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TMI Blog2019 (4) TMI 2135X X X X Extracts X X X X X X X X Extracts X X X X ..... mail correspondences and the overall conduct of NSE in the entire matter which helped an unauthorized service provider to access to their Colo facility to lay dark fibre connectivity on behalf of two trading members so was to provide them with higher speed and lower latency that would helped them in trading in securities in a more efficient and profitable manner, it leaves no doubt that the Noticee has actively supported and helped W2W and GKN to gain faster access to the market data feeds by means of a irregular connectivity which was certainly a major inducement for the two trading members to engage Sampark and to circumvent all policies and guidelines so as to achieve their goals. I am therefore of the view that the actions and conducts of NSE appropriately fall into the inclusive definition of fraud under Regulation 2 (1) (c) of PFUTP Regulations, 2003. As a logical corollary to the aforesaid observation, I am of the opinion that NSE has conducted its business in a manner which involved unfair trade practice and also amounted to commission of deceit on its trading members who were discriminated against because of the fraudulent acts committed by it in allowing its own policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... way Colo facility has been mis-managed and manipulated by certain trading members with the active connivance of an unauthorized service provider and the officials of NSE, as evident from the discussions and observations made by me in the earlier paragraphs of this order, shows NSE's apathy towards the principle of transparency, fairness and equity mandated by SEBI on them. Under the circumstances, the irregular acts, absence of due diligence, misrepresentation and false statements that have come to notice in this entire narrative of P2P connectivity involving Sampark have put a question mark on the corporate ethos and credibility of the exchange trading system. Such collusive irregularities cannot be allowed to be passed off as mere technical irregularities as has been postulated by NSE, W2W, GKN and other individual Noticees in their submissions. The roles played by all the Noticees as highlighted above have cumulatively resulted into not only a fraud on the trading platform of a recognised leading stock exchange but also have upset the very foundation of a securities market institution that is built upon faith and confidence of the investing public at large. With respe ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ensure equal, unrestricted, transparent and fair access to all stock brokers and has thus violated regulation 41 of the SECC Regulations, 2012. (ii) Noticee no. 3, 4 5, by committing aforesaid acts, being key management personnel of a recognised stock exchange, have failed to abide by the Code of Ethics specified under Part B of Schedule II of SECC Regulations, 2012. (iii) Noticee no. 3, by committing aforesaid acts, has also failed to abide by Code of Conduct specified under Part A of Schedule II of SECC Regulations, 2012. (iv) Noticee no. 8 and 12, by indulging in the acts as narrated above, have violated the Code of Conduct for Stock Brokers, as provided under Schedule II of Stock Broker Regulations. SECC Regulations, 2012 has been repealed by Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (hereinafter referred to as SECC Regulations, 2018 ). In terms of regulation 52(2) of SECC Regulations, 2018, notwithstanding such repeal, anything done or any action taken or purported to have been taken or contemplated under the repealed regulations and circulars before the commencement of these regulations shall be deemed to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 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) The Noticee no. 1 is directed not to introduce any new derivative product for next six months from the date of this order. Chitra Ramakrishna (Noticee No.3) f) Noticee No. 3 is directed that she shall not hold any position either directly or indirectly in the management and/or the Board of or be associated, directly or indirectly, with any Stock Exchange, Clearing Corporation, Depository recognized or registered by SEBI and/or any intermediary registered with SEBI or any of their related entities, for a period of 3 years. Further, Noticee No. 3 shall also not hold any position either directly o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tice No. 8 is hereby directed not to accept / induct / enroll any new client for a period of 1 year from the date of this order. Further, Noticee No.8 shall not undertake any trades on any stock exchange recognized by SEBI on proprietary account for a period of 2 years. Shashibhusan, CEO of Way2Weath (Noticee No.9) m) Noticee No. 9 shall not hold any position, either directly or indirectly, in or be associated, directly or indirectly, with any Stock Exchange, Clearing Corporation, Depository recognized or registered by SEBI and/or in any intermediary registered with SEBI or any of their related entities, for a period of 2 years. GKN Securities, (Noticee No.12) n) Noticee no. 12 is directed to deposit a sum of Rs 4.9 Crores along with interest calculated at the rate of 12% p.a. from September 11, 2015 till the actual date of payment, to IPEF of SEBI within 45 days from the date of this order. o) Notice No. 12 is hereby directed not to accept / induct / enroll any new client for a period of 1 year from the date of this order. Further, Noticee No.12 shall not undertake any trades on any stock exchange recognized by SEBI on proprietary account for a period of 2 year. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... preliminary fact finding of the various irregularities alleged in these complaints. 2. Subsequently, another complaint dated October 03, 2015 was received which alleged inter alia that Way2Wealth Brokers Private Limited (hereinafter referred to as W2W ) was permitted to avail of Point to Point (hereinafter referred to as P2P ) dark fiber connectivity from Sampark Infotainment Private Limited (hereinafter referred to as Sampark ), a non-empanelled service provider and the P2P connectivity provided by Sampark conferred a latency advantage to W2W which resulted in substantial increase in its turnover during the period April-August, 2015. 3. Based upon the preliminary findings of CFT and the subsequent complaint dated October 03, 2015 received by SEBI and on the basis of recommendation of the Technical Advisory Committee of SEBI (hereinafter referred to as TAC ), an Expert Committee was constituted for further examination of the allegations made in the complaints. The Expert Committee submitted its report to SEBI on March 02, 2016. TAC accepted the report of the Expert Committee and recommended seeking reply of NSE on the findings of the Expert Committee. 4. The finding ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ularities and accordingly, Show Cause Notices (hereinafter referred to as SCNs ) dated July 03, 2018 were issued to 17 Noticees including NSE and its 6 employees, W2W and its CEO/ directors, GKN Securities (herein after referred to as GKN ) and its partners and Sampark and its CEO. 8. Briefly stated, the facts of the instant case that are germane to the allegations made in the SCNs served on various Noticees, revolve around the P2P connectivity installed by two brokers of NSE, viz: W2W and GKN between the Colo facility of NSE and the Colo center at BSE during the month of April-May 2015 by engaging an unauthorized service provider i.e. Sampark, in violation of NSE's own circular in which, NSE had authorized four specific Telecom Service Providers (hereinafter referred to as TSP ) from whom its brokers had been availing P2P connectivity from the year 2009 onwards. Sampark allegedly laid dark fiber connectivity for these brokers with the promise of more bandwidth and lower latency for their data transmission and continued the service even after it was found that Sampark did not possess the necessary license from the Department of Telecommunications (hereinafter referred to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , NSE Co-location allows stock brokers to take on rent specific racks designated for this purpose and co locate their servers and systems within the exchange premises, in order to have a low latency connection to the exchange. The servers and systems placed 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. NSE s infrastructure for co-location, therefore, consists of the dissemination architecture (including the primary dissemination centre, point-of presence servers and ports on the point-of-presence servers to which stock brokers are connected), and the colocation racks of individual stock brokers where the trading systems and equipment of the stock brokers was located. The primary objective of co-location services of NSE is to reduce latency for connectivity to the exchange s trading systems for Direct Market Access (DMA), Algo trading and Smart Order Routing (SOR). NSE has framed various rules and guidelines to monitor, screen and restrict access to the Colo facility, including physical access to the datacentre. Stock brokers are allowed physical access to their r ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s through the MUX installed by the network service providers. Colo Rack In the Colo facilities, the exchange provides rack space, called Colo rack, for keeping servers and other allied infrastructure. In the instant case, NSE leases the Colo rack space to the brokers availing Colo facilities on an annual fee basis. The brokers were provided one or more rack space in the Colo as per their request. Cross Connect Cross connect, connects broker's equipment at Colo to the MUX in the MMR. In the instant case, a cross connect was used to connect a broker's rack in colocation to the MMR. Edge Router An edge router is a specialized router residing at the edge or boundary of a network. This router provides the connectivity with external networks. In the instant case, the edge routers were used by BSE to provide P2P connectivity to the brokers between NSE and BSE. The fibre connections from NSE Colo can terminate at the BSE edge router, from which the brokers get connectivity to the rack in BSE Colo. Consideration of Issues 10. Before I proceed in t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ar dated August 31, 2009, were denied permission by NSE staff. While both the service providers did not have requisite DoT license. Lack of clear documented policy for conducting due diligence of services providers (a) by checking the license of service provider while allowing P2P connectivity; (b) by granting permission to Sampark to place infrastructure in NSE MMR without verifying Sampark s license. 1. Regulation 41 (2) of SECC Regulations, 2012. 2. Clause 3 of the SEBI Circular no. CIR/MRD/DP/07/2015 dated May 13, 2015. 3. Non-implementation of recommendation made by SMAC in its meeting dated November 11, 2011, as communicated to NSE by SEBI vide email dated November 28, 2011. NSE Millennium was unable to avail P2P connectivity of Sampark by installing MUX directly in its rack while other stock Regulation 41 (2) of SECC Regulations, 2012 and clause 3 of Entity name Nature of allegations/findings in brief Violations observed brokers (GKN and W2W) availed the same benefit. This was on account of flawed policy ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ock brokers connected to the Sampark MUX placed in NSE MMR. NSE issued the work permits through Sampark and the cabling was through NSE s MMR. The aforesaid arrangement could not have taken place without collusion of W2W, Sampark and staff of NSE. It was the responsibility of Colo Support team of NSE to monitor the cabling and ensure fair and equitable access to all its stock brokers. However, NSE failed to carry out the necessary due diligence and oversight, as warranted under their own Colo framework. Part B of Schedule II of SECC Regulations, 2012 and read with Regulation 26(2) of SECC Regulations, 2012 and SEBI Master Circular dated December 31, 2010. Regulation 3(d) 4(1) of PFUTP Regulations, 2003 read with Section 12A(c) of SEBI Act, 1992. Entity name Nature of allegations/findings in brief Violations observed As supervisor of Colo Support (supervisor of Deviprasad), it was his duty to incorporate checks and balances so that, incidents like cabling to Sampark s MUX through W2W rack are detected early. He failed to establish such procedures to prevent su ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s, 2012 read with Regulation 26(1) and 26(2) of SECC Regulations, 2012 and SEBI Master Circular dated December 31, 2010. Chitra Ramakrishna Millennium was unable to avail P2P connectivity of Sampark by installing MUX directly in its rack while other stock brokers (GKN and W2W) availed the same benefit. This was on account of flawed policy on the part of NSE, which allowed P2P connectivity to W2W and GKN by installing a MUX in their rack and denying the same to Millennium thereby following discriminatory policies. Part A B of Schedule II of SECC Regulations, 2012 read with Regulation 26(1) and 26(2) of SECC Regulations, 2012 and SEBI Master Circular dated December 31, 2010. Chitra Ramakrishna Non transparent mode of communication to stock brokers- An existing circular of NSE was modified by way of a change on Part A B of Schedule II of SECC Regulations, 2012 read with Entity name Nature of allegations/findings in brief Violations observed website hosting. W2W and GKN were al ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ark connectivity even after finding out that Sampark did not have requisite license. c) Conducting site inspection of offices of Millennium, GRD SMC for connectivity while not following the same procedure for W2W and GKN. Regulation 3(d) and 4(1) of PFUTP Regulations, 2003 read with section 12A(c) of SEBI Act, 1992; and Part B of Schedule II of SECC Regulations, 2012 read with Regulation 26(2) of SECC Regulations, 2012 read with SEBI Master Circular dated December 31, 2010. Subramanian Anand Non transparent mode of communication to stock brokers- An existing circular of NSE was modified by way of a change on website hosting. W2W and GKN were allowed to establish P2P connectivity through Sampark while many stock brokers (e.g. Mansukh Securities, Shaastra Securities) who desired to lay P2P connectivity through Part B of Schedule II of SECC Regulations, 2012 read with Regulation 26(2) of SECC Regulations, 2012 read with SEBI Master Circular dated December 31, 2010. Entity name Nature of allegations/findings in brief Violations observed ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... park s license. December 31, 2010. Ravi Varanasi Decided to allow W2W and GKN to continue to avail Sampark connection even after finding out that Sampark did not have the requisite license to provide P2P connectivity. No site visit for W2W and GKN was conducted while in case of Millennium, NSE conducted site visit. The above approach points towards differential treatment meted out to stock brokers by NSE. Nagendra and Ravi Varanasi were responsible for the differential treatment. Regulation 3(d) 4(1) of PFUTP Regulations, 2003 read with Section 12A(c) of SEBI Act, 1992. Part B of Schedule II of SECC Regulations, 2012 read with Regulation 26(2) of SECC Regulations, 2012 and SEBI Master Circular dated December 31, 2010. Ravi Varanasi Millennium was unable to avail P2P connectivity of Sampark by installing MUX Part B of Schedule II of SECC Regulations, Entity name Nature of allegations/findings in brief Violations observed directly in its rack while other st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ce without collusion of W2W, Sampark and staff of NSE It was the responsibility of Colo Support team of NSE to monitor the cabling and ensure fair and equitable access to all its stock brokers. However, NSE failed to carry out the necessary due diligence and oversight, as warranted under their own Colo framework W2W (Noticee No. 8) W2W was direct beneficiary of preferential treatment by NSE, since NSE allowed W2W to continue to use the Sampark line even after knowing that Sampark did not have the requisite licenses to provide such Clauses A(1), A (2), A (3) and A (5) of Code of Conduct specified in Schedule II read with Regulation 9 of SEBI Entity name Nature of allegations/findings in brief Violations observed connectivity. The above conduct of NSE W2W points towards collusion between W2W and NSE to provide benefit to W2W. W2W continued to avail the services of Sampark till September 9, 2015, in spite of knowing that Sampark did not have the requisite license. Sampark s connectivity at NSE to other stock br ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... B G Srinath, Director of W2W (Noticee No.11) W2W was direct beneficiary of preferential treatment by NSE, since NSE allowed W2W to continue to use the Sampark line even after knowing that Sampark did not have the requisite licenses to provide such connectivity. The above conduct of NSE W2W points towards collusion between Regulation 3(d) 4(1) of PFUTP Regulations, 2003 read with Section 12A(c) of SEBI Act, 1992. Entity name Nature of allegations/findings in brief Violations observed W2W and NSE to provide benefit to W2W. W2W continued to avail the services of Sampark till September 9, 2015, in spite of knowing that Sampark did not have the requisite license. W2W through Sampark arranged the cabling in the Colo rack such that W2W had the lower latency compared to other stock brokers connected to the Sampark MUX placed in NSE MMR. GKN (Noticee no.12) GKN was direct beneficiary of preferential treatment by NSE, since NSE allowed GKN to continue to use the Sampark line ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... BI Act, 1992. Sampark (Noticee No. 16) Sampark acted in collusion with W2W and NSE to lay the cabling in such a way that W2W had lower latency compared to other stock brokers connected to the Sampark MUX placed in NSE MMR. Regulation 3(d) read with 4(1) of PFUTP Regulations, 2003 read with Section 12A(c) of SEBI Act, 1992. Prashanth D souza Sampark acted in collusion with W2W and NSE to lay the cabling in such a way that W2W had lower latency compared to other Regulation 3(d) read with 4(1) of PFUTP Regulations, 2003 read Entity name Nature of allegations/findings in brief Violations observed (Noticee No. 17) stock brokers connected to the Sampark MUX placed in NSE MMR. with Section 12A(c) of SEBI Act, 1992. 