SAT delivers relief to NSE in co-location case: Sets aside Sebi's Rs 625 crore disgorgement order

SAT delivers relief to NSE in co-location case: Sets aside Sebi's Rs 625 crore disgorgement order

The Securities Appellate Tribunal (in short SAT) delivered major relief to the National Stock Exchange (in short NSE) when it set aside Securities Exchange Board of India (in short SEBI) April 2019 order directing it to disgorge Rs. 1,000 crore for committing violations of stock exchange and clearing corporation regulations. Disgorgement refers to the repayment of gains that have been made illegally.

In its order delivered on April 30, 2019, the market regulator had directed NSE to disgorge profits worth more than Rs. 687 crore at comprising initial amount of Rs. 625 crore, along with twelve per cent interest per annum from April 2014 onwards.

The case relates to alleged lapses in high-frequency trading offered through NSE's co-location facility wherein some entities allegedly got preferential access in high frequency trading. The NSE co-location facility provides stock brokers to take on rent specific racks and co-locate their servers and systems within the exchange premises. The onus behind co-location services for NSE was to reduce latency for connectivity to the exchange's trading systems for Direct Market Access (in short DMA), algo trading and Smart Order Routing (in short SOR).

SAT while providing relief found that NSE had not committed any violation of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2018 (in short SECC). These relate to stock exchanges and clearing corporations. However, NSE had not adhered to its own norms and guidelines and has not followed the circular.

SAT discovered that while allocating IPs on various ports, proper due diligence was not carried out by NSE and that there was inequitable distribution of IPs. In addition to this, they failed to monitor frequent connections to the secondary server by certain trading members.

NSE had not indulged in any unethical act neither did it unjustly earned profit, noted the Appellate Tribunal.

The division bench comprising of Justices Tarun Agarwala (Presiding Officer) and M.T. Joshi (Judicial Member) in its 232-page order observed, "the Securities Contracts (Regulation) Act, 1956 confers a large responsibility upon the exchange to ensure that undesirable transactions do not take place. Being a first level regulator, it has a front-line responsibility for regulation of the market and has a mandate to ensure compliance by the Trading Members (in short TM) of its own norms, guidelines, and circulars. NSE has a duty to ensure transparency and fair access to all the TMs. For lapses committed by NSE directions under Sections 11 and 11B could be passed and some of the directions of the WTM were rightly passed. Direction for disgorgement was unwarranted but the appellant NSE cannot be allowed go scot free and is required to pay a price for the lack of due diligence on account of human failure to comply with the circular in letter and spirit."

Consequently, the tribunal directed NSE to deposit a sum of Rs 100 crore to the Investor Protection and Education Fund created by the Securities and Exchange Board of India.

The SAT with respect SEBI's order passed against NSE's former officials, former Managing Director, and Chief Executive Officer of NSE, Ravi Narain and Chitra Ramkrishna to disgorge 25 percent of their salaries to the Investor Protection Fund have also been set aside. Narain was asked to disgorge 25 percent of his salary drawn during FY11 to FY13 and Ramkrishna was asked to disgorge her salary drawn for FY14. However, the SAT opined that two officials cannot abdicate their responsibility for the lapses in the monitoring of certain areas.

Moreover, directions were issued restraining Narain and Ramkrishna from associating with any listed company or a market infrastructure institution for a period of five years has been set aside and substituted for the period undergone by them.