The Securities Appellate Tribunal (SAT) recently set aside an order of the Securities and Exchange Board of India (SEBI) which ordered the National Stock Exchange (NSE) to disgorge around ₹625 crore as penalty for violating regulations in the co-location scam. [NSE v. SEBI]
Disgorgement means giving up portions of profit allegedly obtained by illegal means or unethical acts.
After an inquiry by the NSE, the Whole Time Member (WTM) of SEBI had ordered the Exchange in 2019 to disgorge an amount of ₹624.89 crore along with interest at the rate of 12% per annum from April 1, 2014 onwards, towards the Investor Protection and Education Fund (IPEF).
SAT has now set aside this order, noting that the WTM had exonerated NSE of the charge of violating SEBI regulations. A Bench of Justices Tarun Agarwala (Presiding Officer) and MT Joshi (judicial member) held in its order passed on January 23,
“In the instant case, the lack of due diligence is not on account of any violation of any provisions of the Act or the Regulations or circulars but is on account of human failure to comply with the circulars completely in letter and spirit...
...WTM has exonerated NSE of the charge of violation of the PFTUP Regulations holding that no fraud was committed by NSE or its employees. We, therefore, find that the activity of NSE was not in contravention of any provisions of the SEBI Act or the Regulations or circulars made therein and it is only a case of non-adherence of a circular to some extent."
SAT, however, directed NSE to deposit ₹100 crore in the IPEF as a deterrent and as a price for lack of due diligence and “lapse which is not expected from a first level regulator”.
It also set aside the directions prohibiting NSE from accessing the securities market for a period of six months, and directed it to carry out system audits at frequent intervals.
The co-location case arose on allegations that NSE had violated the fundamental objective of ensuring equal access to all market participants. NSE was accused of giving preferential access to the data to certain members with vested interests.
Co-location service is a facility provided by stock exchanges where the trading or data vending systems of brokers are allowed to be physically located (co-located) within the stock exchange premises.
In its order, SAT also set aside the directions of the WTM to Ravi Narain (former NSE Managing Director) and Chitra Ramakrishna (former NSE Chief Executive Officer) to disgorge 25% of their salaries each for the financial years 2010-11, 2012-13 and 2013-14.
SEBI had held that the MD and CEO had held the senior most management positions at the relevant time.
SAT, however, deduced that experts had been appointed and decisions were taken basis their advice.
"We, however, find that there is no finding to the fact that Mr. Ravi Narain or Ms. Chitra Ramkrishna has made profit or wrongful gain which is a prerequisite for issuance of a direction under Sections 11 and 11B for disgorgement. In the absence of any finding of wrongful gain being made by Mr. Ravi Narain and Ms. Chitra Ramkrishna, we are of the opinion that no direction for disgorgement can be made especially when there is no finding of fraud, unfair trade practice or collusion with any TM," the order stated.
The Appellate Tribunal thus quashed and set aside the disgorgement orders against the two former officials. It also set aside the direction restraining them from associating with any listed company or market infrastructure institution for a period of five years.
In the 235 page order, SAT took exception to SEBI’s conduct of not having conducted the investigation proactively and seriously.
“We find that SEBI had adopted a slow approach and, in fact was placing a protective cover over NSE's alleged misdeeds. It is only when questions were placed on the floor of the Parliament that SEBI woke up and instituted an investigation. Considering the gravity of the alleged charges, SEBI should have itself conducted an investigation/enquiry instead of delegating it to NSE to conduct an investigation. It is strange and it does not stand to reason as to how SEBI directed NSE to conduct an investigation against itself. It is clear that a casual approach was adopted,” the SAT order underscored.
NSE was represented by Senior Advocate Darius Khambata along with Advocates Somasekhar Sundaresan and Abhishek Venkataraman. They were briefed by a team from AZB & Partners comprising Partner Sonali Mathur, Senior Associate Prabhav Shroff and Associate Harshit Jaiswal.
Senior Advocate Rafique Dada argued for SEBI. He was briefed by a team from The Law Point led by Partner Poornima Advani, Associate Partner Manish Chhangani, Ravishekhar Pandey, Prerna Sharma and Samreen Fatima.
Senior Advocate Gaurav Joshi, briefed by Advocates Ravichandra Hegde and Mitravinda Chunduru of Parinam Law Associates, appeared for stock brokerage house OPG Securities.
Narain was represented by Senior Advocate Pesi Modi, who was briefed by Advocates Neville Lashkari, Rashid Boatwalla, Aditya Vyas and Dhruv Jadhav of MKA & Co.
Senior Advocate Prashant S Pratap and Advocates Piyush Raheja and S Priya, argued for Ramkrishna.
Advocate Nithyaesh Natrajan appeared for A Kumar, an advocate practicing before the Madras High Court who intervened and sought a probe into the co-location scam.