11. A close scrutiny of the violations that have been alleged against different Noticees highlighted in the above table shows that the Noticees are primarily alleged to have violated certain directives/instructions contained in the SE ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the SEBI Circular No. CIR/MRD/DP/07/2015 dated May 13, 2015 In order to ensure fair and equitable access to the Colo facility, stock exchanges shall: 3.1. provide Colo / proximity hosting in a fair, transparent and equitable manner. 3.2. ensure that all participants who avail Colo / proximity hosting facility have 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 Colo / proximity hosting experience similar latency with respect to exchange provided infrastructure. 3.4. ensure that the size of the Colo / 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 Colo / proximity hosting so as to meet the needs of all stock brokers desirous of availing such facility Regulation 26(1) and 26 (2) of SECC Regulations, 2012 and SEBI Master Circular dated December 31, 2010. Regulation 26(1) 26(2) of SECC Regulations, 2012: Code of Conduct for directors and key management personnel. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... by Sampark at NSE's Colo facility on behalf of W2W GKN. These supporting documents which have been used as evidences in the SCN predominantly comprise email correspondences exchanged between employees of W2W, Sampark, GKN and NSE officials and also internal emails exchanged by officials of W2W. These emails are contemporaneous in nature and have been primarily exchanged/addressed by the officials of NSE and W2W in due course of their transactions with each other and with Sampark. The SCNs also rely upon various statements recorded mainly of different officials of NSE, officials of W2W and Sampark before the investigating authorities of SEBI. I note that some of the emails and statements referred to in the SCNs have significant implications in terms of their evidentiary value relating to the allegations made in the SCN. 14. Since, the email correspondences of different dates are integral part of the entire factual narratives of the case, at this point, I consider it appropriate to highlight hereunder, the important chronological events that led to installation of dark fibers by Sampark to provide P2P connectivity to W2W GKN and also the events post establishment of P2P co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... eir office in BSE 24 June, 2015 Ms. Prachee Shinde from NSE asks Millennium to provide Undertaking, network diagram and leave license agreement, electricity bill and maintenance bill, for their B end address 24 June, 2015 Mr. K K Daga of Millennium provides the network diagram and undertaking with Sampark name on the same date. June 25, 2015 Sampark/Tekzi officials (including Prashanth Dsouza) meet NSE officials, Mr. Nagendra and Mr. Deviprasad Singh. During the said meeting, discussions were around installations of Sampark s MUX (from where connectivity is redistributed to stock brokers) in NSE MMR were held July 06, 2015 Millennium issues a Purchase Order to Sampark for 1 (One) 1gb Managed Network Service between NSE Colo Data Centre and its office at PJ Tower BSE. July 07, 2015 Ms. Rima of W2W writes an email to Mr. Shashibhushan of W2W stating that they are not in compliance with the B end address provided to NSE and they have a direct connectivity to BSE Colo asking Shashibhushan to take ac ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ver phone that NSE is not allowing them to work July 20, 2015 James Dsouza of Sampark sends an email to Mr. Deviprasad Singh, Mr. Nagendra and Mr. Avadhut of NSE inter alia informing that they have successfully terminated their optical fiber cable at all 3 Racks along with MUX and Fibre Switches. All three MUXs have independent fibre inputs. He requests to change the names on the racks as Tekzi India since they do Enterprise business on Tekzi India Brand. July 21, 2015 James D'Souza informs Mr. Deviprasad Singh, Mr. Nagendra and Mr. Avadhut through email that W2W is shifted on Saturday and GKN will be shifted once they get the confirmation regarding the new set up. Mr. James D Souza informs that they have received orders from GRD and Millennium and if NSE approves they can start their services also together as it's only one hour work to connect new customers. Mr. Nagendra advises James D'Souza through email that the said stock brokers should approach their teams and standard procedure will be followed for each of the cases July 22, 2015 Millennium sends a ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k brokers are still working on the low latency circuit and Millennium is losing lots of business. He requested Mr. Nagendra to find out some solution to this issue immediately. July 30, 2015 in reply to the above WhatsApp message, Mr. Nagendra sends a WhatsApp message to Mr. K K Daga of Millennium stating that all are at par now. July 30, 2015 In reply to the above WhatsApp message, Mr. K K Daga of Millennium sends a WhatsApp message to Nagendra asking whether at par means no other member is on Sampark circuit as on date. Millennium did not get any reply to this message. August 01, 2015 PO raised by Millennium on Reliance mentioning link needs to be provisioned by Sampark Estate Pvt Ltd in the terms and conditions August 03, 2015 Mr. K K Daga of Millennium writes an email to Mr. Nagendra and Ms. Prachee of NSE stating that Reliance is their telecom vendor for the P2P connectivity between NSE-BSE. August 12, 2015 Mr. Nagendra writes to Mr. Mohit of W2W to change their fibre vendor from ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to Reliance by end of next week. W2W issues Letter dated August 18 2015 to Sampark on Termination of Managed network services. August 19, 2015 Reliance informs NSE that Sampark s has handed over its infrastructure to Reliance and the leased line services through the said infrastructure of Sampark would be provided by Reliance from August 21, 2015. Reliance sends commercial proposal to W2W. August 19, 2015 Mr. K K Daga of Millennium sends a work permit to NSE for fibre cabling and installation from Sampark MUX to their rack by Reliance. August 19, 2015 Ms. Nagendra replies to K K Daga of Millennium asking for a revised work permit as they do not recognize Sampark MUX. August 19, 2015 Millennium re-applies to NSE for work permit to which NSE advises to wait for Reliance and Sampark to confirm that the MUX belongs to Reliance August 21, 2015 GKN raises a purchase order dated August 21, 2015 on Reliance for P2P connectivity between NSE and PJ Towers (BSE) ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... March 18, 2019 8. Way2Wealth Brokers Private Limited February 01, 2019 March 19, 2019 9. Mr. M R Shashibhushan, CEO of W2W February 04, 2019 March 19, 2019 10. Mr. C K Nithyanand, Director of W2W February 01, 2019 No written submissions filed 11. Mr. B G Srinath, Director of W2W February 01, 2019 No written submissions filed 12. GKN Securities No reply March 20, 2019 13. Ms. Sonali Gupta, Partner of GKN Securities No reply April 05, 2019 14. Mr. Om Prakash Gupta, Partner of GKN Securities No reply April 05, 2019 15. Mr. Rahul Gupta, Partner of GKN Securities No reply April 05, 2019 16. Sampark Infotainment Pr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Noticees. b) No Specific Measures Contemplated In The SCN: An objection raised by NSE and some other Noticees is that the SCN of SEBI is silent on the specific measures that are contemplated against the Noticees. In this case the SCN has called upon the Noticee No.1(NSE) to show cause as to why 'suitable directions' should not be issue against them under section 11(1), 11(2)(a), 11(2)(j), 11(4) and 11B of SEBI Act, 1992 read with Section 12A of SCR Act, 1956 and Regulation 41 of SECC Regulations, 2012. Similarly, other Noticees have also been called upon to show cause as to why 'suitable directions' should not be issued against them under specific provisions of Section 11 and 11B of SEBI Act, 1992 and Section 12A of SCR Act, 1956 as specifically stated against the respective Noticees at para-63 of the SCN. According to the Noticees, the principles of natural justice demand that SEBI should have stated the specific measures that are contemplated against the Noticees so that the Noticees are in a position to present their case on the suitability of the directions/measures proposed. The Noticees have relied upon the order of the Supreme Court in the case of Gorkha ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e, the SCNs issued to the Noticees have spelt out the provisions under which the desired preventive/remedial measures would be issued. The SCNs also clearly indicates the specific nature of violations that have been alleged against the respective Noticees in terms of different regulations, circulars, code of conduct etc. which, if found to be breached, require issuance of possible directions under specific provisions as indicated in the SCNs. It is therefore incumbent on the part of the Noticees to explain their position with support of relevant evidence in response to various allegations made against them in the SCNs. Only after examining and considering the explanation offered by the Noticees to the allegations leveled under the SCNs, it would be imperative for the competent authority to determine as to if and what direction is required to be issued against the Noticees, depending on the extent of the gravity of violation committed by the Noticee. It is to be noted here that the provision of Section 11 and 11 B vest in the quasi-judicial authority a wide plenary power to issue wide ranging directions as it may deem fit, in the interest of securities market which cannot be predict ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on the premise that no further remedial action is warranted in the present case and the present proceedings will only result into penal direction. Whether any remedial action is warranted in the present case or not is to be adjudged on the examination of whole conspectus of facts of the case. The fact that NSE has taken certain measures either on its own motion or under instruction from SEBI does not vitiate the pursuance of present proceedings. d) Inspection and Cross -Examination: Another objection raised by some of the Noticees is that they were not permitted to take inspection of all the documents including the documents pertaining to other Noticees, statement recorded from all the persons and have instead been granted inspection of limited documents relating to the issues raised in the SCNs. A few Noticees have also pointed out that they have not been given opportunities for cross examination of certain experts whose reports have been relied upon by SEBI. In this regard, I find that the objections raised by the Noticees are general in nature. From the records, I can observe that all the Noticees have been granted inspection of all the documents, records, investigation repo ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nition came for consideration of the Hon ble Supreme Court in SEBI Vs. Kanaiyalal Baldevbhai Patel (2017) 15 SCC 1, wherein Hon ble Supreme Court observed as under: 24 .The definition of dealing in securities acquires some importance as charge under regulation 3 completely depends on the aspect whether the tippee was dealing in securities in the first instant or not. For a transaction to be termed as dealing insecurities, following ingredients need to be satisfied- 1. Includes an act of buying, selling or subscribing pursuant to any issue of any security, or 2. Agreeing to buy, sell or subscribe to any issue of any security, or; 3. Otherwise transacting in any way in any security by any person as principal, agent or intermediary referred to in Section 12 of the Act. 25. The definition of dealing in securities is broad and inclusive in nature. Under the old regime the usage of term to mean has been changed to includes , which prima facie indicates that the definition is broad. Moreover, the inclusion of term otherwise transacting itself provides an internal evidence for being broadly worded so as to include situations such as the present one ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ny and would presume that the facts incorporated in the balance-sheet are true and correct. Considering the said aspect, even though the petitioners may not have direct association in the share market activities, yet the statutory duty regarding auditing the accounts of the Company and preparation of balance-sheets may have a direct bearing in connection with the interest of the investors and the stability of the securities market. In our view, the petitioners in their capacity as auditors of the Company Satyam, which was at one point of time considered to be a blue chip company who had a defining influence on the securities market, can be aid to be persons associated with the securities market within the meaning of the provisions of the said Act .. Applying the same analogy and logic as adopted in the aforesaid judgment to the facts of the present case, it can be stated that the Noticees (i.e. Sampark and its Director) in this case are persons who are associated with securities market since they have provided infrastructure support and telecom services for P2P connectivity with lower latency which was availed by the stock brokers for Algo trading, DMS or SOR while dealing i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 2010 and NSE Circular No. 736 dated on April 21, 2011 in connection with Colo facility. The Circular No. 712 referred to Circular No. 693 and inter alia, stated that the Circular is in continuation to NSE s earlier Circular No. 693. Further, the Circular No.736 also referred to both Circular No. 693 and Circular No. 712. The aforesaid provision regarding telecom vendors was reiterated in the NSE Circular No. 712 dated March 4, 2010 and NSE Circular No. 736 dated on April 21, 2011. 18.3 NSE, in October 2013 made modification (hereinafter referred to as 2013 modification) to the above provision by making the following change, 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. 18.4 The above modification was communicated to the stock brokers by posting the same on NSE website. 18.5 The above amendment made in 2013 did not provide any reference to the earlier requirement mentioned in its Circular dated August 31, 2009 Members may ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... llegation: 19.1 Changes made to existing Circulars which are regulatory in nature are communicated through another Circular. The amending circular would refer to the Circular being amended; 19.2 Where the amendments proposed are in relation to non-regulatory processes, procedures, facilities, functionalities, commercials etc., the changes are communicated by making changes to the Noticee's website; 19.3 The 2013 modification was a non-regulatory amendment. It enabled stock brokers to engage service providers of their choice for availing P2P connectivity. Since, it was an operational and a procedural matter, no Circular was issued; 19.4 NSE posted the 2013 modification on its website, which has also been confirmed by E Y; 19.5 SEBI issued a circular dated May 13, 2015 with the subject Colo/proximity hosting facility offered by stock exchanges , wherein in Paragraph 3.8, SEBI, inter alia, directed exchanges to make available on their websites description of the Colo/ proximity hosting, including requirements to be fulfilled by stock brokers/ data vendors who avail the facility, details on fees charges associated with the facility, etc ; 19.6 The Noticee s acti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... find that the aforementioned Circular of SEBI does not endorse the modus operandi of amending an existing provision of a circular by way of an amendment posted on the website, without any cross reference to the Circular which was being amended, as adopted by the NSE. On the contrary, the SEBI Circular mandates stock exchanges to provide Colo / proximity hosting in a fair, transparent and equitable manner. SEBI Circular also mandates stock exchanges to frame guidelines on access and conduct of the personnel of stock brokers / data vendors in the premises of the stock exchange, including in the co-located space. 20.3 The allegation that the amendment to a provision relating an important facet of Colo facility was not clearly communicated in a transparent manner is also evident from the fact that most of its stock brokers were not aware of the said amendment. This is clearly demonstrated by the statement dated July 04, 2017 of Ms. Rima Srivastava (CTO of W2W), wherein it was accepted that it was an oversight of the part of W2W to have applied for P2P connectivity through Sampark, as Sampark was not part of the list of TSP mentioned in the NSE circular dated August 31, 2009. 20. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... at NSE has treated W2W and GKN on a preferential and priority basis while granting them permission to establish P2P connectivity while similar requests from certain other brokers were not treated favorably. 