Mr. A. Kumar vs Sebi

application and the appeal filed by Mr. A. Kumar. Mr.

A. Kumar is an advocate practicing in the Madras High

Court and has filed an appeal praying that the order of the

WTM dated 30th April, 2019 be set aside and that the

respondents should be directed to undertake a

comprehensive investigation into the NSE Colocation

scam and initiate appropriate proceedings against the

NSE management who intentionally did not cooperate

and provided false and misleading information to the

Technical Advisory Committee (hereinafter referred to as

„TAC‟) and Deloitte Touche Tohmatsu LLP (hereinafter

referred to as „Deloitte‟) and to take appropriate 12

proceedings against the directors, principal officers, key

managerial persons of NSE and further pass appropriate

orders for disgorgement under Section 11B. The

appellant prayed for other directions which are spelt out

in the memo of appeal. In addition to the aforesaid, the

appellant has also filed an intervention application in the

appeals filed by NSE, Mr. Ravi Narain and Ms. Chitra

Ramkrishna praying that he may be allowed to intervene

and be impleaded as a party in the appeals.

7. The contention of Mr. A. Kumar is, that being

aggrieved by the impugned order he filed a complaint

dated 6th July, 2019 before SEBI complaining about the

NSE Colocation scandal. According to him, the scandal

runs into Rs.50,000 crores which has tarnished the

reputation of the major market infrastructure institution

and severely dented the integrity of the securities market.

As a result of the scam, millions of investors have

incurred huge losses due to delayed dissemination of the 13

„Tick-By-Tick‟ (hereinafter referred to as TBT)‟ data. It

was contended that in the Colocation scam the NSE had

violated the fundamental objective of ensuring equal

access to all market participants and that certain TMs

with vested interests were given preferential access to the

data. It was alleged that certain TMs with prior access to

the data indulged in front running and abused the market

and committed fraud not only to the detriment of the

securities market but also to the whole nation. It was

alleged that no action was taken by SEBI on the

complaint letter filed by appellant and, therefore, he filed

a writ petition before the Madras High Court in which he

prayed for a direction to SEBI to decide his

representation and reinvestigate the matter. This writ

petition is still pending.

8. It was urged that during the time of Mr. Ravi Narain,

NSE had launched its Colocation facility in January, 2010

which was unauthorized and did not have approval from 14

SEBI and, therefore, such unauthorized activity was

wholly illegal which SEBI should investigate. It was

alleged that selected brokers were allowed to misuse the

Colocation facility by giving them advantage over other

market participants. It was alleged that the role of Mr.

Ravi Narain and Ms. Chitra Ramkrishna should be

investigated. It was contended that Omnesys

Technologies Pvt. Ltd. (hereinafter referred to as

„Omnesys‟) provided technology for trading on NSE. It

was alleged that Ms. Chitra Ramkrishna was also a

Director of Omnesys and was also the MD & CEO of

NSE and, therefore, there was a clear conflict of interest

and, therefore, investigation should also be made by SEBI

with regard to the role of the IT Company which had a

business relationship with NSE.

9. It was also alleged that Mr. Sanjay Gupta, owner and

promoter of OPG abused the TBT architecture in

connivance with the officials of NSE on the basis of 15

which it allowed OPG to be the first one to log in the

exchange server of NSE and, which resulted in unlawful

gain to OPG and loss to other brokers. It was also alleged

that Mr. Ajay Shah alongwith his wife Ms. Susan Thomas

had collected NSE trade data which was subsequently

passed on to private unknown persons and was used to

develop algo software called „Chanakya‟. It was alleged

that this software was sold to brokers including OPG,

who in turn benefitted it by exploiting the TBT

architecture of NSE.

10. It was also urged that SEBI should also examine the

relationship of Ms. Susan Thomas‟ sister with former

Head of Surveillance, NSE and the role played by Ms.

Susan Thomas and Mr. Ajay Shah. It was also alleged

that OPG had various vested interest and had some

connection with Mr. Ajay Shah and all these facts were

available with SEBI which forms part of the appellant‟s

representation as well as the writ petition. It was, thus, 16

urged that directions should be issued to SEBI to conduct

a fresh comprehensive investigation into the Colo scam

and the impugned order should be set aside. Similar

relief was claimed in the intervention application.

11. In addition to the above, it was contended that when

NSE was involved in the Colo scam it was inappropriate

for SEBI to direct NSE to conduct an investigation. It

was contended that SEBI should have conducted its own

investigation instead of outsourcing the investigation to

NSE. It was also urged that the TAC report as well as the

Deloitte report gave a categorical finding regarding non-

cooperation by NSE inspite of which no action was taken

by SEBI under Section 11C of the SEBI Act and,

therefore, suitable directions should be given by this

Tribunal. It was also contended that the TAC report and

Deloitte report made scathing observations against NSE

regarding manipulation of the TBT architecture on

account of which select brokers benefitted. Further, 17

preferential treatment was given to OPG in connivance

with certain staff of NSE. It was also contended that the

WTM committed an error in giving a finding that

violation of PFUTP Regulations have not been proved. It

was contended that PFUTP Regulations is applicable in

the present case. The circumstantial evidence and

inference can be drawn to invoke the PFUTP Regulations

and if the said Regulations are applied it would clearly

reveal that there was a devious ploy to hide and suppress

material facts, which was a ground by itself to invoke the

PFUTP Regulations against NSE. It was further urged

that SEBI should be directed to exercise its powers under

Section 24 of the SEBI Act and launch criminal

prosecution against the erring officers.

12. It was also urged that misuse of secondary server by

unscrupulous brokers manipulated the market as a result

of which the purity and sanctity of the securities market

was compromised. It was urged that the economic fraud 18

of this magnitude and nature deserves no leniency or

sympathy and that the wrong doers must be punished by

this Tribunal. It was also urged that the WTM has passed

two contradictory orders, namely, the order passed in

NSE matter and in OPG matter. On account of these

contradictions and inconsistency in the two impugned

orders, it was urged that the two impugned orders should

be set aside and a fresh direction should be issued to

SEBI to reinvestigate the matter and pass fresh orders

thereafter. It was, thus, contended that the appellant

should be permitted to interfere and should be impleaded

as a party.

13. The appeal and the intervention application was

vehemently opposed by the appellants contending that the

interveners are not necessary parties nor are interested

parties and are unnecessarily poking their nose in which

they have no stake in the matter. The respondent urged

that Mr. A. Kumar has no locus standi to file the 19

intervention application or to file an appeal as he is not a

person aggrieved under Section 15T of the SEBI Act.

The applicant Mr. A. Kumar is neither a proper or a

necessary party for adjudication in the appeal and,

consequently, has no locus standi to file the appeal.

14. Insofar as SEBI is concerned, it was urged that they

would abide by the decision of this Tribunal and in the

event the Tribunal directs reinvestigation in the matter

they would comply with the said directions.

15. Considering the submissions made by the parties, we

are of the opinion that Mr. A. Kumar is neither a

necessary party nor is an interested party.

16. Section 15T of the SEBI Act provides as under:

"15T.Appeal to the Securities Appellate Tribunal.

(1) Save as provided in sub-section (2), any person aggrieved,-

(a) by an order of the Board made, on and after the commencement of the Securities Laws 20

(Second Amendment) Act, 1999, under this Act, or the rules or regulations made thereunder; or

(b) by an order made by an adjudicating officer under this Act: or

(c) by an order of the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority, may prefer an appeal to a Securities Appellate Tribunal having jurisdiction in the matter.

[***]

(3) Every appeal under sub-section (1) shall be filed within a period of forty-five days from the date on which a copy of the order made by the Board or the adjudicating officer or the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority, as the case may be, is received by him and it shall be in such form and be accompanied by such fee as may be prescribed:

Provided that the Securities Appellate Tribunal may entertain an appeal after the expiry of the said period of forty-five days if it is satisfied that there was sufficient cause for not filing it within that period.

(4) On receipt of an appeal under sub-section (1), the Securities Appellate Tribunal may, after giving the parties to the appeal, an opportunity of 21

being heard, pass such orders thereon as it thinks fit, confirming, modifying or setting aside the order appealed against.

(5) The Securities Appellate Tribunal shall send a copy of every order made by it to the Board of the Insurance Regulatory and Development Authority or the Pension Fund Regulatory and Development Authority, as the case may be, the parties to the appeal and to the concerned adjudicating officer.

(6) The appeal filed before the Securities Appellate Tribunal under sub-section (1) shall be dealt with by it as expeditiously as possible and endeavour shall be made by it to dispose of the appeal finally within six months from the date of receipt of the appeal.‖

17. A perusal of the aforesaid provisions indicates that

any person aggrieved by an order of the Board may prefer

an appeal to the Tribunal. Admittedly, the appellant is an

advocate practicing in the Madras High Court. The

impugned order does not affect him in any way nor is he

concerned with the securities market. Nothing has been

stated as to how the appellant is aggrieved by any finding

of the WTM in the impugned order. Shri A. Kumar has 22

not produced any new material or evidence which would

necessitate an intervention by the applicant in the present

appeal. Mr. A. Kumar admittedly had not availed any

Colocation service and, therefore, he is not an aggrieved

person as an investor or user of NSE services. The

applicant has no connection with NSE nor is otherwise

interested in the functioning of NSE and, therefore, we

are of the opinion that the applicant Mr. A. Kumar is not

aggrieved by any action of NSE let alone Colocation

facilities.

18. A perusal of the memo of appeal and the intervention

application indicates that he is espousing a public cause,

namely, to ensure that the market is transparent, fair and

equal access is given to all participants. In this regard,

the applicant has already made a complaint to SEBI

which is pending consideration and has also filed a writ

petition before the Madras High Court seeking a direction

to SEBI to pass appropriate orders on his complaint. The 23

complaint and the writ petition filed before the Madras

High Court by Mr. A. Kumar is in the nature of a public

interest litigation. Since the ground raised in the memo

of appeal and in the intervention application are pending

consideration before the Madras High Court which

directions has been sought to SEBI to decide its

representation, it is not open to Mr. A. Kumar to make the

same prayer before this Tribunal. Once the appellant has

chosen a particular forum for redressal of his grievance it

is no longer open to the applicant Mr. A. Kumar to

choose another forum.

19. In any case, since the impugned order does not affect

the interest of the appellant, we are of the opinion that the

applicant is not a person aggrieved and is therefore

neither a proper or a necessary party.

