that such alleged violation was never brought to her notice by the functional heads and, therefore, she cannot be made vicariously liable for their actions since she had no knowledge appears to be attractive but cannot be believed. It may be true that while permission was granted by the functional heads and its subordinate officers to W2W and GKN to install the P2P connectivity through Sampark which decision may not have been intimated to MD being a routine matter, nonetheless, we are of the opinion that when at some stage it was found by the concerned department that Sampark did not hold a valid license, such violation being serious and the measures taken thereafter must have been brought to the notice of the MD / CEO, namely, the appellant, noticee nos. 3. 120. Even though, the appellant noticee nos. 3 may not have any specific role in the matter of permitting members to select the service provider or to set up equipment in the NSE colo services, the fact that th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... from the directors any officer can also be penalized if his role can be attributed to be an officer in default. If any officer has played some role in bringing about the default or he might have performed the duties assigned to him then he could be penalized as an officer in default. Section 5(g) of the Companies Act thus makes it clear that in the absence of any managing director or any specific order of a board, then by a deeming fiction, all the directors of the company would be officers in default. 21. In this regard the Ministry of Corporate Affairs while initiating prosecution against the Directors under the Companies Act came across a lot of hurdles as to who was an officer in default and whether any Director could be prosecuted without there being evidence with regard to being responsible for the affairs of the Company. In this regard, the Ministry of Corporate Affairs issued a Master Circular dated 29th July, 2011 on prosecution of Directors and clarified that the prosecution should be filed primarily against the Managing Director and against such Directors who were in charge and responsible for the affairs of the Company. It was clarified that extra care should be ta ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tion debarring noticee nos. 3 for the alleged lapse could be remedial in nature. A remedial action is to correct a wrong or a defect. Preventive measure can be issued in a given case of unfair trade practice or where fraud is proved. In the instant case, the above is lacking and debarring the noticee would be clearly punitive and violation of Article 19(1)(g) of the Constitution of India as it takes away the fundamental right to carry on its business. 126. Thus, the direction to debar the appellant noticee nos. 3 cannot be sustained and is quashed. At best penalty could be imposed upon appellant noticee nos. 3. Mr. Ravi Varanasi (Noticee nos. 5), Mr. Nagendra Kumar SRVS (Noticee Nos. 6) and Mr. Deviprasad Singh (Noticee Nos. 7) 127. Common submissions have been made on behalf of these three employees of NSE and the same are being taken up together. 128. The impugned order inter-alia holds all the appellants guilty of violation of the PFUTP Regulations. Additionally, the appellant Mr. Ravi Varanasi has been held to have violated the Code of Ethics under the SECC Regulations and SEBI s Master Circular dated December 31, 2010. The main purported findings in the impugned ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... evelopment Team and thereafter the team used to pass such request to the concerned department of NSE for further processing. Therefore, the permission to lay the P2P lines to Sampark was not within his domain. Further, it was specifically stated that verifying license of Sampark was outside the scope of his role and responsibility. 132. Mr. Nagendra Kumar, noticee nos. 6 was the Head of the Membership Department and contended that as head of the department, he is not required to verify the license of the service provider and that he had no role to play regarding the verification of the license. The said appellant also contended that the request for all forms of connectivity to the exchange was first lodged with the Business Development Team of which he was a part of and thereafter such request was forwarded to the concerned department of NSE for further processing. Mr. Deviprasad Singh, noticee nos. 7 contended that P2P connectivity was part of the member s infrastructure and was not in violation of NSE policy. It was further contended that the violation committed by Sampark regarding its license was a matter between DoT and Sampark and that the fact that Sampark told NSE that t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... arly indicated that a TM could utilize the services of a license service provider of DoT and, therefore, whenever a TM came with