21.2 W2W,vide an email dated April 06, 2015, submitted an application to NSE for a P2P connectivity through Sampark connectivity through a MUX to be placed in their rack at NSE Colo facility which was permitted by NSE on April 21, 2015. Similarly, GKN also requested for Sampark connectivity through a MUX in its rack in the Colo facility which was permitted by NSE on April 22, 2015. The MUX was installed directly in the racks of GKN and W2W at NSE Colo facility from which Sampark connectivity was provided to these two stock brokers. At the time of permitting Sampark to lay its dark fibre in Colo facility of NSE, neither NSE nor the stock brokers, i.e. W2W and GKN had checked the license of Sampark to find out if Sampark was, at all, eligible to provide such services. 21.3 It is noted that Sampark had IP-1 (Infrastructure Provide Category -I) license which enabled it to provide infrastructure to Internet Service Providers (hereinafter referred as ISPs ) and telecom service ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... change existing service providers and subsequently, on July 29, 2015, rejected the request for empanelment of Microscan citing no feasibility to lay extra cables in NSE ducts and also for the fact that Microscan lacked requisite DoT licenses. 21.7 In view of the above stated refusals to some Brokers' request to avail P2P connectivity through Sampark or other service provider, it is alleged in the SCN that NSE failed in ensuring equal and fair access to all its stock brokers and gave preferential treatment to Sampark and the two brokers i.e. W2W and GKN. 22. Submissions of NSE NSE has made the following submissions in response to the above allegations: 22.1 As noted in the 2009 NSE Circular, Colo services provided by the Noticee are on a best efforts basis . Therefore, considerations of fair and non-discriminatory access must necessarily be balanced with considerations of feasibility and practicality. 22.2 No trading member has a right to insist that Colo services including P2P connectivity are provided by a service provider of his choice and NSE would necessarily have the discretion to determine whether such a request is reasonable and practical. NSE s bona-f ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ermitting Sampark to deploy an MUX in the MMR. Sampark commenced installing the MUX in the Noticee's MMR between July 17, 2015 and July 19, 2015. 22.11 Sampark began transitioning its existing clients to the common MUX installed in the MMR. W2W therefore was provided connectivity through the MUX installed in the MMR on July 18, 2015. 22.12 When NSE sought the license of Sampark, it discovered that Sampark had an Infrastructure Provider- I (IP-1) license which did not allow it to render services directly to customers and it could provide infrastructure support services only to other telecom service providers. 22.13 No member other than W2W was connected to Sampark's MUX installed in the Noticee's MMR. 22.14 As Sampark lacked the requisite licenses to install a MUX in the MMR and it was not practical to provide connectivity directly to Mansukh and Millennium's racks at NSE Colo, their requests for P2P connectivity from Sampark was not acceded to by NSE and this cannot amount to either unfair or discriminatory treatment. 22.15 On the one hand, the 2018 SCN finds fault with the Noticee for allowing Sampark to render services to W2W and GKN in violation of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iming that the P2P connectivity availed by a broker which directly terminates at the Colo rack of the broker forms part of the trading member's infrastructure over which NSE does not have any control, while at the same time asserting that NSE would have the discretion to determine whether someone's request for P2P connectivity is reasonable. It is fact on record that from the inception of its Colo facility, NSE has issued its Circular dated August 31, 2009, which prescribed various terms and conditions for compliance by the brokers whoever desired to have connectivity to the NSE Colo. The Circular also provided a proforma application form for the brokers to fill in necessary particulars while applying for access to Colo facility. The said circular also allowed the stock brokers to avail lease line connectivity from the amongst the four empanelled telecom service providers. 23.3 It is also seen that NSE has prescribed Colo guidelines to guide the desirous stock brokers for compliance with various requisitions for the purpose of availing Colo facility. Therefore, it will be erroneous to say that NSE had a system of segregated policy with respect to its Colo facility, by wh ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the contention of NSE brokers had freedom to take direct connectivity to their own racks as per their own choice of service providers, it is assumed that NSE would have made provision for adequate duct space, so that the brokers could exercise their discretion. However, in this case it is noticed that immediately after allowing W2W and GKN to install direct connectivity to their racks, when similar requests were made by Millennium and Mansukh, they were promptly denied on the ground of lack of duct space. 23.6 NSE has not explained as to why stock brokers had to take NOC from it before engaging a service provider for installing connectivity directly to their Colo racks, if it was their policy not to interfere in the matter of stock broker's trading infrastructure. The fact that nobody could have got any access to the Colo facility where the brokers racks are located without prior approval of NSE proves that even for taking a connection directly to the stock brokers' rack, NSE approval was mandatory. The 2009 circular also states that physical access to the Colo datacenter would be available only with prior permission from NSE. 23.7 From the chronological events narrat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... iscriminatory policies. 23.9 It is not being advocated here that Noticee no. 1 should have allowed an unauthorized service provider to provide connectivity to any stock broker at all but having already entertained Sampark to provide connectivity to two (2) specific brokers and continuing them to avail the services of Sampark even after Sampark was found to be lacking the requisite license, it was certainly unfair on the part of NSE to deny the same connection to Millennium and also to Mansukh more so when Millennium has complained that it was losing business because of other brokers who were enjoying low latency due to Sampark connectivity. 23.10 Noticee no. 1 has argued that SEBI has not issued any directives about engaging service providers and it is NSE who had taken voluntary initiative to ensure that only such service providers who have been licensed by the sectoral regulators provides the services. By implication NSE seeks to express that it was their own Circular voluntarily issued and the violation of it should not call for any regulatory action. I find that this is an erroneous assumption on the part of Noticee no. 1. Noticee no. 1 is a stock exchange which has been ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... KN, arranging the cabling within its Colo facility to provide unfair advantage to W2W, etc. indicating fraudulent conduct on the part of NSE and its officials. I do not find any such concerns found in the investigation with respect to BSE Colo center. Therefore, it will be erroneous to suggest that the facts in the case of Noticee's Colo facility and the facts pertaining to BSE Colo center are comparable. Therefore, given the nature of allegations against the Noticee, I do not agree with the contention of the Noticee that the actions proposed against the Noticee are disproportionate. 23.12 The Noticee no. 1 contends that the SCN is self-contradictory. According to it, on the one hand, the SCN finds fault with allowing Sampark to render services to W2W and GKN while on the other hand, it alleges that Noticee has refused to permit Mansukh and Millennium to avail service from Sampark. In my view, the SCN is not self-contradictory and by pointing out the discriminatory approach exhibited by Noticee by favoring two stock brokers and disfavoring others, the SCN only emphasizes on the fact that the Noticee has not conducted its services in a fair and equitable manner and resorted t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ring its meeting dated 25th June 2015 that they had all the required licenses provided by DoT. Also, in subsequent follow ups on con calls on 10th July 2015, Sampark represented that they have licenses and would submit the same in due course. Sampark was allowed to install their infrastructure and subsequently email was sent to Sampark on 22nd July 2015 seeking his license. It is noted from the statements of Mr. Nagendra Kumar (Head of Membership Department - NSE) dated June 29, 2017 and Mr. Deviprasad Singh (Head of Colo support - NSE) dated July 14, 2017 that Noticee no. 1 had a practice of not verifying the license of a service provider in case the connection is to the rack of a stock broker. 24.5 Mr. Deviprasad Singh (Head of Colo support - NSE) has further stated in his statement dated March 01, 2018 that When a service provider applies to put his infrastructure in NSE Meet Me Room. The role performed by my team is to check the feasibility in terms of power, space and duct availability. Post feasibility, the DoT are validated. It is also possible that during Project Phase the service provider is allowed to install its infrastructure and parallely licenses are validated. F ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... or P2P connectivity were bona-fide, fair and reasonable. 25.3 The Noticee's policy of distinguishing between service providers providing: (a) P2P connectivity that terminates in the stock broker's rack and (b) P2P connectivity to multiple stock brokers by hosting a common infrastructure (MUX) in the Noticee's MMR, was therefore, fair, reasonable and logical. 25.4 In the cases of both W2W and GKN, as the stock brokers had requested for connections from Sampark terminating at MUX's located in their own racks, the Noticee followed a uniform approach and did not verify the license of Sampark (as the lines were for the sole use of the respective stock brokers, and did not relate to exchange infrastructure). 26. Consideration and Observations 26.1 The explanations offered by Noticee no. 1 do not give any rationale or justification for ignoring the crucial aspect with regard to granting permission to brokers availing P2P connectivity directly from their rack in NSE Colo. There is no doubt that Noticee no. 1 did not take care to verify the eligibility of Sampark when W2W and GKN introduced Sampark to Noticee no. 1 for the purpose of providing P2P connectivity ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uirement of making application for seeking permission for Sampark to lay the cabling, had given an undertaking that the P2P connection would be from their rack in Noticee no. 1 to its office at 213, PJ tower, BSE Building. This is because Noticee no. 1, as a matter of policy, did not allow its brokers to establish direct connectivity from its Colo facility to the BSE Colo center. The connectivity from NSE Colo had to be first terminated at the office of the Broker and then from the office, the connectivity was taken to BSE Colo. However, during the investigation, it was noted that the P2P connectivity of W2W was terminated directly at W2W rack in BSE Colo instead of terminating at their office at 213, PJ Tower, BSE Building in violation of Noticee no. 1's policy. On account of this arrangement, W2W had gained advantage of at least one lesser hop/switch which enabled W2W to reduce the latency in terms of the receipt of data flow from NSE Colo. 27.2 Further, it was observed during investigation that when Sampark had installed its MUX at MMR of NSE, it was installed in such a manner that the source cable was first connected to W2W s MUX and from thereon it went to other stock b ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to all its stock brokers. Further, Noticee no. 1 also failed to carry out the necessary due diligence, oversight and periodical supervision. It is alleged that such arrangements were made in collusion and connivance between Sampark, NSE and W2W. 27.7 During the course of investigation, it was also noted that BSE had outsourced its Colo operation and maintenance to Netmagic Solutions Private Limited (hereinafter referred to as Netmagic ). It is noted that, in respect of W2W connectivity, Mr. Madan Kumar Shinde (Netmagic personnel) in his statement dated February 6, 2018, stated that they had found only W2W cross connect to Sampark in the period 2014-2016 and that when a connectivity comes from stock broker's office at PJ Towers (BSE) to BSE Colo centre then there is no requirement of a cross connect between Netmagic MMR to customer rack at BSE Colo centre. 27.8 In this respect, it is further observed that in the email dated July 7, 2015 from Ms. Rima Srivastava (CTO, W2W) to Mr. Shashibhushan (CEO W2W) and Mr. Mohit Mutreja (Director, AlphaGrep), it was stated that As you are aware, the point to point leased circuits (TCL, Reliance, Sampark) were terminated directly t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... E that P2P connectivity would be terminating at their office at BSE whereas the same was terminated at their rack at BSE. Noticee no. 1 also, for reasons known to them, did not conduct site inspection and failed to verify the same. 27.12 As stated earlier, NSE had not conducted site inspection of W2W connectivity at BSE office. In this respect, Mr. Nagendra Kumar (Head of Membership Department - NSE) in his statement dated March 1, 2018, stated that, in case of P2P requests, they used to initiate site inspection and officers from the membership team used to visit stock broker s office at BSE office building, PJ towers if the stock broker s end point connectivity was with BSE office building. It was also stated that during 2014, based on the concerns raised by the Colo team that they were getting requests for termination at PJ Tower, it was decided to do a site-visit to ensure that the stock broker had an actual office space and that the line was not terminating at any rack space/BSE Colo. 27.13 However, in this respect, Ms. Rima Srivastav (CTO, W2W), Mr. Mohit Mutreja (Director, AlphaGrep) and Mr. Prashant Mittal (Director, AlphaGrep) in their statement dated March 9, 2018 st ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... installed its MUX at W2W's rack, it subsequently shifted the same MUX to the Noticee's MMR - consequently, there was no MUX at W2W's rack, and there was only a passive junction box with a fiber cable joint through which the fiber optic cable passed before reaching the MUX in the MMR. W2W was given connectivity through the MUX placed in the MMR (as any other stock broker would eventually have been). 29. Consideration and Observations 29.1 I don't find any force in the arguments advanced by NSE in response to the allegations about advantage of latency conferred on W2W. The allegations made above with the support of diagrammatic representation about the P2P connectivity availed by W2W, as made available to SEBI during investigation, clearly suggests that W2W had arranged its connectivity on both the ends (NSE Colo and BSE Colo) in a manner that it enjoys the advantage of minimum latency as compared to other brokers who were connected to Sampark fiber. The diagram is also supported by documentary evidence from the email addressed by Mr. Sudipta of W2W to his CTO stating that the source cable is passing through their rack in NSE to the Sampark MUX in (MMR) instea ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... indicates that such type of laying of cable was part of a pre planned arrangement as no service provider will lay cable in a manner deviating from the policy of the exchange without being in collusion with or without being instructed by the brokers (in this case W2W) or even the exchange who have allowed them to install the connectivity for the added latency advantage for the broker. Moreover, Mr. Madan Kumar Shinde of Netmagic (Managing BSE Colo) in statement dated February 6, 2018, has stated that 'when a connectivity comes from stock broker s office at PJ Towers (BSE) to BSE Colo centre then there is no requirement of a cross connect between Netmagic MMR to customer rack at BSE Colo centre.' This implies that there was no cross connect through which the connectivity of W2W had reached their rack in BSE Colo, thereby it was successful in avoiding any switch / hop for its connectivity to BSE Colo. It is further supported by W2W s own submission dated February 01, 2019 wherein it is admitted: a) At para 113 that on July 09, 2015, Noticee No.8 has installed a switch in their office at BSE building which resulted in the termination of the circuit at their office . ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Colo. In fact it is because of SEBI's circular of December 01, 2016 that the exchange had to allow direct connectivity between racks of same stock broker in Colo facilities at NSE and BSE. 29.6 The Noticee has also stated that W2W and Sampark had provided false undertaking to the Noticee with regard to the termination of P2P connectivity and at the same time it also states that nothing on record to positively demonstrate that W2W P2P connectivity indeed terminated at W2W rack in BSE Colo. In my view, the Noticee has to first put a question to itself as to why it did not conduct physical inspection of the office premises and connectivity at the BSE end before holding the stock broker responsible for misleading it. 29.7 In my view, on the face of such incontrovertible evidence as highlighted above, it can be concluded that the P2P connectivity established by Sampark provided preferential latency advantage to W2W at the cost of other stock brokers. 