20. Further, the contention raised in the memo of appeal

directing SEBI to conduct certain investigation cannot be

taken into consideration for the purpose of deciding the 24

present appeal. We are of the opinion that the applicant

Mr. A. Kumar has no locus standi to file an appeal or to

intervene as he is not a necessary or an interested party

and even though we had heard the applicant at length the

intervention application cannot be entertained. We are of

the opinion that the intervener has no locus to intervene

as he is not a necessary or interested party. Accordingly,

the appeal and the intervention applications filed by Mr.

A. Kumar are rejected.

21. On April 3, 2008, Securities and Exchange Board of

India (hereinafter referred to as „SEBI‟) allowed Direct

Market Access („DMA‟ for short) facility which allowed

clients to access the market directly i.e. without human

intervention, using the software of a trading member and

routing the orders through the trading member‟s

infrastructure. This paved the way for algorithmic („algo‟

for short) trading where the decisions on the trades are

executed by computer software. The orders are executed 25

using automated preprogrammed trading instructions. The

absence of human intervention steps up the frequency and

the speed of the reactions to market movements, and is

called "High Frequency Trading" („HFT‟ for short), using

algorithms in trading.

22. Co-location services i.e. (Colo) is a facility

provided by Stock Exchanges across the globe for all

trading members for a reasonable fee. Interested member-

brokers who are engaged in HFT, can avail Colo facility.

Access to Colo is fairly and equitably available to all

member-brokers. In HFT, faster access to data and price

feed helps in swifter execution of a trade (which results in

a high daily turnover and high order-to-trade ratio). When

a member-broker avails Colo, trading or data vending

systems of the broker are allowed to be "co-located" i.e.

physically located within the very premises of the stock

exchange.

26

23. In 2009-10, in line with international best practices,

NSE decided to provide its Colo facility. This service was

available to any desirous member-broker, for a fee. The

member-broker would rent a physical rack space within

the Colo facility in the premises of NSE, and place their

servers therein.

24. The technology for dissemination of data in the

Colo facility is through the „Tick-By-Tick (TBT)‟

mechanism. TBT comprises dissemination of „ticks‟. A

„tick‟ is a fundamental unit of data dissemination in the

TBT architecture. In other words, ticks comprise order

entries, order modifications, order cancellations, trades

arising from the orders, and every other piece of data

related to the market, on a real-time basis. The

dissemination of such data builds for the trading

members, their order book (the list of orders that indicates

the interest of buyers and sellers in a particular security at

any point of time).

27

25. The ticks have to be received by the computer

system of the member-broker, for the order book to get

compiled and is made available to the trading system of

the member to enable him to trade.

26. TBT data feed result in members receiving every

single tick, and thereby compiles the order book. If one

tick is lost, the entire order book would be out of sync

with that of the exchange, and members could suffer huge

losses with the data integrity not being completely

assured.

27. Transmission Control Protocol/Internet Protocol

(„TCP/IP‟ for short) has an inbuilt flag system that

acknowledges the receipt of each single TBT data packet

at the receiving end, and even identifies lost ticks. If

even one packet of data is lost, the network itself attempts

to recoup the lost data packet, and transmit it again. It

therefore ensures the integrity of market data and safe

delivery of all ticks to the member.

28

28. On account of the growth of the Colo facility and an

increase in its demand, in 2013, NSE reviewed the TBT

architecture and planned the introduction of Multi-cast

Tick-By-Tick („MTBT‟ for short) because MTBT could

handle higher volumes and users, more efficiently.

29. Thus, in keeping with the development of technology

and the advancement of the market, NSE began

upgrading its system architecture to MTBT in April 2014.

The architecture was migrated from the TCP/IP-based

TBT system architecture to the MTBT system, in a

phased transition, and with effect from December 3, 2016

it had completely migrated to the MTBT architecture. In

the intervening period, NSE continued to provide TCP/IP

TBT feed as well while the market adapted to MTBT.

Thereafter, from December 2016, NSE discontinued the

TCP/IP feed, which, since then, is been used as a back-up

owing to the integrity of dissemination and receipt

assured by MTBT.

29

Brief description of the TCP/IP TBT System Architecture

30. NSE operates independent trading systems which

match, buy and sell orders to discover price. From the

trading system of the exchange, data is communicated/

disseminated to the members availing the Colo facility

using the TCP/IP TBT system architecture in the nature

of ticks. As stated above, each tick denotes a change in

the order book i.e. order entries, order modifications,

order cancellations, trades, and other data related to the

market that can change the order book as they happen.

The member-brokers‟ trading systems which are co-

located in the exchange premises connect to the Ports (as

defined hereinafter) through IPs, for the receipt of

disseminated data from NSE‟s trading systems.

31. A diagrammatic representation of the TCP/IP system

architecture in the Cash Market segment, with the

Secondary Server shown as „POP 4 Receiver‟ in the

diagram, is produced herein below for easy reference: 30

The data comes from the trading system of NSE. 31

Primary Data Source ("PDC")

32. The first part or tier of the TCP/IP architecture is the

Primary Data Source („PDC‟) which is connected to the

trading system and receives the TBT data from the

trading system. The „Epsilon script‟ (a type of software)

automatically starts the TBT application in the PDC as

the first step.

33. The three Receivers i.e. Receiver 1, Receiver 2 and

Receiver 3 receives the information which comes from

the trading system. The information which is received in

these three Receivers is received randomly and not in a

chronological order that is to say „Tick 1‟ which is sent

from trading system may be received by „Receiver 1‟

whereas „Tick 2‟ may be received by „Receiver 2‟ and

„Tick 3‟ may be received by „Receiver 3‟ and „Tick 4‟

may be received by „Receiver 4‟. The aforesaid

information from three Receivers percolates to the

"Sequencer" which sequences this information in the 32

order of the "Ticks". Thereafter, the information goes to

the "Processor". The "Receivers", the "Sequencer" and

the "Processor" together makes the „PDC‟.

Pop Servers

34. From the Processor, the information goes to the

"Point of Presence Servers" (POP Servers) which is the

second layer of dissemination of the tick. A POP Server

comprises of a POP Receiver and three POP Senders.

The POP Receiver receives the data from the PDC and

sends it to the POP Server. The order of dissemination

from PDC to POP Servers during any given day was

sequential in nature, and depended on the order in which

the POP Servers got connected to the PDC in the morning

for the first time. All the POP Servers starts

automatically almost at the same time using the Epsilon

script, after the PDC is started. However, the order in

which the POP Servers actually connect to the PDC

varies due to random variations in the TBT application 33

start up time within each POP Server. The information

that goes to the POP servers from the Processor is in a

sequence, namely, that the information is received in POP

Receiver 1, then POP Receiver 2 and then POP Receiver

3 and then POP Receiver 4 which is the secondary server.

According to SEBI, the sequence in which the POP

Receivers receives the information is dependent on which

POP Receiver is switched on first manually.

Ports

35. From the POP server, the information is transmitted

to the three Ports. Every POP Server also has three POP

Senders, also known as „Ports‟. Data which is received

by the POP Receiver is in turn, disseminated onwards

through the „Ports‟ to the servers of member-brokers

sitting on the Colo-rack.

36. Each trading member is connected to a particular Port

and cannot shift without the express permission of NSE.

Member-brokers were allotted specific ports & IP 34

addresses on the POP Servers, and could only access the

POP server through their respectively assigned IP address

and port. Member-brokers were also given access to the

secondary server.

37. The information is transmitted out of the Port on the

basis of „first connection‟ and the order of dissemination

remains the same throughout the day in the same

chronology.

Secondary Server

38. The term "Secondary Server" is a nomenclature used

for an additional/alternate/backup POP Server provided

by NSE. The secondary server was meant to act as a

back-up server in the event of a primary POP Server

failure in which case the Secondary Server would allow

continuous access without disruption to the TBT market

feed. Each trading member was also given an IP address

for connecting to the Secondary Server, and it was

expected and indeed instructed that members must only 35

connect to the Secondary Server only when they were

unable to connect to the primary POP Servers. The

purpose was to ensure that trading members could easily

connect to the Secondary Server in case of primary POP

Server failure.

39. Much after the „TBT architecture‟ was upgraded to

MTBT in April, 2014 which system was adopted in a

phased transition, and entirely with effect from December

3, 2016 that SEBI received certain complaints dated

January 8, 2015, August 10, 2015 and October 3, 2015

from Mr. Ken Fong against NSE with regard to its Co-

location facilities alleging:

a. TBT data feed, which provides information

regarding every change in the order book, was

disseminated over TCP/IP. Under this protocol,

the information is delivered one-by-one unlike

broadcast, where everyone gets the price

information at the same time. TBT data feed was 36

disseminated sequentially in the sequence trading

members („TM‟) connected/logged-in to the server.

b. The first one to connect to the lowest load server

would get advantage in terms of receiving the data

faster than others.

c. Some people had figured out that the way to game

the system by being the first one to connect to the

server and preferably a server which was the

fastest. A server could be the fastest due to lesser

load or it could be hardware of the server which

was slightly powerful.

d. NSE was the second largest shareholder of

Omnesys and Omnesys had the knowledge that

connecting faster would put the server ahead in the

queue.

e. One TM namely, OPG used the NSE system to its

advantage by (a) hiring Mr. Nagbhusan Bhat, who

was working with Omnesys to figure out which 37

server was working better; (b) having certain

arrangements with NSE‟s datacenter staff named

Mr. Jagdish Joshi who would inform the TM(s) the

time when the servers would start, and therefore

could be the first to connect; (c) switching on to

the fastest servers or accessing least crowded

servers with the help of NSE staff members. It was

alleged that OPG indulged in front-running in

collusion with NSE employees.

f. In addition to the above, the back-up servers that

were installed for the purpose of business

continuity, whose access should ideally be

permitted in case the primary servers went down,

were allowed to be accessed by OPG as load on

such server was low.

g. Once NSE started MTBT at its co-location facility,

the market share of OPG fell off the chart. 38

40. Upon receipt of the complaint, SEBI constituted a

Cross Functional Team („CFT‟ for short) to conduct a

preliminary fact finding on the veracity of the complaints.