a request seeking permission for getting the P2P connectivity through a service provider, it was the onerous task of the Business Development Team and the IT Operations to find as to whether the vendor had a valid license provided by DoT. In the instant case, we find that these appellants have no right to shrug of their responsibilities by saying that the P2P connectivity was being processed by the concerned department and not by their department. We further find that an evasive reply has been given by these appellants contending that it was not their role and responsibility to verify the license of the vendor. We find that Mr. Deviprasad Singh and Mr. Nagendra Kumar were fully involved in the process of granting permission to Sampark and should have verified the license of the vendor. Thus, two appellants were reporting to Mr. Ravi Varanasi who was the head of the Business Development Team and, therefore, Mr. Ravi Varanasi also cannot feign ignorance in the matter relating to granting permission to Sampark. We, therefore, find that the appellants are gui ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ate of 12% p. a. and further have been directed not to accept, induct or enroll any new client for a period of one year from the date of the order and that noticee nos. 8 would not undertake any trades on any stock exchange recognized by SEBI in its proprietary accounts for a period of two years. In so far as noticee nos. 9 is concerned, the WTM directed that he shall not hold any position either directly or indirectly or be associated directly or indirectly with any stock exchange, clearing corporation, depository for a period of two years. 138. In view of the findings given by us in the earlier paragraphs that there was no collusion between the broker W2W with the employees of NSE nor any fraud was played either by NSE employees or by the brokers, we are of the opinion that the charge of collusion / fraud under Regulations 3 and 4 of the PFUTP Regulations read with Section 12A of the SEBI Act cannot be sustained. 139. We have also held that no latency advantage was given to the brokers in the P2P connectivity and, therefore, there was no preferential treatment given to the noticee nos. 8 nor any discriminatory policy was followed by NSE official to other stockbrokers. 14 ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rietary account for a period of two years was appropriate. The direction against noticee nos. 9 Mr. Shashibhushan not to hold any position with any stock exchange, clearing member, etc. for a period of two years is harsh and inappropriate and cannot be sustained and is quashed. However, for the violation found by us, appropriate penalty could be imposed, if any. GKN Securities noticee nos. 12, Ms. Sonali Gupta noticee nos. 13, Mr. Om Prakash Gupta noticee nos. 14 and Mr. Rahul Gupta noticee nos. 15 143. The allegation against GKN is that they were direct beneficiary of preferential treatment by NSE since NSE allowed GKN to continue to use Sampark s connectivity even after knowing that Sampark did not have the requisite license to provide such connectivity. The WTM found that preferential treatment was given by NSE and such preferential treatment pointed towards collusion between GKN and NSE for giving benefit to GKN, since GKN continued to avail this service of Sampark in spite of Sampark not having the requisite license. The WTM accordingly directed GKN to disgorge an amount and issued other direction under Section 11 and 11B of the SEBI Act. 144. For the reasons given ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ore SEBI and such details of the escrow account would be submitted to SEBI from time to time. 148. Since we have set aside the unlawful gains, we direct SEBI to refund a sum of Rs. 62.58 crore along with interest accrued on it to the appellant within four weeks from today. We further vacate the direction given to the appellant for depositing the revenues emanating from colocation facility, etc. in an escrow account and the details to be submitted to SEBI from time to time. 149. In Appeal No. 337 of 2019 of Chitra Ramkrishna noticee nos. 3, the direction given by the WTM debarring Chitra Ramkrishna from holding any position for a period of three years is quashed. The appeal is partly allowed. Penalty, if any, could be imposed. 150. The direction given by the WTM against Mr. Ravi Varanasi, Mr. Nagendra Kumar and Mr. Devi Prasad Singh in Appeal Nos. 324 of 2019, 325 of 2019 and 323 of 2019 respectively restraining them from holding any position in any exchange, clearing corporation or depository for a period of two years cannot be sustained and is quashed. The appeals are partly allowed. Penalty, if any, can be imposed. 151. The direction given against Way2wealth Brokers ..... X X X X Extracts X X X X X X X X Extracts X X X X
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