30. Allegation 5: Continuation of Sampark Connectivity by W2W and GKN 30.1 As stated earlier, GKN and W2W obtained Sampark connectivity by installing a MUX directly in their rack at NSE Colo. From the evidence on record, i ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... his statement dated March 1, 2018 stated, I did inform business team that Sampark was not authorised leased line service provider. However we did not take any decision to discontinue Sampark services. It would have been inappropriate for exchange to disrupt the services of member without providing them alternative. Hence NSE business team advised W2W to shift to alternate service provider from Sampark s infrastructure . 30.6 In this respect, Mr. Nagendra Kumar (Head of Membership Department - NSE), in his statement dated March 01, 2018, stated that The decision not to disconnect the existing connection of W2W GKN were discussed and approved by Mr. Ravi Varanasi. The idea and intent was not to disturb any of the existing services to the member whereas Ravi Varanasi in his statement dated April 19, 2018 with respect to services being continued for W2W and GKN mentioned that General principle is to avoid disruption to members trading activity. I would have advised them accordingly. 30.7 It is also noted from the email dated August 12, 2015, August 18, 2015 and August 20, 2015 sent by Mr. Nagendra Kumar (Head of Membership Department - NSE) that NSE, instead of taking actio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fered by the Noticee is that it did not disconnect the Sampark P2P connectivity for W2W and GKN to avoid any disruption to these stock brokers and a decision to this effect was taken by the Business development team at NSE headed by Mr. Ravi Varanasi, which has been affirmed by Shri Deviprasad Singh (Head of Colo support) and Shri Nagendra Kumar (Head of membership department) in their respective statements recorded during the investigation. The exchange has also taken the plea that as a quasi regulator it had to take decision so that it does not prejudice any person. In my view, the arguments of NSE are fraught with contradictions. On the one hand, NSE rightly assumes the role of a quasi regulator so as to ensure that its action does not prejudice any person but in its action what it has done was to perpetuate the preferential treatment already availed by W2W and GKN and in protecting the vested interests of these 2 stock brokers in availing latency advantage uninterruptedly. 32.2 I note that both W2W and GKN are old customers of NSE's Colo facility and have been accessing the Colo facility since 2010 onwards. Both these stock brokers were well aware of the NSE circular and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... reminders, grievance and disappointment. On the one hand NSE claims that Sampark has misled them and at the same time it rewards Sampark by allowing it to continue providing their services to W2W GKN till such time they find a solution of their problem in handing their infrastructure over to Reliance, while denying other stock brokers to avail Sampark connectivity during that time. The judicial decisions relied upon by the Noticee including the case of A.R. Antulay Vs R.S. Nayak and Anr (1998) 2 SCC 602, to argue that while taking the decision, the Noticee was required to consider the impact of such decision upon its constituents, and to ensure that it does not prejudice any person, have no relevance with the way the Noticee has acted and hence do not apply to the facts of the case. 32.5 It was also observed that it was illegal on the part of Sampark to serve end customer as, it did not have the requisite DoT license. Even after NSE found out about the same, NSE allowed Sampark to continue with such illegal activity. This in my view is not worthy of an entity, which is performing the role of a quasi- regulator. Therefore, I am of the view that NSE ought to have taken immediat ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... service of P2P connectivity by advising them to shift the service subsequently from Sampark to Reliance. 33.4 It was, therefore, alleged that by conducting site inspection for other brokers except GKN and W2W, NSE had adopted discriminatory approach towards stock brokers and provided preferential treatment to selected brokers (GKN and W2W) and thereby NSE failed to provide fair and transparent access to all it stock brokers in equal manner. It is further alleged that NSE was acting in collusion with W2W and GKN under a fraudulent scheme of arrangement for providing undue benefit to selected brokers (W2W and GKN) at the cost of other stock brokers. 34. Submissions of NSE 34.1 The SCN alleges that NSE conducted site visits for some stock brokers but not for others. 34.2 NSE s policy at the relevant time did not allow direct connectivity between NSE Colo and BSE Colo. Therefore, when P2P connectivity requests were made by stock brokers between NSE Colo and a stock broker's office at BSE, the membership department of the Noticee used to initiate a site inspection. The site inspection involved officers from the membership team visiting the stock broker's office at ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tivity. Therefore, it is not correct to find fault with the Noticee for pro-actively undertaking site-visits when SEBI itself did not specify that such visits ought to be undertaken. A departure from a voluntary initiative of the Noticee for good reasons, cannot become grounds for regulatory intervention by SEBI. 34.9 This policy on site-inspections was consistently followed by the Noticee and there was no preferential treatment. The SCNs do not demonstrate how any norms of fair and equitable access of the stock brokers were adversely affected by site-visits. 34.10 It is incorrect to suggest that the act of undertaking a site inspection by a recognized stock exchange in some cases but not in others, per-se amounts to a violation of a stock brokers' right to fair and transparent access. Such an approach would have larger ramifications on the ability of the Noticee or indeed any stock exchange to regulate the conduct of stock brokers. Indeed, it would have a chilling effect on the monitoring and surveillance functions of an exchange, since the exchange would hesitate to undertake any checks or steps which had not been taken in respect of all other stock brokers constituent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... P2P connectivity sought by the member terminated at the BSE Edge router. 35.2 The objective of the said policy of NSE of conducting physical inspection was to ensure that no trading member establishes connectivity directly between NSE Colo to BSE Colo. From the facts, it is clear that the above policy of site inspection was not followed for W2W and GKN. 35.3 There is no doubt that for a regulator, the degree of scrutiny and checks required may vary from case to case, depending on the specific facts and circumstances. I also agree with the submission of NSE that a regulator should have discretion while performing certain checks. It is, however, incumbent on a regulator to apply the same standards of checks in cases with similar facts and circumstances. Otherwise, a regulator would be accused of bias and unfair and inequitable in its treatment of the trading members. 35.4 If the concern of NSE was that the P2P connection should not terminate in BSE Colo then the same would have called for an inspection of address of GKN office at BSE Building, when GKN intimated NSE that its P2P connectivity would be terminating in its office instead of BSE Edge router. If NSE was of the vie ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... raveen Shinde to meet him and understand opportunity of business for RCom too . 36.3 It is also noted that Mr. Deviprasad Singh (Head of Colo support - NSE)vide email dated July 17, 2015 had informed Mr. Nagendra Kumar (Head of Membership Department - NSE) with subject which read as Fiber laying and MUX installation activity ; and stating that Reliance and Sampark are starting work today. Further, prior to the formal handing over email received from Reliance to NSE dated August 19, 2015, Mr. Nagendra Kumar (Head of Membership Department - NSE)vide email dated August 12, 2015, had instructed Mr. Mohit Mutreja (Director, AlphaGrep subsidiary of W2W) with the subject captioned Please change your fibre vendor from Sampark to Reliance. Pls. cheers . Further vide email dated August 18, 2015 Mr. Nagendra Kumar (Head of Membership Department - NSE) had again stated Have you shifted your line from Sampark. Pls confirm. Cheers. On August 20, 2015 again, Mr. Nagendra Kumar (Head of Membership Department - NSE) had sent an email to W2W stating that looks like there is an issue with Reliance and Sampark. You need to cancel the current set up with Sampark and speak to Shailesh of Relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ales representative Netaji was a former employee of Reliance. It is Sampark that volunteered to work with Reliance and since it was an existing vendor of Reliance. 37.3 The decision of Sampark to partner with Reliance may be due to the similarity in the type of infrastructure deployed by Sampark and Reliance at the MMR of NSE. Sampark deployed fibre optic cables whereas other providers deployed copper cables. 37.4 Reliance upgraded its infrastructure to fibre cables between July 17-19, 2015 at NSE's MMR when Sampark was also in the process of installing its MUX in the MMR of NSE. It is in this context Deviprasad Singh has stated in his email dated July 17, 2015 that Sampark and Reliance are starting work today with the subject Fibre and MUX laying activity . This email was a reference to the work that was being undertaken by Reliance and Sampark (separately but simultaneously) at the Noticee's MMR. 37.5 Given that Reliance was the only other service provider using fiber optic cables, it was suggested to some stock brokers which were seeking connections from Sampark that they 'change' their fibre vendor from Sampark to Reliance (even prior to the arrangem ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... of the abovementioned communications, one can genuinely infer that NSE was actively associated in the process of transition from Sampark to Reliance. 38.4 I am of the view that the reference to SEBI order dated March 22, 2016 has been cited out of context. In the said order, SEBI had, inter alia, advised all the companies to shift from Sharepro to other Registrar and Transfer Agent. SEBI did not ask Sharepro to somehow make the illegal activity legal. It is also found to be misplaced for the reason that the direction of SEBI in Sharepro was in the interest of the market, whereas the decision of Noticee to allow W2W and GKN to continue to avail the services of Sampark despite having found that they had existing alternative service providers could not be said to be justified in the interest of the market. 38.5 I find that there is no force in the explanations of the Noticee on this point given the fact that Netaji (former employee of Sampark) in his statement recorded on September 6, 2017, has clearly stated that Mr. Deviprasad Singh (NSE) suggested Sampark to approach Reliance to take over the existing infrastructure as Sampark was already a vendor of Reliance. Thus there is ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nce gives rise to a strong preponderance of probability that the officials of NSE had an active role to play in facilitating the deal between Sampark and Reliance so that W2W and GKN continue to enjoy the connectivity of Sampark under the banner of Reliance without any loss to their latency advantage. This also explains the reason as to why even after discovering about Sampark's license deficiency, NSE waited for long till Sampark found solution to its problem. 38.7 In view of the above observations, the explanation of NSE that they were merely suggesting alternatives to Sampark and not suggesting them to collaborate with Reliance is not found satisfactory and rather all the circumstantial evidences including the WhatsApp meesage dated July 22, 2015 to K K Daga and the evidence found from the statement dated September 06, 2017 of Netaji and the statement dated March 09, 2018 of employees of W2W clearly point out that NSE wanted to facilitate the handover of assets by Sampark to Reliance so as to regularize the unauthorized connectivity provided by Sampark o W2W and GKN. 38.8 Incidentally, from the records I observed that Sampark has handed over its infrastructure to Relia ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to W2W and GKN to avail P2P connectivity of Sampark without verifying the license of Sampark. f) NSE facilitated the arrangement between Sampark and Reliance in an attempt to regularize the same to give post-facto legitimacy to an unauthorized activity of Sampark. g) NSE did not allow direct P2P connectivity between NSE Colo and BSE Colo. However, from the scheme of things as emerged from the analysis above, indicate towards contributory negligence on the part of NSE that facilitated W2W terminating the Sampark link at the W2W rack at BSE co-location though W2W had undertaken to terminate the P2P link at their BSE office. 39.2 NSE is also found to have violated regulation 41 (2) of SECC Regulations, 2012 and clause 3 of the SEBI circular CIR/MRD/DP/07/2015 dated May 13, 2015 and clause 4(i) of SEBI circular CIR/MRD/DP/09/2012 dated March 30, 2012 on account of the following: a) In case of W2W and GKN, NSE allowed the connections to terminate directly in the racks placed inside NSE co-location center which was contrary to normal practice followed by NSE. However, for providing connectivity to Millennium and other brokers, on the ground of lack of duct space, Sampa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... t a higher standard of proof for preponderance of probability is necessary to allege fraud or collusion on part of the Noticee. 40.2 Before I deal with the contentions of the Noticee, it would be relevant to visit the definition of fraud as defined under PFUTP Regulations, 2003 and then advert to the issue as to whether the conduct of Noticee falls within the ambit of fraud. The provisions of Regulation 3 (d) and Regulation 4 (1) are also quoted hereunder after the definition of fraud: Regulation 2 (1) (c) of PFUTP Regulations, 2003 defines Fraud as under: fraud includes any act, expression, omission or concealment committed whether in a deceitful manner or not by a person or by any other person with his connivance or by his agent while dealing in securities in order to induce another person or his agent to deal in securities, whether or not there is any wrongful gain or avoidance of any loss, and shall also include (1) a knowing misrepresentation of the truth or concealment of material fact in order that another person may act to his detriment; (2) a suggestion as to a fact which is not true by one who does not believe it to be true; (3) an active c ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ion includes even a mere expression or omission to act without having any intention to deceit or collude, if such act or omission or expression or concealment leads to inducement of another person to deal in securities irrespective of whether there is any wrongful gain or avoidance of loss in dealing with such securities. 40.4 With regard to the meaning and legislative intent behind the phrase unfair trade practices, the finding of the Hon ble Supreme Court of India, in the matter of SEBI Vs Rakhi Trading Private Ltd 2018, (SCC online Sc 101) is relevant wherein it was observed that 35 having regard to the fact that the dealings in the stock exchange are governed by the principles of fair play and transparency, one does not have to labour much on the meaning of unfair trade practices in securities. Contextually and in simple words, it means a practice which does not conform to the fair and transparent principles of trades in the stock mark. In the instant case, one party booked gains and the other party booked a loss. Nobody intentionally trades for loss. An intentional trading for loss per se, is not a genuine dealing in securities. The platform of the stock exchange has ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ntage as compared to other trading members who were complying with the NSE's policy of routing the connection through their offices. 40.6 After having examined the various acts, omissions, expressions through email correspondences and the overall conduct of NSE in the entire matter which helped an unauthorized service provider to access to their Colo facility to lay dark fibre connectivity on behalf of two trading members so was to provide them with higher speed and lower latency that would helped them in trading in securities in a more efficient and profitable manner, it leaves no doubt that the Noticee has actively supported and helped W2W and GKN to gain faster access to the market data feeds by means of a irregular connectivity which was certainly a major inducement for the two trading members to engage Sampark and to circumvent all policies and guidelines so as to achieve their goals. I am therefore of the view that the actions and conducts of NSE appropriately fall into the inclusive definition of fraud under Regulation 2 (1) (c) of PFUTP Regulations, 2003. 40.7 As a logical corollary to the aforesaid observation, I am of the opinion that NSE has conducted its busin ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... us, the Noticee had stopped taking any critical decision in the intervening period prior to handing over his responsibilities as CTO. Therefore, during the period July 17-19, 2015, the time when Sampark was allowed to install MUX in the Colo facility of NSE, Noticee No.2 had already left NSE. 41.5 The charges mentioned in the SCN are general, vague and unsupported by facts or evidence. 41.6 Functional reporting of the Colo helpdesk was with the business development team and not with the technology team. Mr. Ravi Varanasi was in charge of business development and operational activities relating to Colo request at the relevant time. 41.7 As per the Noticee, during the relevant period of time, Mr. Deviprasad Singh was serving a dual role, viz. as Head-IT-Operations and also as a Supervisor of the managers of the Colo helpdesk. While for matters relating to Colo facility he reported to Mr. Ravi Varanasi (the head of Business Development team), for functions other than Colo facility he reported to the Noticee No. 2. 