A report dated 30th November, 2015 was submitted by

CFT to the Technical Advisory Committee („TAC‟ for

short). On examination of the preliminary report of the

CFT, TAC recommended that a detailed analysis be

carried out by an Expert Committee. The

recommendation of the TAC was accepted by SEBI and

an Expert Committee was constituted which submitted its

report on 2nd March, 2016 contending that:

a. NSE TBT architecture was prone to market abuse

thereby compromising market fairness and integrity;

in that it provided quicker order dissemination to

those who managed to login early, i.e, if one entity

is ahead of the other while logging in the morning, it

gets information ahead of the other throughout the

day. Further, it is not important to be absolutely the 39

first one to login. It simply gives you probabilistic

advantage to log-in as early as possible.

b. OPG tried to exploit this architecture by not only

logging in first on select servers but it even tried to

crowd out others by occupying 2nd, and 3rd

positions on those servers.

c. OPG was always consistently logging in first on

servers with better hardware in terms of Memory/

Front Side Bus (FSB) speeds.

d. It also appears plausible that OPG and some other

brokers were given preferential access to backup

servers of NSE TBT system.

e. OPG gained materially from the exploitation of TBT

architecture, in that, once MTBT was introduced,

OPG‟s success in getting Unique Multi-Leg Option

(„UMLO‟) trades executed reduced dramatically,

while it did not fundamentally change for other

brokers. Thus, OPG‟s earlier success in UMLO 40

trades can be causally attributed to its exploitation of

the weaknesses in the TBT architecture.

41. The findings of the Expert Committee alongwith

TAC report was forwarded to NSE who in response

refuted the findings of the Expert Committee. The TAC

considered the response of NSE and issued directions

dated September 9, 2016 directing NSE to initiate an

independent enquiry including forensic investigation by

an external agency as highlighted in the Expert

Committee‟s report including lack of processes and

collusion, if any, and fix accountability for the aforesaid

breaches covering NSE and stock brokers, vendors and

outsourced entities who were involved allegedly in the

issue. Directions were also issued to complete the

investigation within three months.

42. Based on the aforesaid, NSE appointed Deloitte

Touche Tohmatsu India LLP („Deloitte‟) to conduct the 41

forensic investigation. Deloitte submitted its report on

December 23, 2016 making the following observations:

a. ―Review of TBT system architecture indicated data was disseminated to members in a sequential manner whereby the member who connected first to the POP server received the ticks (market feed) before the members who connected later. Hence, the system architecture of the TCP based TBT system was prone to manipulation;

b. Due to the sequential dissemination of information, ticks were disseminated faster to members connected on less crowded servers, thereby giving an advantage to such members.

c. In order to ensure that the norms of ‗fair access' were not breached, it was possible for NSE to negate the advantage of connecting first by implementing a ‗randomizer' which would randomly pick a connection to begin dissemination of data, rather than starting with the first connection each time. However, though NSE developed a randomizer in 2011 that was implemented only for Bucket POP servers. This was not replicated on the broader TBT systems.‖

43. Subsequently, vide letter dated 28th February, 2017,

SEBI advised NSE to undertake a forensic audit in the

Cash Market („CM‟) segment, Currency Derivatives 42

(„CD‟) segment and Interest Rate Futures („IRF‟)

segment for the period 2010-15 and to examine the

benefits/profits made by the TMs through the TBT

mechanism. Based on the directions, NSE appointed

M/s. Ernst & Young LLP (hereinafter referred to as „EY‟)

to carry out forensic audit of CM, CD and IRF segments.

NSE also appointed Indian School of Business („ISB‟) to

undertake examination to estimate the benefits/ profits to

the TMs who logged in first. EY submitted its report on

May 18, 2018 and ISB submitted its report on November

14, 2017. TAC after considering the EY report

recommended:

a. ―The architecture of NSE with respect to dissemination of TBT through TCP/IP was prone to manipulation/market abuse.

b. Some trading members were given preferential access to backup servers at NSE.

c. Brokers having an access to backup servers were having a potential access advantage over other trading members.

43

d. Trading members having multiple IPs have a potential access advantage over other trading members.

e. As the IPs were manually allocated and given the fact that the servers were not equally loaded and configured, selective manual distribution/allocation of IPs could present potential access advantage over other trading members.

f. TAC agreed with the conclusion of EY that randomization was not implemented in TCP/IP TBT architecture and in absence of a randomizer, dissemination on each Port of a TBT server was sequential based on login time of a member. Therefore, such sequential dissemination could result in a potential advantage to preferred trading members.

g. TAC mentioned that from the email evidences and observations in EY report regarding reprimanding selected members for making connections to Secondary Server and not all, it can be concluded that preferential treatment was given to few brokers in terms of selective information."

44. In this manner, seven reports were furnished by

various agencies over a period of time, namely, the CFT

report in November 30, 2015, the TAC Expert Committee

report in March 2, 2016, Deloitte report dated December, 44

2016, ISB report in November, 2017, EY report dated

May 18, 2018 in CM segment, EY report dated June,

2018 in CD segment and IRF and Deloitte report dated

July, 2018 with regard to first/early connect and

connection to secondary server.

45. Based on the findings of the TAC report and Deloitte

report, a show cause notice dated May 22, 2017 was

issued to 15 noticees. The show cause notice mainly

contained allegations regarding:

i. the issue of preferential access given to certain TMs

while disseminating the TBT data feed.

ii. the issue of access to Non-ISPs for laying of Dark

fiber within the exchange premises.

iii. non-cooperation by NSE and its Officers iv. not acting on complaints forwarded to the

exchange.

v. NSE failed to ensure trading in a transparent, fair

and open manner and, consequently, failed to fulfil 45

the objects envisaged in its MoA and the conditions

of recognition.

46. Subsequently, issue relating to access to Non-ISPs for

laying of Dark fiber within the exchange premises was

split into different show cause notices in 2018. One set of

show cause notice was issued on July 3, 2018.

Supplementary show cause notice was issued on July 31,

2018 and, in this way, notices initially issued to 15

noticees increased to 17 noticees.

47. Summary of allegations contained in 2017 show cause

notice, 2018 show cause notice and supplementary show

cause notice are as under:

a. TCP/IP based TBT architecture was allegedly prone

to manipulation which compromised market fairness

and integrity. NSE did not consider the principles of

fair and equitable access while taking a decision

regarding the system architecture; 46

b. NSE allegedly failed to implement a 'randomizer' in

its TBT architecture. Although, NSE had developed

a randomizer in 2011 and implemented it for the

Bucket POP servers, this was not implemented on

TBT servers;

c. NSE allegedly failed to implement a load balancer

and did not adhere to its policy for allocation of IPs,

and more than 30 IPs were allocated on some ports

in breach of the NSE‟s policies. This put members

who were on more crowded ports at a disadvantage

and provided an unfair advantage to members on

less crowded ports;

d. NSE allegedly did not have defined policies and

procedures with regard to Secondary Server access,

and the guidelines were not issued as a circular. By

selectively reprimanding some brokers connecting

to the Secondary Servers (and not others), and

allowing some brokers to continue connecting 47

regularly to the Secondary Servers, NSE allegedly

showed differential treatment to brokers;

e. NSE allegedly failed to maintain backups or records

for:

(i) The configuration file (which captured

parameters like IP address, Port number and

vendor file, and sequence in which ports would

receive TBT data); or

(ii) Requests for change of the configuration file

by members.

f. There were allegedly no policies and procedures for

allocation/mapping of the IPs of members to the

dissemination servers, nor was there a Standard

Operating Procedure („SOP‟) to deal with requests

for change in IP mapping to a particular server. Such

requests were left to the discretion of the NSE's

Project Support and Management ("PSM") Team, 48

which has shown differential treatment / responses

to members for such requests;

g. The Noticee has allegedly violated the provisions of

Section 4 of the Securities Contracts (Regulation),

Act 1956 ("SCRA"), by failing to fulfil its main

object of ensuring fair dealing;

h. The Noticee has allegedly failed to comply with

Regulation 48 of the Securities Contracts

(Regulation) (Stock Exchanges and Clearing

Corporations) Regulations, 2012 ("SECC

Regulations") in view of its alleged failure to

cooperate with SEBI, the SEBI External Committee

appointed by SEBI, and the forensic auditor

appointed by the Noticee on SEBI's direction, and to

provide requisite information as sought by SEBI;

and

i. The Noticee has allegedly failed to comply with

Regulation 41(2) of the SECC Regulations by 49

giving preferential access to certain trading

members.

48. In addition to the above, 2018 show cause notice

alleged

a. NSE failed to comply with Regulation 42(2) of the

SECC Regulations and Clause 3 of SEBI circular

CIR/MRD/DP/07/2015 dated May 13, 2015 by

failing to ensure fair, transparent and equitable

access to all trading members in respect of the co-

location facility;

b. NSE failed to comply with clause 4(i) of SEBI

circular CIR/MRD/DP/09/2012 dated March 30,

2012 by failing to have adequate controls and

policies in respect of the Co-location facility,

thereby making the system prone to manipulation;

and

c. NSE and its employees allegedly violated Section

12A(a), (b) and (c) of the Securities and Exchange 50

Board of India Act, 1992 (hereinafter referred to as

„SEBI Act‟), Regulations 3(a), 3(b), 3(c), 3(d) and

4(1) of the Securities and Exchange Board of India

(Prohibition of Fraudulent and Unfair Trade

Practices relating to Securities Market) Regulations,

2003 (hereinafter referred to as „PFUTP

Regulations‟) by colluding with OPG to provide

preferential access to OPG, and thereby indulged in

fraudulent and unfair trade practices.

d. It was alleged that OPG was constantly logging in

across servers and OPG was aware of the weakness

of the system architecture and the advantage of

having first access in terms of trade. Further, OPG

had designed the software in such a way that OPF

could connect first and gain advantage.

e. It was also alleged that by assigning multiple IPs to

OPG to a single Port by NSE allowed crowding by

OPG enabling OPG to establish first, second, third 51

and even fourth connection to the server and thereby

in this regard OPG gained advantage over other

stock brokers and, therefore, alleged NSE has acted

in a fraudulent manner and had indulged in fraud

and unfair trade practices in the securities market.

f. It was further alleged that the manner in which OPG

gained preferential access day after day on select

servers indicate complete laxity and dereliction of

duty on the part of NSE officials and employees and

failed to prevent manipulation of the system and

failed to ensure equal, fair and transparent access. It

was alleged that by not taking preventive as well as

curative measures proactively Mr. Ravi Narain and

Ms. Chitra Ramkrishna facilitated fraud and

manipulation by OPG.

49. The supplementary show cause notice further alleged

a. that NSE gave inconsistent replies to Deloitte with

respect to the identification of Primary and 52

Secondary Servers and the data relating to the same;

and

b. that in view of absence of proper documentation and

recording, NSE and its officials had given varied

response.

50. Based on the above, the WTM framed the following

issues:

"Issues on Merit:

Issue I: Whether the TCP-IP architecture for TBT data feed provided fair and equitable access to all the TMs;

Issue II: Whether access to Secondary Server had advantage of receiving information early and what was the mechanism in NSE to monitor the Secondary Server misuse?

