Gkn Securities & Ors. vs Sebi

Date : 06.05.2019

Appeal No. 183 of 2019

GKN Securities & Ors. ...Appellants

Versus

Securities and Exchange Board of India ...Respondent

Mr. Gaurav Joshi, Senior Advocate with Mr. Ravichandra Hegde, Mr. Robin Shah, Mr. Ashish Venugopal, Ms. Mitravinda Chunduru and Ms. Ankita Roy, Advocates i/b Parinam Law Associates for Appellants.

Mr. Mustafa Doctor, Senior Advocate with Mrs. Dr. Poornima Advani and Mr. Anubhav Ghosh, Advocates i/b The Law Point for the Respondent.

ORDER:

1. The appellants were charged that they were direct

beneficiary of preferential treatment by National Stock

Exchange of India Ltd. ('NSE' for short), since NSE allowed

the appellants to continue to use the Sampark line even after

knowing that Sampark did not have the requisite license to

provide such connectivity as well as that the conduct of NSE

and the appellants points towards collusion in order to provide

benefit to the appellants and that the appellants continued to

avail the services of the Sampark line till September 10, 2015 in 2

spite of knowing that Sampark did not have the requisite license

and therefore violated Clause A(1), A(2), A(3) and A(5) of the

Code of Conduct specified under Regulation 9 of the SEBI

(Stock Broker and Sub Broker) Regulations, 1992 and

Regulations 3(d) and 4(1) of SEBI (Prohibition of Fraudulent

and Unfair Trade Practices relating to the Securities Market)

Regulations, 2003 ('PFUTP Regulations' for short) read with

Section 12A(c) of the SEBI Act, 1992. The charge having been

proved, the Whole Time Member ('WTM' for short) of

Securities and Exchange Board of India ('SEBI' for short)

imposed a penalty of disgorgement of Rs. 4.9 crore along with

interest at the rate of 12% p.a. and further directing the appellant

no. 1 not to accept, induct, enroll any new client for a period of

one year and further not to undertake any trading on any Stock

Exchange recognized by SEBI on proprietary account for a

period of two years. The other appellants were restrained from

holding any position, either directly or indirectly with any Stock

Exchange, Clearing Corporation, Depository recognized or

registered by SEBI for a period of two years.

2. The Show Cause Notices revolved around point to point

connectivity installed by the appellant between the colocation

facility ('colo facility') of NSE and the colo centre at BSE 3

during the period May 7, 2015 to September 10, 2015 by

engaging an unauthorized service provider i.e. Sampark in

violation of NSE's circular.

3. Before us it was urged that the penalty imposed is based

on surmises and conjectures. It was contended that even

assuming without admitting that the objective of having a point

to point connectivity was in order to receive large quantity of

data at a faster speed which enabled the appellants to gain faster

access to the market data than other brokers was immaterial

since no finding has been given of any advantage being taken by

the appellants in terms of trade volumes or profits on the basis

of accessing large volume of data at a faster speed in

comparison to the data accessed by other brokers. It was urged

that in the absence of any finding that the appellants has profited

from this transmission of large quantity of data at a higher speed

than the other brokers, the penalty of disgorgement was wholly

unwarranted. It was also contended that E&Y report

categorically reported that they are not in a position to find out

as to whether the appellants had gained any advantage from the

dark cable. It was further contended that under the Regulations,

disgorgement is to the extent of profits earned whereas in the

instant case the disgorgement has been made on the gross 4

income which is wholly unwarranted. It was further contended

that the income of the appellants has been shown in its income

tax returns was from various sources and was not confined to

the proprietary trading on the NSE / BSE platform and therefore

the amount of penalty imposed towards disgorgement was

wholly arbitrary. It was also urged that the volume of trades

made by the appellants prior to the installation of the dark fibre

line by Sampark and after its installation remained the same and

no benefit was made by the appellants. Thus imposition of

penalty of disgorgement and restraining the appellants from

accepting new clients for a period of one year and restraining

them from undertaking any trade on proprietary account is

arbitrary and excessive.

4. On the other hand, the learned senior counsel for the

respondent contended that time was the essence in algo trading

and by utilizing the dark fibre line provided by an unauthorized

vendor Sampark gave material advantage to the appellants

compared to other brokers who could not utilize this facility. It

was contended that in spite of knowing that Sampark was the

unauthorized vendor the appellants continued to avail the dark

fibre connectivity from Sampark which conferred the latency

advantage to the appellants. It was also urged that the ability to 5

access the market data faster than the others was by itself

violative of the Regulations and it was not necessary to go into

the question as to whether the appellants took any advantage of

the high market data accessed by them.

5. Having heard the learned senior counsel for the parties, we

find that prima facie the contentions raised requires

consideration which cannot be decided at the admission stage

and requires a reply and detailed hearing. The fact whether the

appellants had benefited and / or made profits from the large

quantity of data that was transmitted at a faster speed and

therefore had faster access to the market data compared to other

brokers is a question which requires determination. Further, the

disgorgement made against the appellants on gross income or

net income is also required to be considered. We further find

that investigations have been going on since 2015 and stopping

the business activity of the appellants with immediate effect by

the impugned order prima facie appears to be unjustified.

6. We are therefore of the opinion that balance of

convenience requires that an interim order be passed. We

accordingly direct the respondent to file a reply within six

weeks. Three weeks thereafter is allowed to the appellants to

file a rejoinder. The matter would be listed for admission and 6

for final disposal on July 22, 2019. In the meantime, the effect

and operation of the impugned order insofar as it relates to the

appellants shall remain stayed provided the appellants deposit a

sum of Rs. 2.5 crore before the respondent on or before

May 20, 2019 which amount shall be kept in an interest bearing

account by the respondent and would be subject to the result of

the appeal. If the amount is not deposited within the stipulated

period, the interim order will stand vacated automatically.

Sd/-

Justice Tarun Agarwala Presiding Officer

Sd/-

Justice M.T. Joshi Judicial Member 06.05.2019 Prepared and compared by:msb