41.8 The definition of fraud under SEBI Regulations deals with dealing in securities or inducing others to deal in securities and not general charges of fraud. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f the loop and was not involved in the Sampark P2P connectivity matters, I understand that the allegations made against him in the SCN will not hold good just because he was holding the designation of CTO at the relevant point of time. Under the circumstances, I am of the view that the allegations made against Noticee No. 2 in the SCN are not sustainable. Chitra Ramakrishna (Noticee No.3) 43. Submissions of Noticee 43.1 In response to the allegations made against the Noticee in the SCN which has been highlighted at para 10 of this order, the Noticee has made the submissions which are listed in subsequent paragraphs of this order. 43.2 The Noticee No. 3 assumed the position of the Managing Director (hereinafter referred to as MD ) and Chief Executive Officer (hereinafter referred to as CEO ) of NSE on April 1, 2013 and continued in her post till she resigned on December 2, 2016. Thus, the Noticee No. 3 was acting in the capacity as MD CEO of NSE during the relevant period of time when it was alleged that NSE allowed W2W and GKN to avail P2P connectivity from Sampark, an unauthorized telecom service provider. In her reply dated February 23, 2019 and written submis ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... fied persons appointed for respective task. In terms of delegations power approved within NSE very few issues were to be dealt with by Noticee No.3, directly, in her capacity as MD CEO while for other issues other responsible person within NSE had the authority to take the decision. 43.12 As regard the charge of fraud against her the Noticee No.3 states that no element of fraud can be pre-supposed against her without providing any particulars of role in the alleged fraud either by commission or deliberate omission. Noticee No. 3 was not involved directly or indirectly in any of the events narrated in the SCN and has no connection with the members who have allegedly derived benefit from the alleged preferential treatment. 43.13 Dealing with the various paragraphs of SCN the Noticee No. 3 has further argued that: a) The findings of SEBI expert committee were not accepted by the NSE Standing Committee on Technology which did not find any violation of policy, or favoritism towards any trading member. b) Regarding non transparent mode of communication, the Noticee No.3 submits that the policy of NSE provides that non- regulatory Circulars may be communicated through upd ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... tigation. The only exception is provided in Section 27 of the SEBI Act, 1992 which presumes such vicarious liability for offences under SEBI Act, 1992. No allegations of any offence committed by the Noticee No.3 under the SEBI Act, 1992 has been raised in the SCN and in the absence of the same, SEBI cannot presume that Noticee No.3 merely as the Managing Director/CEO or Joint Managing Director (JMD) was automatically liable for actions of NSE. In this regard, Noticee No.3 has relied upon certain case laws such as Sunil Bharti Mittal V/s Central Bureau of Investigation and Aneeta Hada vs. Godfather Travels and Tours (P) Ltd. its employees. h) Serious allegation like fraud cannot be made as a matter of course and it is necessary for SEBI to identify the fraudulent act specifically attributable to Noticee No. 3. A charge of fraud necessarily requires inherent dishonest intention of which there is no allegation in SCN itself. The charge of fraud has been levied on the basis of conjectures and surmises. There is no material in the SCN to demonstrate even prima facie action of Noticee No.3 which is contrary to prohibition set out in Regulation 3 and 4 of PFUTP Regulations, 2003. T ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... me the assigned or vested in her by the Board.'. 44.3 In N. Narayanan Vs. Adjudicating Officer, SEBI (2013) 12 SCC 152, while dealing with the case of imposition of monetary penalty on a director for mis-statements in the financial statements of a listed company wherein the defence taken by the director was that he was incharge of the human resources functions of the company, Hon ble Supreme Court has observed as under: 33. Company though a legal entity cannot act by itself, it can act only through its Directors. They are expected to exercise their power on behalf of the company with utmost care, skill and diligence. This Court while describing what is the duty of a Director of a company held in Official Liquidator v. P.A. Tendolkar (1973) 1 SCC 602 that a Director may be shown to be placed and to have been so closely and so long associated personally with the management of the company that he will be deemed to be not merely cognizant of but liable for fraud in the conduct of business of the company even though no specific act of dishonesty is provide against him personally. He cannot shut his eyes to what must be obvious to everyone who examines the affairs of the comp ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... e exchange. Therefore, it will be unfair on the part of MD CEO to evade her responsibility towards the irregularities and the fraudulent acts allegedly committed by her subordinates in the matter of allowing P2P connectivity in the Colo facility of the exchange. 44.6 Incidentally, I find that Mr. Ravi Narain former MD CEO of NSE in his statement dated April 13, 2018 recorded before the Investigating Officer of SEBI, has stated that Chitra Ramakrishna served a Joint MD from 2003 and almost all operations and technology reported through her. In 2009 she was promoted by the Board as JMD at which point everyone in the exchange reported through her. Thus, it is observed that even long before the Noticee assumed the responsibility of MD CEO, she was looking after the technology matters of the exchange. Hence, claiming ignorance of the happenings in Colo facility of NSE is under the plea that Colo facility was managed by functional heads and she is not aware of the Sampark connectivity issues, is not substantiated. 44.7 It is also recognized under the corporate law that the liability of the Managing Director, when compared with the other directors is comparatively high. Whil ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... D CEO she was exercising all the powers and functions as delegated to her by the Board of Directors. The Board of Directors appointed her because of their faith in her skill, competence and integrity and they may not have the same faith in another person. The views held by the Supreme Court in the case of J.K Industries Limited v. Chief Inspector of Factories (1996) 6 SCC 665 emphasize on the point that the directors being in control of the company's affairs cannot get rid of their managerial responsibility by nominating a person as the occupier of the factory. A proper degree of delegation and division of responsibility is permissible but not a total abrogation of responsibility. A director might be in breach of duty if he/she left to others the matters to which the Board as whole had to take responsibility. Directors are responsible for the management of the company and cannot divest themselves of their responsibility by delegating the whole management to agent and abstaining from all enquiries. If the latter proves unfaithful, the liability is that of the directors as if they themselves had been unfaithful. 44.10 Based on the aforesaid views held by the Hon'ble Supr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... uments and explanations as have been put forth by NSE in its written submission. Under the circumstances, I cannot persuade myself to accept the arguments advanced by the Noticee No.3 in a manner to keep herself at a safe distance from the alleged wrong doings of the NSE. The liability of the MD CEO as far as the maintainability of the allegations in the SCNs are concerned has to be on equal footing and on par with the liability of the exchange of which she was the operating head during the relevant period. Being the executive head of the Exchange, her culpability is inextricably linked with the culpability of the NSE and if NSE is held liable in terms of provisions of SEBI Act, 1992, PFUTP Regulations, 2003, SECC Regulations, 2012 or any other regulatory provisions, the MD CEO shall also be equally held accountable under those provisions. 44.12 It is noted that every director of a stock exchange is bound by code of conduct and code ethics as specified under Part-A and Part-B of Schedule II of SECC Regulations, 2012. On account of this, the Noticee No. 3 was duty bound to administer the stock exchange with professional competence, fairness and impartiality. Being a KMP of th ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... y from Microscan (a service provider similar to Sampark) were denied permission by NSE. e) NSE did not have a transparent policy for conducting due diligence of service providers (i) at the time of allowing P2P connectivity and (ii) at the time of granting permission to Sampark to place infrastructure in NSE MMR. f) Millennium was unable to avail P2P connectivity of Sampark by installing MUX directly in its rack while other members (GKN and W2W) availed the same benefit. This was on account of flawed policy on the part of NSE, which allowed P2P connectivity to W2W and GKN by installing a MUX in their rack and denying the same to Millennium thereby following discriminatory policies. 44.14 In view of the foregoing discussions, I further hold Chitra Ramakrishna (Noticee No. 3) in violation of regulation 3(d) read with 4(1) of PFUTP Regulations, 2003 read with section 12 (A) (c) of SEBI Act, 1992 and Part A B of schedule II of SECC Regulations, 2012 read with Regulations 26(1) and 26(2) of SECC Regulations, 2012 read with SEBI Master Circular dated December 31, 2010 on account of the act that NSE followed a policy of preferential treatment of stock brokers by: a) fa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s re-designated as Group Operating Officer and Advisor to MD w.e.f. April 1, 2015 by, then MD CEO, Ms. Chitra Ramakrishna, thereby placing him at par with Job grade M 13 i.e. equivalent to Group president, just next to MD CEO. In the annual report for the year 2015-16 of NSE, Noticee has been indicated as part of the Management Team in the capacity of a Group Operating Officer. The Noticee was practically enjoying the post of a key managerial person (that of a KMP) is indicated in a report of the Nomination and Remuneration Committee (NRC) of NSE, dated November 22, 2017 submitted to SEBI, in which it has been observed by the NRC that the re-designation of Anand Subramanian was not tabled to the then NRC despite the fact that as per the provision of the Companies Act, 2013, he would have been a KMP and his re-designation would have needed an approval from the NRC. Further, I find that Board of NSE, in its meeting held on August 11, 2015, further delegated to the Noticee substantial power of management akin to the power granted to MD and CEO, in order to smoothen the day-to-day conduct of business operations of the exchange. 46.2 As pointed out above, the Noticee became G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nge. 46.5 I find that Noticee No. 4 has neither disputed to the fact that he was a KMP nor to the applicability of Regulation 26(2) of SECC Regulations, 2012. I also find that every KMP of a stock exchange is bound by code of ethics as specified under Part-B of Schedule II of SECC Regulations, 2012. On account of this, the Noticee No. 4 is under obligation to deal with matters relating to the stock exchange with fairness and in a transparent manner. In the previous paragraphs, I have dealt in detail how NSE failed to conduct itself in a fair and transparent manner while dealing with issues relating mode of communication regarding the amendment of 2009 Circular of NSE, allowing brokers to avail P2P connectivity from a unauthorized service provider in an unfair manner, lack of clear documented policy for conducting due diligence of service providers, deciding to allow W2W and GKN to continue to avail Sampark connection, decision to not conduct site visit for W2W and GKN in violation of its own policy, flawed policy regarding allowing P2P connectivity to W2W and GKN by installing MUX in their rack and denying the same to Millennium, etc. I find that while performing his role as a G ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... October, 2013; d) NSE allowed W2W and GKN to establish P2P connectivity through Sampark while stock brokers viz. Mansukh which desired to lay Sampark connectivity and Shaastra which desired to have connectivity from Microscan (a service provider similar to Sampark) were denied permission by NSE. e) NSE did not have a transparent policy for conducting due diligence of service providers (i) at the time of allowing P2P connectivity and (ii) at the time of granting permission to Sampark to place infrastructure in NSE MMR. f) Millennium was unable to avail P2P connectivity of Sampark by installing MUX directly in its rack while other members (GKN and W2W) availed the same benefit. This was on account of flawed policy on the part of NSE, which allowed P2P connectivity to W2W and GKN by installing a MUX in their rack and denying the same to Millennium thereby following discriminatory policies. 46.8 In view of the foregoing discussions, I further hold Subramanian Anand (Noticee No. 4) in violation of regulation 3(d) read with 4(1) of PFUTP Regulations, 2003 read with section 12 (A) (c) of SEBI Act, 1992 and Part B of schedule II of SECC Regulations, 2012 read with Regula ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er in any manner whatsoever, as alleged or otherwise. 48.4 He was the head of the department and hence trivial issues were never escalated to him at any point in time. 48.5 The P2P connectivity between the rack of a trading member at NSE premises to its office was not under his purview and/or within his job profile. 48.6 As per the policy of NSE, P2P connections were terminated to trading member's offices or BSE Edge router and not at the Colo facility offered by BSE. 48.7 The process of site visit started from May, 2015 and was conducted as most of the members were seeking lines that were terminating to a common point at BSE in spite of members having an existing connection to their office address in BSE building or an Edge router connection. W2W s site was not inspected as they had an existing connection terminating in their office 48.8 The allegation of not verifying licenses of Sampark is outside the scope of his role and responsibilities, hence the allegation of not verifying licenses of service providers does not arise in any manner whatsoever and is completely unfounded and baseless. 48.9 The decision not to disconnect W2W and GKN was internally discuss ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... as part of their routine job function. 49. Consideration and Observations 49.1 The preliminary objections raised by the Noticee No. 5 have already been dealt with by me in the beginning of this order at para 16 above. The submission of the Noticee that he has not been afforded a fair and reasonable opportunity of inspecting and then reviewing documents that constitute the entire record necessary for determining or responding to the SCNs is also not justified. I see from the record that all the Noticees have been provided with detailed inspections and copies of the documents referred to and relied upon in the SCN including the entire investigation report. During the course of hearing, the Noticee has not made any submission advancing the prejudice caused to him for want of inspection of any specific documents. Thus, the submission of the Noticee is without any merit. As regards the other explanation and submissions made by the Noticee No. 5, I find that some of his explanations, especially on the issues of amended circular of October 2013, non-interference in P2P connectivity directly terminating at Colo racks of trading members and the issue of non-disruption of Sampark con ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on, that disconnecting Sampark would cause control disruption and monetary loss. Further, Noticee has not submitted any documents or correspondence with W2W or GKN to suggest that he had to take the decision against discontinuation of Sampark connectivity in response to any specific request made by these 2 stock brokers citing any disadvantage or monetary loss that may be caused to them if the Noticee had taken any decision to discontinue their Sampark connectivity. In the absence of any corroborative evidence, the ground of non disruption taken by the Noticee can be called only a speculative claim without any basis. 49.3 The Noticee's conduct also does not appear to be equitable vis-a-vis other trading members when it comes to dealing with them especially Millennium which despite complaining to the Noticee that they are incurring trading losses because of other trading members operating on low latency, was kept waiting while W2W and GKN continued to enjoy the Sampark connectivity. The Noticee's contention that site visit of trading member offices started in May, 2015 only (and not in April 2015 when W2W and GKN got their approvals), is also not supported by any evidence ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f SECC Regulations, 2012 and thereby violated Regulation 26(2) of SECC Regulations, 2012 read with SEBI Master Circular dated December 31, 2010. 