Issue III: Whether NSE can be held liable for PFUTP violation under PFUTP Regulations, in the given circumstances?

Issue IV: If yes, (i) whether there was any role of employees of NSE in the violation and (ii) whether there was any non-cooperation on the part of NSE and its employees?‖ 53

51. Before we proceed to consider the issues on merit as

framed by the WTM, we feel it necessary to look into the

choice of the architecture selected by NSE.

52. From the documents/evidence that has come on

record, we cull out the following, namely,

53. At the time of launching of the Colo facility there were

two kinds of technology available for implementing the

TBT system, namely, (i) Transmission Control

Protocol/Internet Protocol („TCP/IP‟) and (ii) Multi-cast

TBT („MTBT‟). NSE made a bona fide choice of using

the TCP/IP protocol for its TBT architecture, for sound

and valid reasons, as explained in detail below.

54. The Colo facility was being introduced for the first

time. It was critical to lay a sound foundation. Choices of

technology were primarily driven by the need to have

complete and fully assured high integrity of

dissemination and receipt of the ticks. TCP/IP was seen

as an appropriate choice of technology for a nascent 54

market. At the relevant time, the F&O segment volume

was only 3,000 to 5,000 messages/ second, which TCP/IP

could effectively handle, while even guaranteeing

absolute market safety and integrity.

55. On the other hand, MTBT is akin to a broadcast, and

can simultaneously transmit large volumes of data to a

large number of persons, with the potential downside of

loss of some data packets. In MTBT, delivery of data is

on a „best effort‟ basis, i.e., the network does not

guarantee or confirm data delivery, and this can result in

loss of packets or the sequence in which packets are

delivered. In MTBT, the onus of ensuring the receipt of

data packets is on the members (and not the system),

wherein members‟ infrastructure would have to be more

sophisticated as opposed to in the TCP/IP system.

56. At the relevant time, TCP/IP technology was the

standard protocol that the market was familiar with. On 55

the other hand, MTBT was a more complex technology,

and its implementation needed extensive programming.

57. At the relevant time, TCP/IP was used by exchanges

across the world (such as Chi-XJapan, BATS, NYSE

LIFFE and NSE).

58. Therefore, the MTBT architecture was not chosen

simply because it would not provide assurance of every

single tick disseminated actually being received. It is

pertinent to note that a key element of the MTBT system

was that it could handle large volumes of data (several

tens of thousands of ticks per second), which at a

fledgling/nascent stage was considered less important

than assuring integrity of data receipt.

59. Additionally, there was no regulatory guidance issued

by SEBI as to what technology should be adopted. We

find that SEBI has not raised any issue with regard to the

choice of the TBT architecture over MTBT architecture.

No fault has been found either by SEBI or in any of the 56

forensic report with regard to the choice of the

architecture.

Issue No.1

60. Whether TCP-IP architecture for TBT data feed

provided a fair and equitable access to all TM. This issue

has been further sub-divided into:

a. First connect/Early login

b. Absence of randomiser

c. IP allocation and load balancer

a) First connect/Early login

61. The show cause notice is based on the TAC report,

Deloitte report and EY report, alleging that the

dissemination of the data form a Port to its members is

sequential based on their login ranks on a Port.

Therefore, it is alleged that a member who connects first

to a particular Port will receive TBT data first before all

other members connecting to that Port on that server.

The expression "first connect/early login" has been 57

analysed from two levels, i.e., number of first connects

across POP server and number of first connects on the

POP server which was connected first to the PDC.

62. It was further alleged that data was disseminated to

the members in a sequential manner whereby the member

who connected first to the POP server received the ticks

before the members who connected later. It was, thus,

alleged that a member who received the first tick would

have an advantage by early login into the system.

63. It was, thus, alleged that the TBT architecture was

prone to manipulation in the absence of automation,

random function at POP servers and load balancers, as

well as allocation to servers with fewer occupants giving

them an added advantage.

64. The above charge was denied vehemently. It was

contended that the TCP/IP architecture was not prone to

manipulation. The sequential dissemination of TBT data

did not offer any advantage to the members who logged 58

in first nor there is anything on record to support as to

what advantage was conferred to the members logging in

first nor any analysis has been done on this aspect. It was

also urged that the architecture had an inbuilt randomizer

in the dissemination of the data and that no member could

be sure of receiving TBT data earlier than others even if

they connect first to the POP server since it could not be

ascertained whether their particular POP server was

connected first. Further, each POP server had three Ports

and, therefore, members could not be sure which data

disseminated first on a particular Port.

65. The WTM after weighing the evidence:

a. Accepted the process of dissemination of data with

respect to data flow from PDC to POP server level

as explained by NSE and forensic auditors.

b. Accepted that there was some randomness in the

sequence of the POP servers connecting to the PDC,

namely, that the sequence of dissemination of data 59

from PDC to the POP servers was not

predetermined. The flow of data from PDC to the

POP server is in a random sequence.

c. However, dissemination of information at the sender

Port level of a particular POP server was in a

defined sequence, i.e. Port 1, then Port 2, then Port

3. Thus, a trading member who logs in first to Port

1 would be the first to get the disseminated data at

the start of the day. The dissemination order would

remain static throughout the day and a TM who

received the data first would continue to receive the

data packet first from the rest of the day.

d. There was no mechanism to shuffle the order of

ranking of a TM in front of a Port in which he has

logged in first and, thus, that TM gained an

advantage as the first connect against other TMs

who logged in late.

60

e. A software script known as Epsilon was used to start

the TBT application every morning. The POP

servers connect randomly depending upon the time

sequence in which the TBT application processes

get started in each server. Therefore, POP servers

get connected to the PDC in a random manner.

There is some randomness in the sequence of the

POP servers connecting to the PDC.

f. On IP allocation, the WTM found that there was no

laid down policies and procedure for allocation/

mapping of the IPs to the dissemination servers.

Further, there was no Standard Operating Procedure

(SOPs) to deal with the request for change in IP

mapped to a particular server. That the shifting of

IP from one server to another was left at the

discretion of the PSM team and that different/

preferential treatment was given to different TMs,

especially OPG. Since there was no defined policy 61

there was a significant variation in terms of total

number of IPs allotted to each POP server. The

limit of 30 connections for each Port of POP server

exceeded 30 and, therefore, IPs were not allotted

equally on each Port of POP server.

g. Since there was inequitable distribution of IPs on a

POP server, the load on the Ports on a particular

server and the load across servers varied

significantly.

h. NSE should have installed a load balancer which

would have taken care of overcrowding on a

particular Port.

i. The WTM found that absence of load balancer had

created an advantage to certain TMs in receiving

ticks first who logged in first before those IPs that

are connected later in time.

62

j. Had there been a load balancer, each Port across

each server would get the same/similar number of

connections without crowding any out.

k. Had there been a randomiser, the order of TMs

connectivity to each Port would be randomized

thereby negating the effect of first connect/early

login.

l. NSE had implemented a randomiser in Bucker POP

but no clear reason was given for not implementing

a randomiser in the TBT architecture.

m. Absence of randomiser on the TBT dissemination

servers created an inherent advantage in receiving

TBT data by members connecting first.

66. Contention of NSE is, that the sequential data

dissemination or early login did not confer any benefit or

advantage for a variety of reasons. It was urged that:

i. There was variation in the sequence in which POP

servers connected to PDC. The EY Reports have 63

found that every individual POP server (including

the secondary server) logged on first at least 25% of

the time. Further, the investigation report itself

notes similar variations in the F&O segment.

ii. NSE had also tendered sample data for the months of

August 2012, October 2013, November 2014, and

October 2015 to show that the time gap between the

various POP servers connecting to the PDC was in

fact minimal, and often far less than 60 seconds.

This is relevant because it demonstrates that there is

no manual intervention or interference in this

process, and that the server process did not afford

individuals any opportunity to give preference to

particular members or pass on information regarding

the order of servers start up to allow particular

members to connect ahead of others.

iii. In any event, the sequence of connect of various

POP servers to the PDC did not affect the time for 64

dissemination of ticks to any member. The absolute

time for dissemination of ticks (absolute latency)

would always be in terms of microseconds to all

members. The sequence or order in which the POP

servers connect to the PDC would impact the

sequence or order of dissemination of ticks. No

other dissemination or receipt of ticks is impacted

by the sequence or connect of the various POP

servers to the PDC.

iv. Moreover, even the order of dissemination of ticks

did not determine the sequence/order in which ticks

were received by the POP/Port/member from PDC.

v. There was variability in order of receipt of data at

the POP level from the PDC - the POP that was

disseminated data first did not necessarily receive all

the data first.

vi. There was variability in order of receipt of data at

the Port level from the POP server/receiver. Even 65

the Port that disseminated data first did not

necessarily receive all the data first.

vii. There was also variability in order of receipt of data

at the member level from the port, depending on the

order of login. Even if a TM logged in first to all

ports, he may still not necessarily receive the ticks

first. This variability was due to inter alia network

factors and number of network devices

viii. The EY Reports clearly demonstrated that the order

of receipt was not the same as the order of

dissemination, and confirmed that "a member

logging in first on a Port may not receive all batches

first on that Port."

ix. Deloitte, on whose reports SEBI places heavy

reliance, has confirmed that they did not examine

the receipt of ticks.

x. There were multiple queues for dissemination of

data (9 in F&O and CM, 6 in CD/IRF). A member 66

would need to log in first on all queues/Ports (across

all 3 POP servers) to be sure of first dissemination

of ticks. A TM would have no knowledge of his

connection on all queues (including the order of

connections of the POP servers to the PDC). No

instances of a member logging in first on all queues

occurred.

xi. TMs were not aware either of the order in which

POP serves would connect to the PDC or whether

they were on the first Port of a particular server, or

were first on a particular Port. TMs also did not

know the order of connection of each Member to a

Port.

xii. Therefore no one could gain from first connect. Even

NSE did not know the order of connections and

could only check this post facto by review of

connection logs.

67

xiii. Findings in EY Reports and ISB Report also

demonstrate that no advantage was conferred by

first/early login (technologically or financially).

xiv. The Impugned Order has not been able to identify

any specific advantage (technologically or

financially) that was allegedly conferred by

first/early login.

xv. The Impugned Order, has failed to consider the cross

examination of the experts in this regard.

xvi. All brokers had fair and equitable chance of

connecting first. In any event, first/early connect

required overt action by the broker and could not be

manipulated by NSE.

xvii. Annexure 20 of the 2018 SCN (at page 708, Volume

IV of the Appeal), showed that the top 5 brokers for

first/early connect in each segment varied only 1

overlap among 15 names. The EY Reports shows 68

that a very high proportion of members logged in

first on at least 1 day.

xviii. This shows that everyone had a fair and equitable

opportunity to connect first/early.

xix. NSE equitably allowed all members to take multiple

IPs and there was no prohibition even by SEBI in

this regard. Members took multiple IPs for their

own business/strategic reasons, and were often

distributed across servers.

xx. EY found that more than 50% of members had

accessed multiple servers/Ports, indicating that NSE

treated all brokers fairly and equitably.

67. The undisputed facts, as held in the impugned order

itself, are as follows:

i. The flow of data from the PDC to the POP

servers follows a random sequence. The

Impugned Order has noted that there is no 69

dispute on this fact of random login

sequence of POP servers to the PDC in any

of the expert reports of the SEBI

Investigation Report.

ii. Data dissemination from POP Receiver/

Server to Ports did not wait for completion

of circulation of data to all the IPs arrayed

on one Port but goes from one Port to the

other and the third immediately; the time

difference between the first Port to the

second and then the third Port was very

little.

iii. The order of sequence of connection of the

Ports to the POP Receiver/Server was

sequential as per the order specified in the

„config file‟ of the system application.

iv. There was variability in the order of receipt

of data at the Port level and even the Port 70

that was disseminated data first did not

necessarily receive all the data first.

v. At each Port level, there is an array of

members‟ IPs formed in the sequence of

login time.

68. The contention of the respondent SEBI is, that the

sequence of the dissemination at the PDC and the POP

Server level is not disputed. The charge in the show

cause notice is not in respect to the order of dissemination

at these levels, i.e. PDC level or the POP Server level.

The charge is confined to the dissemination of the tick at

the Port level. It was urged that the TBT architecture was

prone to market abuse thereby compromising market

fairness and integrity. The order of dissemination

connected to the same Port in a server, is on a first come

first serve basis, meaning thereby a member connecting

first to a specific Port in a dissemination server will 71

receive the tick before all other members connected to

that Port on that server. It was urged that the data was

disseminated in a sequential manner meaning thereby that

a member who connected first to the POP Server received

the ticks before the member who connected later. It was

urged that a member who was aware of the sequential

nature of dissemination of TBT data would derive an

advantage by early login into the system. Hence, the

TBT architecture was prone to manipulation.

69. On the issue of first connect/early login, what we find

is, that the respondent SEBI has no quarrel with the

dissemination of tick/data from the trading system to the

Receiver to the Sequencer to the Processor to the POP

Receiver and to the Port Servers. The contention of SEBI

is, that a member who logs in first from his Colo rack to

the Port gets the first tick before other members who logs

in after the first member. Further, the sequence of

receiving the data remains the same throughout the day, 72

meaning thereby, the member who logs in first receives

the data first and continues to receive subsequent

ticks/data/feed before other TMs during the course of the

day. This is on account of sequential dissemination of

data.

70. Before we look into the dissemination of data from

the Port Server to the Colo rack server of a TM, it would

be necessary and essential to trace the path of the

ticks/data that is disseminated from the trading system.

71. On the basis of the statement made by NSE and the

analysis made by Deloitte and EY in their reports, it is

clear that the data comes from the trading system of NSE

and is received by the PDC. The Epsilon script starts the

three receivers in the PDC. As per Deloitte report, the

TBT application is started manually by a member of the

Production Support and Management Team (PSM) at

around 7.30 a.m. on trading days followed by the

application at POP Servers. There are no logs or records 73

to show the process or sequence in which the three

receivers and the POP Servers were started, namely,

whether it started simultaneously or sequentially one after

another. EY in its report stated that on 96% of the trading

days the three POP Servers started within 60 seconds of

each other.

72. It is also not clear whether the Epsilon Script was

activated manually or whether it was automated.

According to NSE it was automated. Deloitte says

manually and EY report states automation. However, one

thing is clear, namely, that the Epsilon script when

activated starts the three receivers and the three POP

Servers within 60 seconds.

73. We also find that the information which is received in

the three receivers at the PDC level is received randomly

and not in a chronological manner, namely, Tick 1 sent

from the trading system may be received by Receiver 1,

whereas Tick 2 may be received by Receiver 2 and Tick 3 74

may be received by Receiver 3. The receiving of the Tick

1, 2 and 3 is also dependent as to which receiver was

activated first through the Epsilon script. The Ticks

received by the Receivers percolates to the Sequencer

which sequences this information in the order of the

Ticks. Thereafter, this information goes to the Processor.

74. From the Processor, the information goes to the POP

Server. The order in which the POP Server gets

connected to the PDC through Epsilon script is random

due to the variation in the TBT application start up time

within each POP Server. According to EY, the

dissemination sequence from PDC Processor to POP

Server could be different on each trading day. According

to SEBI, the sequence in which the POP Receiver

receives the information is dependent on which POP

Receiver starts or gets connected first to PDC.

75. We also find that the information sent from the

Processor to the POP Server is in a sequence, namely, 75

that information is received in POP 1 Receiver, then POP

2 Receiver and POP 3 Receiver and then POP 4 Receiver

(Secondary Server). On another trading day, the

information transmitted by the Processor could be

received first by POP 2 Server, and, thereafter POP 3

Server, POP 4 Server and POP 1 Server. This order of

receiving information would change on every trading day

as per EY‟s report.

76. Thereafter, POP Server transmits the information to

the three Ports. Every POP Server has three POP Sender

known as Ports. Information sent by the POP Receiver

could reach first on any of the three Ports and it is not

necessary that information disseminated from POP 1

Receiver would always reach Port 1. It would be

received by Port 2 or Port 3 which are all connected to

POP 1 Receiver.

77. From the above, it is clear that the sequence of

dissemination of data from PDC to the POP Server is not 76

predetermined. The flow of data from PDC to the layer

of POP Server is in a random sequence. The finding of

the WTM that such randomness was not on the basis of a

system characteristic or a built in design but was a matter

of chance based on unpredictable circumstances is based

on surmises and conjectures. In fact, the process of

dissemination indicated by NSE and anlaysed by EY in

its report clearly indicates that the TBT architecture had

an inbuilt randomiser in the dissemination of the

Ticks/Data/feed starting from the Trading system and

disseminating upto the POP Server. There was no

predetermined sequence as to which tick would be

received first by Receiver 1, Receiver 2 or Receiver 3 at

the PDC level. Further, the information disseminated

from the Processor to the POP Receiver was also random.

The information packet disseminated from the Processor

could be received first by POP 1 Receiver, then POP 2

Receiver, POP 3 Receiver and then POP 4 Receiver on a 77

particular trading day and this sequence could change on

the next trading day. This randomiser was dependent on

the starting of the TBT application by the Epsilon script.

Any Receiver at the PDC level and any POP Receiver at

the POP level could get activated first before the other.

The architecture was such that it had an inbuilt

randomiser in the dissemination of data at the PDC level

as well as at the POP Server level. This random login

sequence was also observed in the Experts report and

SEBI Investigation Report.

78. The WTM accepted this randomness in the impugned

order holding:

―In light of the aforesaid and having regard to the Technical Document made available by NSE, I am inclined to accept the process of dissemination of data as explained by the Forensic Auditors and NSE, with respect to data flow from PDC to POP server level. I am also inclined to accept that there was some randomness in the sequence of the POP servers connecting to the PDC as brought out in para 8.1.1.9 (b) earlier.‖ 78

79. The WTM has held that the dissemination of

information at the Port level was in a predefined

sequence, i.e., first to Port 1, then to Port 2 and then to

Port 3. The WTM held that since the dissemination of

information at the Port level was in a defined sequence,

the TM who logs in first to Port 1 of the POP Server

would get the data first at the start of the trading day and

thereafter the sequence of the IPs in a Port would

continue to remain the same throughout the day. The

information dissemination order from a Port would

remain static throughout the day depending upon the

ranks established on the strength of log in timings. It was

thus held that equal access of information was not

possible to all the TMs logged into the TB data feed

system at a given point of time and, therefore, the system

conferred an advantage on early loggers in a Port

compared to others.

79

80. The aforesaid conclusion drawn by the WTM was

primarily based on the fact that the dissemination of

information at the Sender Port level of a particular server

was in a predefined sequence, i.e. first to Port A, then

Port 2 and then to Port 3. In our opinion, this finding is

not based on any evidence for the reasons stated

hereunder:

a. EY (CM) Report analysed the dissemination of

information from POP Server to Members‟ IP

and analysed as under:

i. "Each POP had three Ports (Port numbers

were 10980, 10981 and 10982) since

December, 2011. Prior to this, there was

one POP with one Port (for most of the

period). As per source code, dissemination

after a batch was received from PDC to

each Port was sequential (i.e. dissemination

first to Port 10980, followed by Port 10981 80

and Port 10982). The source code defined

the order of dissemination of batches but

not that of their receipt at each Port within

the same POP. For example, batch 1 may

be received first by Port 10980 while batch

2 may be received first by Port 10981.

ii. There are nine independent dissemination

queues and dissemination on each Port is

sequential based on login time of a

member.

iii. NSE provided members access credentials

to a Port of a POP which could then be

used to access TBT market data feed.

Based on our review of source code of

POP, each Port was an independent

dissemination queue and dissemination

from a Port to members was sequential

based on their login ranks on a port (login 81

rank was determined based on the login

time of members on that Port). Such

sequential dissemination on the Port was on

account of an array that was designed based

on login time of member‟s IP. The reason

for designing the array based on a login

time of a member‟s IP could not be

ascertained.

iv. Also, a member may not have knowledge

of his rank in an array as the login

acknowledgment message sent by the

exchange did not have this information.

v. The login rank on the different ports and

not the absolute time of login defined the

order of dissemination. For e.g. if member

A and B log in at 8:45 a.m. and 8:50 a.m.

respectively on Port 10980 and member C

and D at 7:30 a.m. and 7:40 a.m. on Port 82

10981, each of them will be ranked 1 and 2

on their respective Ports. However, if Port

10980 is disseminated the tick first, then

member A and B who have logged in later

than member C and D may still be

disseminated the batch earlier.

vi. A member ranked first in the array on a

particular Port would always be

disseminated a batch before others on that

Port for that trading day. Similarly a

member ranked last on the array on a Port

would always be disseminated a batch last

on that Port for that trading day.

vii. Further, there were three POP servers

(including secondary) with three Ports each

and consequently nine independent

dissemination queues. A member would

need to be first on all the nine Ports (across 83

three POPs) to be disseminated all the

batches first on that trading day.

viii. Each POP had a receiver and three senders

(also termed as Ports) since December

2011. The Port numbers assigned in CM

were 10980, 10981 and 10982.

ix. The Ports would start in the sequence of

Port 10980, 10981 and 10982.

x. POP receiver receives a batch from PDC

and disseminates it to the respective queue

of each Port sequentially.

xi. Each Port will read the batch from its

respective queue. Source code did not

define the order of the receipt of batch at

each Port.

xii. An array (dissemination sequence) is

maintained by each Port which is created

based on the time of login by a member on 84

that Port, i.e. earliest login is ranked first.