49.6 I also find that every KMP of a stock exchange is bound by code of ethics as specified under Part-B of Schedule II of SECC Regulations, 2012. On account of this, the Noticee No. 5 is under obligation to deal with matters relating to the stock exchange with fairness and in a transparent manner. In the previous paragraphs, I have dealt in detail how NSE failed to conduct itself in a fair and transparent manner while dealing with issues relating mode of communication regarding the amendment of 2009 Circular of NSE, allowing brokers to avail P2P connectivity from an unauthorised service provider in an unfair manner, lack of clear documented policy for conducting due diligence of service providers, deciding to allow W2W and GKN to continue to avail Sampark connection, decision to not to do site visit for W2W and GKN in violation of its own policy, flawed policy regarding allowing P2P connectivity to W2W and GKN by installing MUX in their rack and denying the same to Millennium, etc. I find that while performing his role in connection wi ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... and Part B of schedule II of SECC Regulations, 2012 read with Regulation 26(2) of SECC Regulations, 2012 read with SEBI Master Circular dated December 31, 2010 on account of the act that NSE followed a policy of preferential treatment of stock brokers by: a) Allowing W2W and GKN to continue to avail Sampark connectivity even after finding out that Sampark did not have requisite license. b) Conducting site inspection of Millennium. GRD and SMC office for connectivity while not following the same procedure for W2W and GKN. Mr. Nagendra Kumar (Noticee No.6) Submissions of Noticee 50. Preliminary Submissions of Noticee 50.1 The 2017 SCN has been issued prematurely and even prior to the completion of the investigation into the captioned proceedings. The allegations made in the SCN 2017 with respect to P2P connectivity are based on incorrect facts and such incorrectness has been confirmed by subsequent investigation 50.2 If the proceedings are allowed to continue under both the SCNs, then the Noticee No.6 would be subjected to regulatory actions under two separate proceedings qua the same cause of action, issues and allegations, which is contrary to the fu ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... est, except for connectivity through Sampark, for which confirmation had been sought from the Colo support team, there was no reason to suspect W2W and therefore no site inspection was carried out. 51.9 As regards GKN, the connection sought by GKN was to the BSE Edge Router and not at BSE Colo and NSE used to allow connections terminating at BSE s Edge Router without conducting any inspection. 51.10 P2P connections and end to end connectivity were being handled only by Colo support team and the Membership team, of which he was the head, had no role to play whatsoever. 51.11 He did not exercise any discretion in granting permission to W2W. The allegation of verifying licenses of W2W is outside the scope of his role and responsibilities. 51.12 With regard to the request from GKN seeking permission for fibre connectivity from NSEIL s Colo facility to BSE Edge Router, since the vendor was Sampark (Colo team had approved the connectivity in the case of W2W), based on the discussions with Colo team, they approved the request made by GKN. 51.13 Millennium, vide email dated June 24, 2015, requested for getting connectivity at its BSE office. Since the principal office of the ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... he P2P connection provided by Sampark was only with a bona fide view to not disrupt the services of trading members until the trading members were transferred to a service provider with requisite licenses. In the event connectivity provided by Sampark to the trading members had been disrupted / disconnected, then such trading members would have incurred losses. 51.25 As per emails dated July 15, 2015 and July 17, 2015 of Colo, apart from Sampark, Reliance was the only available alternative to trading members for fibre hand-offs at the relevant period.. 51.26 After Colo team s confirmation on the lack of appropriate licenses by Sampark, the matter was internally discussed and it was decided to inform trading members to move their connection from Sampark to Reliance, as they were the only available alternative. 51.27 As soon as it was concluded that trading members could not operate from the MUX of Sampark in MMR, on August 7, 2015, he attempted to reach out to certain trading members informing them of the aforesaid decision taken by NSEIL. 51.28 On August 12, 2015, an email was addressed informing trading members about shifting to Reliance from Sampark. He was never awar ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gh the Noticee no. 6 (Shri Nagendra Kumar) has admitted that he has conveyed the approval to W2W and GKN, yet he has done so only after receiving the clearance from the Colo support team. As per the records, vide email dated April 6, 2015, Ms. Rima Srivastava (CTO- W2W) requested the Noticee (Shri Nagendra Kumar) to allow Sampark info to lay fibre upto our rack (rack no. 18, phase 2) and install their MUX to provision the said connectivity which was referred by the Noticee to Noticee no.7 (Shri Deviprasad Singh, Head Colo support Team, NSE) with the remark please confirm? to which Noticee no. 7 responded stating can be permitted . Therefore, it now appears that the Colo support team was referred to as the concerned department by Noticee no. 5 (Mr. Ravi Varanasi) in the matter of giving approval to Sampark connectivity, as it was Shri Deviprasad Singh of Colo support team who gave clearance to the Noticee to confirm W2W about their proposed connectivity. 52.4 As per the reporting structure that was prevalent at NSE during the relevant of time, the Colo support team and also the membership department was reporting to the Head of Business Development. Therefore, the Head of ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... vity without any site visit of their office premises at BSE building. 52.7 With regard to GKN, it has been submitted by Noticee No. 6 that since the connection sought by GKN was to the BSE Edge Router, no site visit was conducted, in line with the NSE practice at the relevant time. It is observed from the submission dated February 25, 2019 made by NSE that initially NSE had been informed that the connection would terminate at the BSE Edge router. Post approval of the said connection, it was intimated by GKN that it would be terminating the connection in its office within BSE. In my considered opinion, in line with the then existing policy of NSE, when GKN intimated NSE that its P2P connectivity would be terminating in its office instead of BSE Edge router, site visit should have been conducted by NSE. 52.8 Further, the Noticee's claim that site visit was waived in respect of W2W since, it had already an existing connection from Reliance from its office at BSE building, suffers from inconsistencies insofar as the Noticee's approach towards Millennium, in whose case site visit was carried out, despite the fact that Millennium was also having similar existing connection ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... Colo operations, the role and responsibility of Noticee was general administrative governance of the Colo support team and to provide guidance in case of any technical issues. The Colo support team is an administrative team that coordinated with the members who have presence in the NSE Colo facility for dealing with their issues and reporting to the business team on a day to day basis. The functions of the Colo support team included help desk support for members infrastructure installed in the Colo facility, preparing work permits to allow members' authorized service providers to provide services and assisting such service providers to do path survey for the purpose of cable lane, from the cable landing point outside NSE premises up to the members' respective racks in NSE Colo facilities. The Noticee in his written submission has explained his position on various aspects of Colo facility at NSE. His submission are briefly presented below: a) Permission to W2W GKN to avail connectivity of Sampark without verifying license: (i) The SCN fails to consider that P2P connectivity provided to W2W and GKN by Sampark was part of the member s infrastructure and not in vio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ity of Sampark provided to W2W and GKN was allowed to continue even after learning about its ineligibility, the Noticee states that the business team decided that it would be improper for NSE to disrupt services of any member without providing an alternative solution. (vi) On the point of denying another trading member, viz. namely Millennium from availing P2P connectivity of Sampark by installing a MUX in its rack while allowing the same to GKN W2W, the Noticee has argued that the Colo facility had minimal space for laying any additional cable and the fact that by the time the request of Millennium was received Sampark was under the radar for not having requisite DoT license and therefore, no new P2P connectivity line from the Sampark MUX in NSE's MMR were allowed. c) On the allegation of latency advantage: (i) The Noticee states that the connectivity provided by the Sampark was not dark fibre/near dark fibre since the fibre terminated at Sampark's equipment from which an Ethernet Hand-off was provided to W2W at both ends of P2P line. (ii) Sampark line was not used for trading by W2W and was used to take market data from W2W servers posted at NSE Co ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ime, the Noticee states that the P2P connectivity is authorized by NSE business team and as the head of the Colo support team he allowed Sampark to lay cable for their P2P connectivity after taking necessary undertaking from Sampark. Thus the Noticee gives contradictory explanation about the procedure and practice of NSE with respect to P2P connectivity. On one hand, he claims that P2P connectivity was part of members infrastructure and there is no need for giving any approval while at the same time he states that Sampark was allowed to establish P2P connectivity on behalf of W2W and GKN after being authorized by NSE business team and after he took undertaking from them. Further, Noticee's claim that he had given a clearance to Sampark only for path survey (and not for laying fibre connectivity) is an unsubstantiated claim and on the contrary, it is the Noticee who, on reference received from Shri. Nagendra Kumar, vide email dated April 6, 2015, had confirmed to him that Sampark may be permitted to lay fibre upto the rack of W2W and install their MUX at NSE Colo. The active involvement of the Noticee in the matter of allowing Sampark is well supported by the record and facts o ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... response from the Noticee with respect to the rejection of request made by Millennium around the same time when Sampark was installing its MUX in the NSE MMR. Thus, the reply of Noticee on this point also suffers from infirmities and is not tenable. 54.6 On the allegation of latency advantage obtained by W2W and GKN, the Noticee comes with an explanation stating that the connectivity provided by Sampark was not a dark fibre, since the same was attached to Ethernet Hand-off on both sides of the connectivity. However, I find that Sampark itself, in their proposal to W2W for providing P2P connectivity have termed it as Dark Fibre and marketed it as a fibre that provide low latency benefit. Therefore, while on one hand the Noticee is claiming that NSE did not have any say on the matters pertaining to members infrastructure and the equipment placed in their racks, on the other hand is certifying that the connectivity was not a dark fibre. 54.7 The Noticee disputes the diagrammatic presentation of the P2P connectivity depicted in the SCN and instead presents another diagrammatic presentation in his submissions to prove his point that after installation of Sampark MUX in NSE MMR, t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... gulatory norms and guidelines issued by NSE. The actions of the Noticee gives rise to a bonafide suspicion on his intentions while he dealt with the P2P connectivity matters of the aforesaid two Brokers. Therefore, I uphold all the allegations made against the Noticee in the SCNs. 54.10 In view of the foregoing discussions, in line with the allegations made in the SCN, I hold Deviprasad Singh (Noticee No. 7) in violation of regulation 3(d) read with 4(1) of PFUTP Regulations, 2003 read with section 12 (A) (c) of SEBI Act, 1992 on account of: a) allowing W2W and GKN to continue to avail Sampark connectivity even after finding out that Sampark did not have requisite license. b) permitting to place infrastructure without verifying the Sampark. c) permitting W2W and GKN to avail connectivity of Sampark without verifying license of Sampark d) denying Millennium to avail P2P connectivity of Sampark by installing MUX directly in its rack while other members (GKN and W2W) availed the same benefit. e) allowing W2W to arrange cabling through Sampark in the Colo rack in a manner that W2W had the lower latency compared to other trading members/stock brokers connected ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... approached them with an offer that they can provide 1 gig bandwidth for the added leased line connected to the Colo facility of NSE. They also presented them with the lower latency that they have achieved between certain locations than the latency currently being enjoyed by the Noticee. 55.6 The Noticee thereafter hired Sampark for one year for Rs. 19 lakhs as payment towards its services subject to Sampark providing a latency of less than 1 millisecond. 55.7 On March 26, 2015 the Noticee sought permission from NSE to use the services of Sampark for laying the necessary infrastructure for installing the P2P connectivity. NSE granted permission on April 6, 2015 which was again reconfirmed by NSE on April 21, 2015. The work in relation to the network line was carried out only after permission was received from NSE. 55.8 The Noticee always treated NSE as a regulator and itself as a regulated entity and accordingly had taken due prior permission before it allowed Sampark to provide them with P2P connectivity from the Colo facility of NSE which went live on May 28, 2015. 55.9 The Noticee was directed by NSE to move the circuit from Sampark to Reliance on August 12, 2015 and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... equisite license to provide its services at the Colo centre of NSE. 55.15 Relying up on the statement given by Mr. Devi Prasad Singh to SEBI on March 1, 2018, the Noticee has stated that NSE was responsible for conducting the validation of the licenses of the service providers and it is only after receiving permission from NSE that the Noticee believed that Sampark was an approved vendor under 2009 Circular of NSE for providing the connectivity to the Colo centre of NSE. 55.16 The Noticee has argued that it cannot be reasonably expected of a trading member to inspect the license of a leased line provider to ascertain its eligibility, in the absence of any clear policy of the exchange with respect to eligibility condition of ISP especially when the leased line provider represents that it possesses the necessary license required to provide a particular service. There was no guidance or regulations framed by the stock exchange specifying the necessary DoT license which an empanelled service provider should possess. 55.17 Several other trading members including Millennium, Marwadi, GDR securities, Shaastra, Kredent, etc. had also approached Sampark for P2P connectivity and und ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... icted in the diagram. 55.27 The SCNs alleges that by arranging the cabling in Colo rack in such a manner that the Noticee No.8 was at advantage in comparison to other trading members connected to Sampark MUX placed in the NSE MMR and the email of Mr. Sudipta Kumar indicate that the connectivity provided by Sampark to Noticee No. 8 and Notice No.12 was different and disadvantageous to other brokers. The Noticee has refuted this allegation stating that the said email merely states that the source cable was passing through Noticee No.8's rack and there is no evidence to suggest that the cable terminated at Noticee No.8 s rack before getting connected to Sampark MUX at NSE MMR. 55.28 The Noticee was not aware of the cable path and hence it had stated in its email of Mr. Mohit Mutreja that, the cost incurred in changing the cable path should be incurred by Sampark . Further, Shri Nilesh Thote (NSE Employee) has denied communicating with Sudipta around March-April 2016 regarding the above issue. 55.29 On the allegation that the other end of P2P connectivity was terminated directly in the rack of Noticee in the Colo facility of BSE instead of its office in PJ Tower between M ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... an be alleged that the wiring connection of the Noticee was inconsistent with the circuit diagram provided by Noticee to NSE, for a short period which was rectified as soon as it became aware of it and it does not constitute any violation of any rules or regulations framed by SEBI or NSE. 55.36 SEBI has not produced any photographs or other documentary proof to substantiate the allegations that W2W availed direct P2P connectivity in absence of any switch or cross connect. 55.37 On the allegation of NSE consciously ignoring its own policy to do physical inspection of the Noticee s office at BSE tower before granting NOC for P2P connectivity, it is contended that NSE had started this policy of physical inspection of Stock Broker's office from May, 2015 whereas Noticee obtained NOC from NSE for its P2P connectivity in April, 2015. The Noticee has drawn its support from an email dated April 13, 2018 addressed by the Chief Regulatory Officer (CRO), Ms. Priya Subbaraman. 