Dissemination from a Port to members is

sequential based on their login ranks on a

Port.

xiii. When a member‟s connects to a TBT

server (on a Port), the member application

sends a login request and transmits the

login credentials. The TBT application

processes the login request and sends a

login response message to the member

application.

xiv. Based on the information in the above login

message details, it appears that a member

may not have knowledge about their rank

in the array."

b. Deloitte in its report has confirmed that they did

not examine the receipt of ticks.

85

c. The analysis of the EY Report clearly indicates

that there was variability in order of receipt of

data at the Port level from the POP Receiver.

Thus the Port that disseminated the data first did

not receive all the data first. EY report indicates

that dissemination of a batch of information was

received from PDC to each Port sequentially, i.e.

dissemination first to Port 10980, followed by

Port 10981 and Port 10982. The source code

defined the order of dissemination of batches but

not that of their receipt at each Port within the

same POP. For example batch 1 may be

received first by Port 10980, while batch 2 may

be received first by Port 10981.

d. EY in its report further found that TM Mr. A

even if he logs in at 8:45 a.m. and TM Mr. B

logs in at 8:50 a.m. respectively on Port 10980

and TM Mr. C and Mr. D logs in at 7:30 a.m. 86

and 7:40 a.m. on Port 10981, each one of them

will be ranked first and second in their respective

Ports. If Port 10980 disseminates the first tick

then member Mr. A and Mr. B who have logged

in later than member Mr. C and Mr. D will

receive the tick first. The EY report further

analysed that there were three POP Servers.

Each POP Server had three Ports. Therefore,

there were nine Ports from which ticks were

disseminated. The report found that a TM would

need to be first to log in all the nine Ports in

order to receive the first batch of information on

a trading day.

e. From the aforesaid, it is clear that even though

information is disseminated from the POP Server

sequentially, it is not necessary that the Port

Server receives it sequentially. The Port may

receive a batch of information first and the 87

second batch may be received first by another

Port. Further, a TM who logs in first on a

particular Port may not receive the information

first as another TM who logged in at a later point

of time on another Port may receive the

information/tick first.

f. EY in its report states that the source code

defined the order of dissemination of batches but

not that of their receipt at each Port within the

same POP. For example, batch 1 may be

received first by Port 10980, while batch 2 may

be received first by Port 10981. There are nine

independent dissemination queues and

dissemination on each Port is sequential based

on login time of a TM.

g. Thus again, we find that there is some

randomness in the dissemination of data from

POP Server to Port. The dissemination from the 88

POP Server is sequential but receipt of the

information at the Port level may not be

sequential. One batch of information may be

received first by one Port and another batch of

information may be received by another Port

first.

h. Each Port was an independent dissemination

queue and dissemination from a Port to TM was

sequential based on their ranks on a Port. Such

sequential dissemination on the Port was on

account of an array that was designed based on

login time of a TM IP.

i. A TM logging in first on a particular Port may

not receive the information first. EY in its report

finds that if TM Mr. A and Mr. B logs in at 8:45

a.m. and 8:50 a.m. respectively on Port 10980

and TM Mr. C and Mr. D logs in at 7:30 a.m.

and 7:40 a.m. respectively on Port 10981, each 89

of them will be ranked 1 and 2 on that respective

Ports. However, if the information/tick is

disseminated first on Port 10980, then TM Mr. A

and Mr. B who have logged in later than TM Mr.

C and Mr. D will receive the information first.

j. Once a TM Mr. A receives the information first

as he was ranked first in that Port will always

receive the batch of information first before

other TMs on that Port for that trading day.

Thus, TM Mr. A would receive the information

first and TM Mr. B would receive the

information thereafter. The time difference

appears to be a fraction of a microsecond to a

nano second. Thus, a TM who is ranked last on

a particular Port would always be disseminated a

batch of information last on that Port for that

trading day.

90

k. EY in its report further found that a member

would need to be first on all the nine Ports to

receive the first batch of information on that

trading day.

l. There were nine Ports on which data/information

was disseminated. A TM would get the

information first if he logged in first in all the

nine Ports on that trading day. No such

instances were found in any of the reports.

m. A TM had no knowledge of his rank in the

queue on a particular Port. A TM was also not

aware of the order in which POP Server would

connect to the PDC on a particular trading day

nor was he aware whether he was logged in on

the first Port of a particular server or was first on

a particular Port. A TM also did not know the

order of connection of each TM to a Port.

91

n. Thus, we find that the flow of data from the PDC

to the POP Server followed a random sequence.

Till this point, there is no dispute. The WTM

also accepts this randomness till this stage. We,

however, find that dissemination of data from

POP Servers is sequential to the Port. But we

find that receipt of information at the Sender

Port is not sequential, namely that batch 1 of

information may be received first by Port 1, but

batch 2 may be received by Port 2. Thus, till the

stage of Port, there is some randomness in the

dissemination of data right from PDC level to

the Port level. We further find there was

variability in the order of receipt of data at the

Port level and even the Port that was

disseminated data first did not necessarily

receive all the data first. A TM who logged in

first would receive the data first on the Port 92

ahead of the TM who logged in after him. The

TM who logged in first would continue to

receive the batches of information ahead of the

TM who logged later from the rest of that

trading day. We also observe that the TM who

logs in first may get a probabilistic advantage of

receiving the data first ahead of other TM who

logged in later on that particular Port.

b) Absence of Randomiser

81. The show cause notice alleged that absence of

randomiser on the TBT dissemination server created an

inherent advantage in receiving TBT data by members

connecting first. It was also alleged that a randomiser

was developed by NSE in 2011 and was implemented for

the bucket POP Server in 2012 but the same was not

implemented in the normal TBT segment server and that

NSE was unable to explain the reason for not 93

implementing the randomiser in the normal TBT segment

server. It was also alleged that the development of the

randomiser and its implementation in the bucket POP

Server was not disclosed to the forensic auditor by the

NSE team until it was identified during the forensic

analysis by the forensic auditor.

82. The WTM after considering the material evidence on

record came to the conclusion that the TCP IP

architecture of TBT data feed was inadequate as the

inherent early log in advantage was not sought to be

addressed by introduction of a randomiser. The WTM

concluded that a TM who logged in to the Sender Port of

a POP Server which had connected first to the PDC on a

trading day would be disseminated data first on that Port

throughout the day and that a randomiser after the Ports

would have ensured that even when a TM consistently

logged in first in a Port of a POP Server which connected

first to the PDC it would not guarantee that such TM 94

would receive the data first. The WTM concluded that

the employment of a randomiser in the normal data feed

dissemination would have upset the pre-determined

sequence of IPs based on early logins and would have

brought in much needed element of unpredictability in the

sequence of data packet (dissemination).

83. As we have concluded earlier that the flow of data

from the PDC to the POP Server is in a random sequence.

The dissemination of data from POP Server to the Port is

sequential but the receipt of the information at the Sender

Port is not sequential, namely, that batch 1 of information

may be received first by Port 1 but batch 2 may be

received by Port 2. Thus, we find that till the stage of

Port there is some randomness in the dissemination of

data already from PDC level to Port level. We further

found that there was variability in the order of receipt of

data on the Port and even the Port that disseminated the

data first did not necessarily receive all the data first. 95

84. In view of the aforesaid finding given by us, the

WTM has erred in coming to the conclusion that a TM

who logged in first to the Sender Port of a Pop Receiver

which was first on a trading day would get the

disseminated data first on that Port. This is incorrect as

we have held that even if a TM is connected first to a Port

it is not necessary that he would receive the data first. A

TM who logs in later on another Port may receive the

data first before the TM who logged in first on Port 1.

85. A randomiser is a function which is Sender Port

specific and which would randomly pick a connection to

begin dissemination of data. The purpose of a randomiser

is that it would randomly send the data either to Port 1 or

to Port 2 or to Port 3 and that there would be

unpredictability with regard to dissemination of the data

on a particular Port. As we have found that the

dissemination of data from the Sender Port to the TM was

not sequential but there was a randomness and that the 96

receipt of information at the Sender Port was not

sequential, namely, that batch 1 of the information may

be received by Port 1 and that batch 2 may be received

first by Port 2 and, therefore, till the stage of Port there

was some randomness in the dissemination of the data.

Thus, introducing a randomiser after the Port level would

have created a randomness of dissemination of data in

which randomness was already existing. In our opinion,

once there was randomness in dissemination of data from

the Sender Port level there was no requirement of having

an additional randomiser for further randomness of

dissemination of data.

86. The finding that absence of randomiser created an

inherited advantage in receiving TBT data who connected

first is erroneous as a TM connecting first does not give it

a guarantee that it would receive the data first when it is

disseminated from the Port.

97

c) IP Allocation and load balancer

87. The show cause notice alleged that there was no laid

down policies and procedure for allocation/mapping of

IPs to dissemination servers and that there was no SOPs.

It was also alleged that many TMs made a request for

change in IP mapped to a particular server and such

request for shifting IPs from one server to another was

left at the discretion of the PSM Team and, consequently,

differential treatment was given by PSM Team to

different TMs. As a result, some TMs were given

preferential treatment.

88. Deloitte in its report has provided data with regard to

allocation of IPs across TBT Servers which has been

tabulated in table XI of the impugned order. The show

cause notice further contended that the limit of 30

connections for each Port of POP Server exceeded 30 IPs

and, consequently, there was significant variation in

terms of total number of IPs allocated to each POP 98

Server. This variation in the allocation of IPs across each

POP Server was known to the PSM Team. This fact is on

the basis of an analysis of emails of the members of PSM

Team.