55.38 Denying any collusion by the Noticee with NSE or its officials as alleged in the SCN, the Noticee argues that there is no evidence of collusion either in the report of E Y or anywhere else and SEBI mus ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecute its P2P Connectivity in the Colo facility of NSE. 56. Consideration and Observations 56.1 After a patient reading of all the averments and assertions made by the Noticee in its submissions, I find that there are certain admitted positions and facts that need to be first identified. According to me, the following facts and observations are undisputed: a) Sampark was certainly not a DoT licensed ISP Vendor to be dealt with by any of the registered Brokers of NSE. Even if the amended circular of NSE allowed the stock brokers to engage any service provider in addition to the four ISP vendors named earlier in its August 2009 Circular, a stock broker needed to and Noticee no. 1 is required to permit only a DoT licensed ISP and not an IP-1 licensed Vendor to provide P2P connectivity. The Noticee has been dutifully availing P2P services from only authorised vendors since the year 2010 and admittedly at the time of engaging the services of Sampark it was not knowing that NSE has liberalized the vendor policy in 2013.So there was no question of it deviating from the August 2009 circular, unless there was any other extraneous reason motivating it to do so. b) Sampark in ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... 9, 2015 . 56.2 Apart from the above stated admitted position as far as dealing between Noticee and Sampark is concerned, the allegation that the Noticee had installed its P2P connectivity in such a manner that it got further advantage in terms of benefit of latency is also found to be adequately substantiated in the SCNs. When Sampark had installed its MUX at MMR of NSE and connected the Noticee with the MUX, it was installed in such a manner that the source cable was first connected to W2W s MUX and from thereon it went to other stock brokers racks through the Sampark MUX in the NSE-MMR. This is supported by the evidence observed from the by the email dated April 1, 2016 addressed by Mr. Sudipta (Manager IT, Alphagrep, subsidiary of W2W) to Mr. Mohit Mutreja (Director, AlphaGrep) and Mr. Prashant Mittal (Director, Alpha Grep) with copy to Ms. Rima Srivastav (CTO, W2W) wherein it was stated that NSE asked Sampark to change the cable path at the NSE Colo. Have spoken to NSE Colo as well regarding this and they are telling that the source cable is passing through our rack to the Mux room and instead of going to the mux room first. And if there is a cut at our Rack then connecti ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... sion dated February 01, 2019 wherein it is admitted a) At para 113 that on July 09, 2015, Noticee No.8 has installed a switch in their office at BSE building which resulted in the termination of the circuit at their office . b) At para 125 that it is submitted that the alleged inconsistencies in the actual cable path of Noticee no.8 was for a brief period and was rectified immediately upon being cognizant of them 56.7 Thus the above arrangement not only helped the Noticee to enjoy better advantage vis-a-vis other trading member at the end of NSE Colo but also enabled it to reduce one switch/hop at the end of BSE Colo by taking the cable directly to its Colo rack in BSE. It is only on July 9, 2015 the Noticee installed a switch in their office which resulted in the termination of circuit in their office and from there the Noticee was connected to the rack at BSE Colo. 56.8 The aforesaid act of the Noticee with the assistance of Sampark is found to be deliberate act. This is explicitly implied when one goes through the email of Mr. Shashibhushan (CEO W2W) dated July 8, 2015 addressed to Ms. Rima Srivastav (CTO, W2W) marking a copy to Mr. Mohit Mutreja (Director, ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... to take advantage of its Sampark connectivity by circumventing the policy of NSE in a manner so that it gets further benefit of latency by avoiding one level of switch/hop at the BSE end. Thus it brings to a conclusion that the Noticee has not only engaged Sampark consciously with the expectation of more bandwidth and less latency resulting in higher data speed, but also to arrange the cable path on both NSE BSE ends in a manner that it gives maximum latency benefits from the said connectivity in an unfair manner. 56.10 Moving onto the other arguments and explanations offered by the Noticee, I have the following observation on the different issues. On exercising due diligence, certainly I can find that the Noticee has exercised due diligence and care as far as assessing the technological capability of Sampark to provide the promised bandwidth and latency. However, for reasons best known to them the Noticee did not ask the first question that it needed to ask before dealing with a new vendor, i.e. whether the vendor possessed the necessary government license to provide such services as per their representation before them. The Noticee states that it was an oversight on their pa ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... f latency because of reduction in one switch/hop at BSE end over and above the latency reduction it was supposed to gain from Sampark connectivity. 56.13 On the issue of NSE not conducting site visit, I have already dealt with the matter earlier in this order. It is observed that NSE has been conducting site visits atleast from 2014 onwards and yet, it did not conduct site visit of W2W, and therefore the contention of W2W with respect to site visit is devoid of merits. 56.14 The Noticee states that the P2P connectivity from Sampark did not have any positive impact on its business turn over or trading volume and neither the E Y report nor the investigation report of SEBI demonstrate any unfair latency advantage to the Noticee. The conclusion drawn about latency advantage in the SCN is based on the email conversations between officials of Noticee and Sampark and NSE without support of any physical evidence about latency advantage. I find the explanation of the Noticee is misplaced on facts and not quite relevant to the core issue. The objective of having a P2P connectivity with maximum bandwidth and lowest latency is to transmit large quantity of data at a faster speed which en ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... becomes explicit in its engagement with Sampark. 56.16 In this regard, I find that the Noticee has made various incoherent arguments at different places of its written submission. At one point it accepts the fact that the cable pathway of its P2P connectivity was inconsistent for a short period with the circuit diagram provided by Noticee to NSE and such a minor aberration with respect to terminating points of the cable should not be construed as a planned attempt to gain any latency advantage or fraudulent conduct. At the same time it states that SEBI has misinterpreted the internal emails of the official of Noticee No.8 to understand that its P2P connectivity was not done as per the representations made to NSE. Further, Noticee also argues that there was no law, regulations, circular or policy of NSE which prohibited any direct P2P connectivity between NSE Colo and BSE Colo centers. At the same time it acknowledges that NSE had a policy of not allowing any direct P2P connectivity to its members. If the Noticee was so sure about the validity of its connectivity, then the question arises as to why did its official Ms. Rima Srivastava raised concern in her email to her superiors ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... , as may be committed, even without any deceit if such act or omission has the effect of inducing another person to deal in securities. Certainly, the definition expands beyond what can be normally understood to be a 'fraudulent act' or a conduct amounting to 'fraud'. The emphasis is on the act of inducement and the security must, therefore, be on the meaning that must be attributed to the word 'induce'. Thus as the apex court has rightly held that the definition of fraud under the PFUTP Regulations, 2003 is quite comprehensive to the extent of covering an action or omission to act under its fold in the same as effect of inducing another person to deal in securities. 56.20 In this case the direct P2P connectivity that the Noticee had taken with the help of an unauthorized leased line service provider so as to gain advantage of latency and speed more than the other brokers was certainly an inducement to the Noticee and the clients of Noticee to deal in security with an expectation of better result and profitability. One has to ask, what is the ultimate objective of Noticee to obtain leased line connectivity from an unauthorized service vendor when the Not ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... its P2P connectivity with the support of Sampark is certainly falling in the category of a fraudulent and deceptive act/transaction for making personal gains. 56.22 To sum up the above, in line with the allegations made in the SCN, I hold W2W (Noticee No. 8) in violation of regulation 3(d) read with 4(1) of PFUTP Regulations, 2003 read with section 12 (A) (c) of SEBI Act, 1992 and Clause A(1), A(2), A(3) and A(5) of Code of Conduct stipulated under regulation 9 of the SEBI (Stock Brokers and Sub- Brokers) Regulations, 1992 on account of the following: a) W2W was direct beneficiary of preferential treatment by NSE, since NSE allowed W2W to continue to use the Sampark line even after knowing that Sampark did not have the requisite licenses to provide such connectivity. The above conduct of NSE and W2W points towards collusion between W2W and NSE to provide benefit to W2W. W2W continued to avail the services of Sampark till September 9, 2015, in spite of knowing that Sampark did not have the requisite license. b) Sampark's connectivity at NSE to other stock brokers was from Sampark's MUX placed at MMR Room. The Sampark's MUX was connected to BSE co-location thr ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... se. The Noticee was the Chief Executive Officer(CEO) of Noticee No.8 and as such was the head in-charge of day to day affairs and operational decisions making in the company i.e. W2W. Under the provision of Companies Act, 2013, the CEO falls within the ambit of definition of KMP (Key Managerial Personnel) and he shall be held responsible, inter alia, as an officer in default for any non compliance with the provisions of the Companies Act. The CEO stand at par with the Managing Director of a company and has a fiduciary responsibility to manage the whole or substantially the whole of the affairs of the company to ensure that all the functions of the company are discharge as per law. As per his own submission the Noticee was in charge of 10 business and 4 non-business divisions which included operations of HO and RO back office and both business head and technology head were reporting to him. Thus, the Noticee was in complete command and control of the company's operations. The contention of the Noticee that he was in-charge of overall operations and did not involve himself in every decision making is not a valid argument as all the decisions are ultimately taken on his behalf and ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... k of due diligence and independent judgment but also is equally responsible for all the acts of W2W involving manipulation of cable path ways on the both sides of the P2P connectivity at NSE Colo BSE Colo respectively in a manner that assured it enhanced advantage of latency over and above the latency advantage that the company enjoyed by engaging the unauthorized service provider in violation of the policy of NSE. 58.5 Moreover, in this case there is a clear cut evidence of direct involvement of the CEO in the matter of engaging Sampark for establishing P2P connectivity which is coming from the email correspondences between CTO of W2W and CEO himself which have been referred to several times in earlier paragraphs. It has already been noted how in the response to the email of Ms. Rima Srivastava (CTO) in which she has expressed her apprehension that their action of directly taking the P2P connectivity from NSE Colo to BSE Colo instead of taking it through their office may attract penalty, the Noticee has sent an email to her stating that Rima to coordinate with Sampark for the needful cabling work immediately. Once the cable is completed, we shall convert the space as functio ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nued to avail the services of Sampark till September 9, 2015, in spite of knowing that Sampark did not have the requisite license. b) Sampark's connectivity at NSE to other stock brokers was from Sampark's MUX placed at MMR Room. The Sampark's MUX was connected to BSE co-location through W2W rack. The above situation was rectified in April, 2016. W2W through Sampark, arranged its cabling in its co-location racks both at NSE BSE ends in such a manner that W2W had the lower latency compared to other trading members connected to the Sampark MUX placed in NSE MMR. Mr. C.K. Nithyanand (Noticee No.10) Mr. B.G.Srinath (Noticee No.11) 59. Submissions of Noticee 59.1 The aforesaid two Noticees have made a common reply on February 1, 2019. Both of them were appointed as non-executive, non-whole time director on the board of W2W (Noticee No.8) during the relevant period of time. After a perusal of their written submission, the points that the two Noticees want to make in their defense against the SCNs served on them are as follows: a) The SCN is vague and does not allege any specific wrong doing by the Noticees. b) The principle of vicarious liabili ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... cee During their personal hearing and in the written submissions dated 28 March, 2019, the Noticee has explained the case with an array of arguments which are summarized as below: 62.1 The Noticee availed the connectivity of Sampark as an additional connection (in addition to the existing connection taken from TATA). This connection was not a substitution of TATA connection and was taken on the trial basis based on the representation made to them by Sampark and as approved by NSE. Sampark represented that W2W had already taken their services with permission of NSE. 62.2 Therefore, based on such representation by Sampark they applied to NSE and after completion of due formalities such as submission of root path for laying the cables and necessary undertaking, work permit was issued by NSE for their P2P connectivity. 62.3 In July 2015, NSE directed Noticee to shift its leased line connectivity from Sampark to other ISP. The Noticee followed the instruction and it did not lose out on anything since it already had data connection for its P2P connectivity. 62.4 On August 19, 2015 Sampark informed the Noticee that all their infrastructure was transferred to Reliance and t ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... s to avoid disruption to trading members including the Noticee, the Noticee made a transition of their contractual terms from Sampark to Reliance immediately after direction from NSE. 62.10 The Noticee has stated that it has conducted necessary due diligence and at best the Sampark connectivity can be termed as a technical human oversight but not violation of any rules, regulation, or commission of any fraudulent act. GKN relied on the judgment and integrity of NSE to conduct the due diligence of all the service providers that use the exchange services. 62.11 NSE had already approved the application of W2W even before GKN had applied for the said line. GKN proceeded on the basis of NSE s approval to W2W and NSE also approved GKN s application. Hence, there was no reason to check the veracity of representation made by Sampark. 62.12 GKN has not bought, sold or otherwise dealt in the securities market in a fraudulent manner. The case deals with alleged preferential access to GKN in respect of leased line connectivity and there is no case of manipulation of any kind of security in the SCN. The Noticee has contended that it has committed no fraud, no inducement to deal insecur ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... onal connectivity on a trial bases in addition to their existing connectivity operating with the leased line provided by TATA while on the other hand it is being explained that they could not disconnect the Sampark connectivity immediately after receiving communication from NSE on the grounds that it would have caused inconvenience to their existing client. The explanation does not justify the reason provided by the Noticee for not disconnecting Sampark line even after being told by NSE to shift from Sampark to other ISP. In fact the Noticee never took any step to shift from Sampark and continued to have the Sampark MUX in its Colo rack and availed data connectivity from Sampark till the Sampark infrastructure was taken over by Reliance and the Noticee got Reliance connectivity officially on September 11, 2015. Even though GKN, as per its own admission had been instructed by NSE to disconnect Sampark line in July, 2015, from the Sampark s invoice dated November 2, 2015 as well as from Ravi Varanasi s statement dated April 19, 2018, it is clear that GKN got preferential treatment and was allowed to avail Sampark s connectivity even though Sampark did not have the requisite license. ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... TSP shows that Noticee was knowing about this disability of Sampark and despite that it went ahead and took P2P connectivity from them. Further, it also reveals that for reasons best known to it, the Noticee did not pay any attention to the disability of Sampark and did not consider it to be a regulatory violation to take direct P2P connectivity from a service provider who did not possess capabilities/requisite approvals to provide such a service. Similarly, it is observed that GKN, vide email dated April 22, 2015, had intimated NSE that it would be terminating the connection in its office within BSE Building (instead of edge router, as indicated earlier). However, unlike many other stock brokers, GKN was not subject to site inspection by NSE. This favorable treatment by NSE reflects the collusive nexus between NSE and GKN in the matter of P2P connectivity to the detriment of several other rule abiding stock brokers. 63.6 The Noticee's contention is that there is no evidence to suggest that because of the Sampark connectivity its turnover increased manifold or it gained any advantage in terms of business vis-a-vis other brokers. This is not the sound argument since it is no ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... on of other brokers. Under the circumstances, I consider the actions and transactions of the Noticee involving its P2P connectivity with the support of dark fibre services from Sampark falling under the definition of fraud and fraudulent activities in terms of Section 12 A(c) of SEBI Act, 1992 and other provisions of PFUTP Regulations, 2003 as have been rightly alleged in the SCNs. Similarly, the allegations for violation of provision of Stock Broker Regulations made in the SCNs holds to its ground against the Noticee in view of the misconduct, lack of due diligence and lack of integrity displayed by the Noticee in the transactions and its actions and inactions vis-a-vis its dealing with Sampark as well as NSE. 63.8 In view of the foregoing discussions, in line with the allegations made in the SCNs, I hold GKN (Noticee No. 12) in violation of regulation 3(d) read with 4(1) of PFUTP Regulations, 2003 read with section 12A (c) of SEBI Act, 1992 and Clauses A(1), A(2), A(3) and A(5) of Code of Conduct stipulated under Regulation 9 of the Stock Broker Regulations on account of the following: a) GKN was direct beneficiary of preferential treatment by NSE, since NSE allowed GKN to ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... acts of the firm done while he is a partner. It is trite that the business of Partnership Firm is conducted by the Partners. Unless otherwise stated in the partnership deed, all partners are actively associated with the business affairs of the Firm and the profit/loss of the partnership firm directly devolve upon the partners as per their shares stated in the partnership deed. 65.2 As mentioned in the SCNs, being the partners of GKN, it was their responsibility to ensure that GKN maintained high standard of integrity and fairness, act with due skill, care and diligence in conduct of its business and also not to indulge in manipulative, fraudulent or deceptive transaction or scheme and abide by all the regulatory provisions. The partners cannot escape from their liability for the action of their partnership firm. Therefore, the GKN and its partners have to be jointly and severally liable for the role played by GKN in the instant P2P connectivity matter involving Sampark dark fiber. Hence, for the same reasons as recorded by me while discussing the submissions of GKN and holding GKN as liable for violation of the provisions of SEBI Act, 1992 and PFUTP Regulations, 2003, as mention ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... hed over to other service provider i.e. Reliance. 67.5 They provided services to stock brokers after obtaining permission from NSE and NSE granted NOC. 67.6 Dark fibre is not some sinister piece of technology which allows backdoor access to the vault and it is just unused fiber over capacity. 67.7 Before a fibre is used, equipment needs to be installed to control the transmission of waves and fibre that is available without such equipment is dark fibre. World over optical fibers both dark and lit are leased by trading firms. 67.8 They did not have any mala fide intention and ulterior motive behind providing services to specific trading members. Cabling inside the premises is completely as per customer and building owner decision. 67.9 There was no collusion between NSE, W2W, GKN and Sampark. 67.10 As an infrastructure provider, their responsibility is to lay cable as per customer and owner of the premises. 67.11 If they had given anything better to W2W, W2W would have continued with them and not shifted to other service provider. 67.12 The entire allegation is untenable in view of the fact that they come under the jurisdiction of TRAI and not within the juri ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d NSE to provide P2P connectivity in an unauthorized and irregular manner so as to help and induce them in their dealing in securities market. Similarly, being the COO of Sampark at the relevant part of time who was driving the business of Sampark and was actively engaged with W2W and GKN throughout the transactions with them and also with NSE, Prashant D Souza (Noticee No. 17) is equally culpable and liable for the actions and fraudulent conduct on the part of Sampark. Under the circumstances, in line with the allegations made in the SCN, I hold Sampark (Noticee No. 16) and Prashant D Souza (Noticee No. 17) in violation of regulation 3(d) read with 4(1) of PFUTP Regulations, 2003 read with section 12 (A) (c) of SEBI Act, 1992. 69. Concluding Observations and Directions 69.1 I have carefully considered all the allegations made in the SCNs and the factual evidence and supporting documents in the form of emails and statements and circulars, etc, that have been referred to in the SCNs. The oral and written submissions made by the Noticees, the explanations offered and arguments advanced by them have been closely examined. At the end of this exercise, in my view, there are cert ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... rastructure provider to Reliance and not as a direct service provider to end customer. Despite this, neither of them enquired about the eligibility of Sampark as a service provider when Sampark approached them. j) The P2P connectivity provided by Sampark remained live for W2W from May 28, 2015 to September 9, 2015 and for GKN, it remained live for May 7, 2015 to September 10, 2015. The P2P connectivity provided by Sampark was dark fibre cable connectivity which is evident from the records. k) The officials of NSE dealing with Colo support and membership Departments never checked or verified the eligibility of Sampark at the time of granting NOC to W2W and GKN for establishing P2P connectivity with their respective racks at NSE Colo. l) NSE officials also permitted Sampark to install its MUX in NSE MMR between June 17-20, 2015, without verifying the license or eligibility of Sampark. m) NSE officials waived their policy of physical inspection of the office of the trading members at BSE prior to granting permission for P2P connectivity to W2W. n) NSE officials allowed W2W and GKN to continue to avail the services of Sampark even after discovering that Sampark ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ns that have been listed out above, support the allegations made against different Noticees with respect to the role played by them in their dealings with each other. At the core of these facts, I can observe that there is a scramble for more speed and less latency by the trading members. In their exuberance and greed to achieve the lowest possible latency in the Colo connectivity, the Noticee No. 8 and 12 have overlooked the basic eligibility of a service provider and engaged Sampark to provide connectivity through their dark fibre cables. Apart from that, I find that Noticee No.8, i.e. W2W has left no stone unturned to acquire latency as low as possible by avoiding switches / hops, by shortening distances of the cable paths or by positioning the cable path in such a manner that it always remains ahead of the other trading members in terms of accessing the market data feeds through its connectivity at NSE Colo and BSE Colo. At the end of the discussions, I am left with the impression that the Colo facility at NSE during the relevant period was symbolized by maladministration and misgovernance. From the way the Noticees, especially NSE, its officials, W2W, its officials and GKN hav ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd manipulation of the network pathways at Colo facilities of NSE and BSE in a manner to achieve, at any cost, its goal of lower latency and fastest access to market data feeds as compared to the other stock brokers. As regards GKN and its partners, they are also equally culpable in engaging Sampark deliberately ignoring the fact that it had no legal ability to provide P2P connectivity. Contrary to their specious claim that they had engaged Sampark only on a trial basis, the fact of the matter is that they remained actively connected to the connectivity provided by Sampark from May 7, 2015 to September 10, 2015, and utilized the connectivity for their data feed and transmission even after that period. GKN also fraudulently stuck to Sampark connectivity even after it was asked to move to another service provider. Therefore, for the reasons recorded by me on the basis of my observations about their respective roles in the matter of allowing Sampark to establish P2P connectivity for them, I hold W2W and its CEO and GKN and its partners liable for violation of various provisions of code of conduct specified in Schedule II of Regulation 9 of stock brokers Regulation, 1992 read with Sect ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... er, the only thing which has been emphasized by SEBI, through its regulations, circulars and guidelines is that the exchanges should display in all their actions, absolute transparency, equity and fairness while dealing with and dispensing technology for the purpose of trading in securities on its platform. Subject to the compliance with the above, like any other MII, NSE has its freedom to utilize the latest technology for upgrading its trading, clearing and settlement functions as well as for enhancing the trading experience for the market participants. 69.8 The technology surrounding Colo facility, P2P connectivity and dissemination of market data feeds is one area where NSE has been freely deploying technology and setting its own regulatory norms for observance and compliance by its own intermediaries. The only cardinal principle that they ought to respect is that no market participant is discriminated against and no market participant is allowed to take undue advantage of its Colo facility and the integrity and sanctity of its facility is ensured at all points of time. As a Self Regulatory Organization (SRO), NSE issued its own circular and guidelines for accessing into its ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... nd 17) are persons associated with securities market for the acts committed by them in connection with providing P2P connectivity to some stock brokers at NSE Colo facility to enable them to have lower latency in the matter of their trading in securities. 69.10 It may be noted that the provisions of section 12A(c) of the SEBI Act, 1992 and regulation 3(d) of the PFUTP Regulations, 2003 prohibit engagement in any act, practice or course of business, in connection with issue or dealing in securities, in contravention of law. Similarly, Regulation 4(1) of the PFUTP Regulations, 2003 provides that no person shall indulge in a fraudulent or unfair trade practices in securities. 69.11 In the instant case, I find that the acts, omissions and conduct of all the Noticees, as alleged in the SCNs, except for the acts of Noticee no.2, Noticee no.10 and Noticee no.11, are covered in the prohibitions prescribed under section 12A(c) of the SEBI Act, 1992 and regulation 3(d) and 4(1) of the PFUTP Regulations, 2003. In view of the aforesaid observations, I find no flaw with the allegations of violations of provisions of Section 12A (c) of SEBI Act 1992 read with relevant regulations of PFUTP ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ropriate directions to them. However, in the case of Noticee no. 2, 10 and 11, whom I don't hold liable for the reasons recorded in respect of them while discussing their respective submissions, no directions is required to be issued. 70. Directions 70.1 Based on the findings established against NSE (Noticee no. 1), the next important issue which requires consideration, pertains to the direction which could be appropriate to be issued to the Noticee no.1 in the facts and circumstances of the matter. As emphasised by me in the foregoing discussions, NSE being a recognised stock exchange and being the leading MII of the country, occupies a pivotal role as a front line regulator in the functioning of the securities market. Therefore, apart from issuing directions that are required to be issued to the Noticee no. 1 for taking various remedial and reformatory steps under section 11, 11(4) and 11B of the SEBI Act, 1992 and Section 12A of the SCR Act, 1956, in my view, considering the gravity of the allegations that have been established against the Noticee, additional exemplary directives need to be issued to the Noticee which could pose an effective deterrence and dis-incent ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... the period from May 08, 2015 to September 10, 2015, i.e. approx. four months comes to Rs.177.43 Crore. As established in this order, Noticee no.1 has allowed Sampark to provide P2P connectivity without having proper licence, to a few stock brokers in a preferential manner while denying the same service to other stock brokers and the said illegitimate service continued for a period of four months. Therefore, it would be appropriate to consider the revenue generated by Noticee during the above stated period of four months as the first basis for determining the amount to be directed to be deposited in the Investor Protection and Education Fund (hereinafter referred to IPEF ) of SEBI. b) In this regard, I further find it relevant to take note of the Net Profit Margin [i.e. Profit after Tax over Revenue from Operations] of Noticee for the relevant period and consider the same as the second basis for determining the subject amount. During the relevant financial year, the net profit margin of Noticee was as shown below: NSE s Net Profit Margin : Year Revenue from Operations (In Rs. Cr.) Profit after Tax (In R ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ces from Sampark, I find it appropriate that a proportionate amount from their respective income earned from trading in securities for the financial year 2015-16, should be deposited by the respective Noticees to the IPEF of SEBI. Accordingly, the proportionate amount of income earned from trading in securities by Noticee no. 8 and Noticee no. 12 during their respective periods of Sampark Connectivity, comes to Rs.15.34 Crores and Rs 4.9 Crores respectively. 70.7 Keeping the foregoing discussions and findings, I, in exercise of the powers conferred section 11, 11(4) and 11B of the SEBI Act, 1992 read with Section 19 of the SEBI Act, 1992 and Section 12A of the SCR Act, 1956 read with Section 11(2)(j) and Section 19 of the SEBI Act, 1992, hereby issue the following directions: NSE (Noticee No.1) a) Noticee no. 1 is directed to deposit a sum of Rs. 62.58 Crores as determined at para 70.3 above along with interest calculated at the rate of 12% p.a. from September 11, 2015 till the actual date of payment, to IPEF of SEBI within 45 days from the date of this order. b) The Noticee no.1, on completion of every six months (by June 30th and December 31st ) for the next thre ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... d any position either directly or indirectly in or be associated, directly or indirectly, with a company listed in any of the stock exchanges recognized by SEBI for a period of 3 years. Subramanian Anand (Noticee No.4) g) Noticee No. 4 is directed that she shall not hold any position either directly or indirectly in the management and/or the Board of or be associated, directly or indirectly, with any Stock Exchange, Clearing Corporation, Depository recognized or registered by SEBI and/or any intermediary registered with SEBI or any of their related entities, for a period of 3 years. Further, Noticee No. 4 shall also not hold any position either directly or indirectly in or be associated, directly or indirectly, with a company listed in any of the stock exchanges recognized by SEBI for a period of 3 years. Ravi Varanasi (Noticee No.5) h) Noticee No. 5 shall not hold any position, either directly or indirectly in or be associated, directly or indirectly, with any Stock Exchange, Clearing Corporation, Depository recognized or registered by SEBI and/or in any intermediary registered with SEBI or any of their related entities, for a period of 2 years. Further, No ..... X X X X Extracts X X X X X X X X Extracts X X X X ..... ecognized by SEBI on proprietary account for a period of 2 year. Sonali Gupta, Om Prakash Gupta and Rahul Gupta (Noticee No.13, Noticee No.14 and Noticee No. 15) p) Noticee No. 13, Noticee No. 14 and Noticee No. 15 shall not hold any position, either directly or indirectly, in or be associated, directly or indirectly, with any Stock Exchange, Clearing Corporation, Depository recognized or registered by SEBI and/or in any intermediary registered with SEBI for a period of 2 years . Sampark Infotainment Private Limited (Noticee No.16) and Prashant D Souza (Noticee No.17) q) Notice No. 16 and Noticee No. 17 are hereby directed not to offer, directly or indirectly, any new telecom services in any manner to any of the Stock Exchange, Clearing Corporation, Depository recognized or registered by SEBI and/or any intermediary registered with SEBI or their related entities, for a period of 2 years. r) Noticee No. 17 is hereby directed not to be associated with any telecom service provider, in any manner, providing services to any of the Stock Exchange, Clearing Corporation, Depository recognized or registered by SEBI and/or any intermediary registered with SEBI, or thei ..... X X X X Extracts X X X X X X X X Extracts X X X X
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