89. EY in its report made the following observation:

a. ―A Port of a POP server was prescribed a limit of 30 connections.

b. For configuring a new member IP for TBT access, the operator used to manually configure an IP to a Port based on availability. Availability was decided based on number of active connections made on that Port on that particular day.

c. Member TBT IP was given access on the Port that had less than 30 connections.

d. Each TBT IP was then configured on the same Port of Secondary Server as well.

e. On multiple trading days, connections on the ports of the primary servers of CM segment had exceeded 30. Based on the login logs, it is observed that on 275 trading days, all the six ports of primary servers had more than 30 connections (maximum of 53 connections were noted on one of the Port of primary server).‖

90. From the aforesaid, the show cause notice alleged: 99

a. There were significant variations in terms of number of IPs allotted to each Port within a particular POP Server.

b. There were significant variations in terms of total number of IPs allotted to each POP Server.

c. The variations in IP allocation numbers are more pronounced on the days for the year 2012.

d. In terms of number of IPs actually connected, the variation is even more pronounced.

e. Though there was a limit of 30 connections for each Port of POP Server, the actual number of IPs allocated exceeded 30.

f. It is observed that the manual load balancing of members across servers did not seem to have been performed equitably.

91. It was, thus, alleged that in the absence of a load

balancer, variation of load on each Port have resulted in

an inequitable access to the TMs in as much as variation

of load at each Port had/or would have resulted in varied 100

lagged time for distribution of data under sequential data

distribution process.

92. The WTM upon consideration of the evidence and

submissions made by the parties found that there was no

SOPs for allocation of the IPs but a limitation of 30

connections per Port of POP Server i.e. a total of 90 per

POP Server was fixed. The WTM found that there was a

significant variation in terms of number of IPs allotted to

each Port within a Port Server and the total number of IPs

allotted to each POP Server. It was found that though

there was a limit of 30 servers on each Port of POP

Server, actual number of IPs allocated exceeded more

than 30 connections of a Port of a POP Server. The

WTM further found that the allocation of the IPs to the

POP Server was done manually. Thus, IPs connected

ahead would receive data packets before those IPs that

were connected later in time in the same array. Such

allocation of IPs done manually exceeded 30 connections 101

per Port on a POP Servers which was not in line with the

recommendations of the NSE Development Team. The

WTM further found that in view of exceeding 30

connections on each Port of POP Server the variation of

load at a particular Port level would significantly impact

the data dissemination time in other Ports of the same

POP Server and across the other POP Servers. The WTM

found that implementation of the load balancer would

have resulted in the IPs being mapped to the load

balancer which would then equitably distribute the

connection across the POP Server thus eliminating the

allocation of IPs being done manually and also

eliminating the time lag in receipt of data packets

experienced by members on account of having connected

to a more loaded POP Servers exceeding 30 connections.

93. Before us, the contention of NSE is, that as and when

NSE received requests from TMs for allocation or

shifting their IPs to a different Port then NSE would take 102

efforts to accommodate such requests, unless there were

feasibility issues regarding non-availability of Ports on a

particular server etc. NSE contended that no preferential

treatment was shown to any particular broker and, in case

any broker complained about any latency issue, such

requests was considered and IPs were shifted after

considering the evidence. It was alleged that the lack of

load balancer did not make the TBT architecture prone to

manipulation. According to NSE, the load balancer was

initially suggested as an automation measure to address

server failures and avoid manual IP movement by the

TBT team to another Port. It was contended that at the

relevant moment of time there was no regulatory

requirement to implement the use of a load balancer. It

was contended that the issue of implementing a load

balancer was conscientiously considered by NSE and a

bona fide decision was taken not to implement the load

balancer on the ground that it would have increased the 103

latency and that it would present one more single point of

failure and that an additional hardware device like that of

a load balancer was generally not used in the TBT

architecture. In support of his submission the learned

senior counsel placed reliance on the statements of Ms.

Mamatha Rangaprasad, Mr. N. Murlidharan. It was

further stated that in any event the variation in load across

servers was not significant which would require a load

balancer. It was urged that the load on each Port

depended on the number of connections by members on

that Port on a given day and the load was not dependent

on the number of allocations of IPs on that Port. It was,

thus, urged that there was no evidence or material to

demonstrate that the variation in load resulted in any

advantage or disadvantage to any TM.

94. Considering the submissions made by NSE and upon

consideration of the material evidence that has come on

record, one thing is clear that there were no defined laid 104

down SOPs for allocation of IPs to a TM. Mr. Ravi Apte

in his submission dated 2nd May, 2018 has categorically

stated that

―there was no system for load balancing/ dynamic load balancing‖

meaning thereby that there was no procedure for

allocation of IPs.

95. However, one thing is clear that NSE took a decision

to allocate 30 connections per Port on a POP Server i.e. a

total of 90 connections per POP Server. This allocation

of IPs was done sequentially i.e. one POP Server at a time

and distributing the IPs to one POP Server and then

moving on to the next POP Server to manage load

balancing across various POP Servers. However, the

evidence on record and especially table XI in the

impugned order shows allocation of IPs exceeded 30

connections per Port of a POP Server. This table has not

been denied by NSE and this table has also been given in 105

the Deloitte report. Thus, the policy adopted by NSE to

limit 30 connections per Port of a POP Server was

infringed.

96. It has also come on record that the allocations of IPs

were done manually to the POP Server. The shifting of

the IPs from one Port to another Port was also done

manually. Evidence has further come to the effect that

load balancing of IPs on a given trading day was also

done manually. We find that the absence of load balancer

appears to have created an advantage to certain TMs due

to manual intervention. The PSM/Colo teams were aware

that the shifting of IPs from one Port to another Port was

increasing the down time which was inconvenient to most

of the TMs. The PSM/Colo teams were also aware that

the manual distribution of IPs created an operational risk

while balancing the load on the servers continually and

the process of shifting the IPs from one Port to another

especially when the number of connections started 106

increasing. Ms. Mamatha Rangaprasad in her statement

dated 1st August, 2017 stated that a load balancer is used

to balance the actual connects on the servers and the

solution of load balancer was suggested to avoid manual

reconnection and auto connect these members to other

server. Mr. N. Murlidharan in his statement of 20th April,

2018 stated that any additional device would create an

additional hop and that the minimisation of device was a

critical factor which ensured fewer failure points and,

therefore, the load balancer was not considered.

97. As early as on 3rd January, 2012, an email from Ms.

Smrati Kaushik indicated that with the increase in the

number of TBT connections two major risk opened,

namely, that in the event of an issue like hardware failure

for which members had to change the IP to come to the

Fall-back server would increase the down time and most

of the members found it inconvenient and that currently

distribution was manual and recommended 107

implementation of a load balancer. This email was

followed by another email on 4th January, 2012 from

Hozefa Poonawala suggesting implementation of a load

balancer.

98. From the aforesaid, it is clear that NSE was aware of

the practical difficulties in manually allocating the IPs

and shifting the IPs from one Port to another Port. A load

balancer was suggested. The reply of NSE indicates that

a decision was taken not to implement the load balancer.

We find that there is nothing on record to indicate what

bonafide decision was taken by NSE for not

implementing the load balancer. As we have already held

there was no laid down defined SOPs for allocation of the

IPs.

99. This leads us to the question of whether a load

balancer was necessary in the facts of the given case.

100. A Load Balancer as described in the impugned order

is as under:

108

a. A Load Balancer is a hardware/software that

distributes network / traffic load across a

number of POP Servers based on a specific

algorithm like least connections, least response

time, round robin etc.

b. A Load Balancer is very commonly used in

systems across industries, across the world to

distribute the network traffic across a number of

servers.

101. We find that the load on the Port on a particular

Server varies vis-a-vis the load across Ports and across

Servers and, in the absence of a „Load Balancer‟, such

variation of load at each Port would have resulted in a

varied time lag for distribution of data under sequential

data dissemination process.

102. We also find that the manual load balancing of

members across servers was not performed equitably by

NSE. There were significant variations in terms of 109

number of connections across different servers and Ports.

The load on Ports on a particular server and the load

across servers varied significantly. In the absence of a

dynamic load balancer, such variation of load at each Port

resulted in varied time lag for distribution of data under

sequential data distribution process.

103. Though NSE claimed that load balancing was done

manually where members were allocated to servers based

on existing load, actual number of IPs allocated varied

significantly across the ports. The variation was even

more pronounced in terms of number of IPs actually

connected. This resulted into significant variation in

crowding at different ports.

104. We are of the opinion that in a system where a Load

Balancer was employed, the Trading Members would not

be mapped to any particular server or port, but rather to

the Load Balancer itself. The function of the Load

Balancer would be to allocate the TBT IPs of trading 110

members evenly to the servers and ports at the time of

login itself. Once the trading members have logged in,

they would have been mapped to the load balancer, which

will automatically allocate the trading member a lesser

crowded port vis-à-vis other port.

105. Consequently, if a Load Balancer was installed, it

would distribute the load at the start of the trading day

across the ports. It would also distribute the load at every

stage when there is a subsequent connection during the

course of the day. This would ensure fairness, equality

and transparency in the system, which the NSE was

mandated to comply with. It is trite that the process of

load balancing is dynamic in terms of continuous

allocation of lesser crowded ports to the trading members

at the time of login either at the start of the day or during

the time of any subsequent connection.

106. In view of the aforesaid, it is apparent that a load

balancer was essential for equal distribution of IPs on a 111

particular Port. If on a given day there is a load factor on

a particular Port in contrast to a lesser load on another

Port, then the load balancer would automatically shift the

excess IPs on one particular Port to another Port which

has a lesser number of connections on that day in order to

equalize and balance the load across all Ports. The load

balancer distributes the traffic across all Ports and

eliminates manual intervention which is otherwise

susceptible to preferential treatment to a given set of

TMs.

107. The alleged decision taken by NSE not to implement

the load balancer is not on record and, in any case, does

not appear to be a bonafide decision. Their contention

that implementation of load balancer would increase the

latency is per se erroneous. Latency, if any, would be

equal for all TMs and it would not be a case where the

latency factor is for one TM against another TM.

Implementation of a load balancer if it increases the 112

latency would be equal across all TMs who have logged

in on that particular date.

108. Thus, non-implementation of a load balancer has not

ensured the norms of fair access and if the load balancer

was implemented, norms of fair access would not have

been breached. Failure to implement the load balancer in

the TBT architecture, in our opinion, failed to ensure fair,

transparent and equal access by NSE to its TMs.

109. To sum up, a TM who connected first to the POP

server was not assured to receive the tick first. The TM

who logged in first may get a probabilistic advantage of

receiving the data first ahead of the TM who logged in

later on that server. Since the TBT architecture created a

randomness in the dissemination of data also from the

Sender Port level, there was no requirement for installing

a randomiser. The allocation of IPs and its shifting from

one server to another server was not done as per the

decision taken by NSE. There were overcrowding of IPs 113

on one server as compared to other server. There was

inequal distribution of IPs on the same server and there

was no laid down SOP for allocation of IPs to a TM.

NSE should have implemented a load balancer which

would have distributed the IPs equally across all servers

and norms of fair access would not have been breached.

Failure to implement the load balancer has failed to

ensure fair, transparent and equal access by NSE to its

TMs.

Issue No.2

110. Whether access of secondary server had advantage of

receiving information early and what was the mechanism

in NSE to monitor the secondary server misuse.

111. The show cause notice is based on TAC report,

Deloitte report and the EY report. The show cause notice

alleges that NSE did not have any defined policies and

procedures with regard to accessing the secondary server

and that guidelines were not issued as circulars. It was 114

also alleged that NSE was selective in reprimanding only

some brokers who had connected to the secondary server

and allowed other brokers to continue connecting

regularly to the secondary server and, thus, showed

differential treatment to brokers. It was alleged that in

the absence of any mechanism for stopping TMs to

access the secondary server it gave advantage to those

TMs who were connected to the secondary server and,

thus, received information early than other TMs who

were logged in to the regular servers.

112. Deloitte in its report submitted that the secondary

server was also an active server and that a TM could

receive data if it was connected to the secondary server.

The report also stated that there was no documented

policy or procedure with respect to connection to the

secondary server nor was there any mechanism to identify

members connected to the secondary servers. Deloitte

also reported that „Ticks‟ were disseminated faster to 115

members connected to less crowded server thereby giving

advantage to such members.

113. EY in its report submitted that based on stimulation

test performed 95% of all the batches were disseminated

first to the members connected first to Port of secondary

servers.

114. Thus, the two reports primarily observed that in the

first few months of 2012 the connection to the secondary

servers were being monitored by NSE and that certain

TMs were reprimanded and were directed to disconnect it

from the secondary servers. The two reports observed

that whereas certain members were reprimanded other

TMs were allowed to stay connected with the secondary

server for no valid reason. EY has given detailed report

with regard to which members being reprimanded.

115. NSE responded that the secondary server was only a

backup server to be used only in the event of failure of

the primary server. NSE submitted that the secondary 116

server would allow TMs to continuously receive TBT

market feed without disruption and each TM was given

an IP address for connecting to the secondary server.

NSE submitted that it was accepted that the members

would connect to the secondary server only when they

were unable to connect with the primary servers. NSE

further submitted that the secondary server was always

kept in active mode to ensure that members could easily

and quickly switch to secondary server in the event of

failure of the primary servers. These guidelines were

issued to all TMs. NSE, however, admitted that they did

not have any mechanism of continuously monitoring the

connection to the secondary server.

116. NSE further responded that since NSE was

experiencing server failures it was decided to move the

TBT infrastructure from the PDC to a separate Colocation

data centre. This migration of TBT server to the new

colocation data centre was undertaken in the first six 117

months of 2012 and, during this period, in order to ensure

that the secondary server was free in the event that the

primary server went down, during the migration period

with the PSM team performed some limited check with

regard to connections to the secondary server. It was

further contended that the PSM Team, upon checking,

found certain members were connected to the secondary

server, and were reprimanded and were further directed to

disconnect from the secondary server. It was contended

that there was no discrimination and warning was issued

uniformly to all the members who were connected to the

secondary server during the migration period. It was

vehemently contended that at no point of time NSE ever

developed a mechanism to continuously or automatically

monitor connections to the secondary server and only

periodic checks were carried out by the PSM team during

the migration period.

118

117. The WTM found that there was no defined policy

with regard to accessing the secondary server and that

only a guideline was issued which was not in the form of

a circular. The WTM further observed that in the absence

of continuous monitoring of the secondary server led

certain TMs to be given preferential treatment who

continued to access the secondary server and,

consequently, misused the secondary server with

impunity. The WTM further accepted the EY‟s

stimulation test observing that 95-96% in CM Segment

and 80-85% in CD Segment of all batches were

disseminated to members connected first to Port of

secondary server and thereby certain advantages were

made by these TMs. This was only possible in the

absence of strict monitoring which allowed members to

harvests the benefits of early access to the TBT feed from

the secondary server.

119

118. Having heard the learned counsel for the parties and

having perused the record we find that NSE had issued a

Colocation guideline on 8th August 2011 which was

revised on 16th April, 2012 which states as under:

―Members who always check the secondary TBT parameters are working fine with their application in case of non-availability of data from TBT primary source they can move to secondary source‖.

119. According to NSE, the Colocation guidelines was

sent as a welcome email to all new members in

Colocation and that the said guidelines was never used as

a circular. NSE also admitted that there was no

monitoring mechanism to identify members connected to

secondary servers nor was there any documented policy

with respect to TMs connected to fallback servers.

According to NSE, when a TM took a new TBT

connection the activation email sent by the membership

team carried information regarding the primary server

and port and secondary server and Port and it was 120

expected from the members that they would only use the

secondary server only in the event of failure of primary

server.

120. We find it strange that NSE as a regulator did not

place any mechanism to check unauthorized access to the

secondary server by the TMs. The reason why we are

saying this is that there is no difference between the

secondary server and the three primary servers. As we

have observed earlier, information is disseminated from

the PDC Center to the POP 1 Receiver, POP 2 Receiver,

POP 3 Receiver and POP 4 Receiver. POP 4 Receiver is

the secondary sever. Each POP receiver has three Ports

and the secondary server also has three Ports. All TMs

were required to login in the three servers and not in the

secondary server. Certain mechanism was placed by

NSE for balancing the load on the three Ports but no

mechanism of balancing the load was placed in the

secondary server and the reason is not far to see, namely, 121

that TMs were not allowed to access the data from the

secondary server and that the secondary server was only

to be used in the event of an emergency upon failure of

the primary server.

121. It was, thus, found that any TMs who logged in

through the secondary server had an added advantage as

there was no mechanism to monitor the load factor and

since there was less load on the secondary server it

became advantageous to access the data faster ahead of

other TMs.

122. The guidelines issued by NSE were clear that the

secondary server could only be used by a TM for

accessing data only in the event of failure of the primary

server. A TM could only use the secondary server upon a

prior intimation and permission given by NSE Colocation

team.

123. Thus, it was imperative for NSE to have a defined

policy for use of secondary server and a mechanism 122

ought to have been placed for monitoring connection by

TMs on the secondary server and reprimanding or taking

penal action against such TMs who violated and used the

secondary server to access the data. By not doing so the

NSE has failed to carry out its duties as the first regulator.

124. Further, we find that the secondary server was also an

active server meaning thereby that data could be accessed

at any moment of time if a TM is connected. Thus, in our

opinion, a system ought to have been placed whereby the

secondary server could only start when the primary server

failed or a mechanism should have come into existence to

ensure that members could connect to secondary server

only when the primary server failed.

125. It was not sufficient for NSE to hold that the TM was

made aware of the use of the secondary server through

their welcome email which, in our opinion, was

insufficient. We find that when the load on the three

Ports were being monitored it became essential for NSE 123

to ensure that no TM had access to the secondary server

for accessing the data.

126. A plausible explanation has been given that the

monitoring on the secondary server was made only for a

limited period during the period of data center migration.

We however find that when NSE came to know about the

misuse of the secondary server by the TMs, it should

have set up a monitoring system immediately and ensured

that no TMs accessed the secondary server without

permission. We also find that there is no plausible

explanation as to why during this period only some of the

TMs were reprimanded and others who had also logged

in to the secondary server were not reprimanded. Thus,

an irresistible conclusion can be drawn that certain TMs

were given preferential treatment and no warning letters

were issued to them.

127. We also observe that admittedly the secondary server

was less loaded in terms of IP connection primarily due to 124

the fact that TMs were expected to access only the

primary server in compliance with the NSE Colocation

guidelines. In the absence of any mechanism for

monitoring, TMs who connected themselves to the

secondary server were able to harvest the benefit of early

access to the TBT feed in comparison to the other TMs

who were not connected to the secondary server.

128. In this regard, we find that the EY in its report has

given details supported by evidence indicating certain

TMs who continuously logged in to the secondary server

for a considerable period of time and were also connected

to the first, second and third Port of secondary server for

majority of the trading days thus, getting information

prior and faster to other TMs. In this regard, detailed

discussion will be made in the latter part of the judgment.

129. In view of the aforesaid, we are of the opinion, that

NSE did not have any defined policy and procedure

regarding access to the secondary server except those 125

which were mentioned in the NSE guidelines which were

basic and inadequate. Further, there was no documented

policy or procedure regarding monitoring of unauthorized

access by TMs on the secondary server which resulted in

the misuse of the secondary server with impunity by

some of the TMs.

Issue no.3

130. Liability of NSE under SEBI PFUTP Regulations,

2003 and SECC Regulations, 2012.

131. The show cause notice alleged that NSE had violated

Section 12A(a) of the SCRA Act read with Section 11(1),

11(2)(a), 11(2)(j) and 11B of the SEBI Act read with

Regulation 3(a), 3(b), 3(c), 3(d) and Regulation 4(1) of

the PFUTP Regulation, 2003 read with Regulation 41(2)

and Regulation 42(2) of the SECC Regulations, 2012

read with Clause 4(i) of the SEBI Circular dated 30th

March, 2012 and Clause 3 of the SEBI circular dated 13th

May, 2015.

126

132. The WTM after considering the response found that

NSE had not violated any provision of the PFUTP

Regulations since no fraud was committed by NSE or its

employees and, consequently, exonerated NSE of the

charge under the PFUTP Regulations. The WTM held:

―8.3.3.8 As far the exchange is concerned, the factual build up and the allegations levelled in the SCN, pertain to violations that are arising by flouting the principles underlying the conduct of business of a stock exchange, pertaining to fair and equitable access to information. Alleging ―fraud‖ against the Exchange, in this scenario, tantamounts to attributing ―intention‖ or ―knowledge‖. In the absence of facts pointing towards the collusion of employees with the TMs or proof of specific discrimination towards any specific TM or the accrual of monetary benefits/ unjust enrichment to any employee or TM, etc., I find it difficult to conclude that there is a violation of the provisions of SEBI (PFUTP) regulations, involved in the matter.‖

133. The WTM further held that failure to place the

randomizer or load balancer in the TCP IP dissemination

protocol, cannot be categorised as breach of the principles

of "fairness and equity" attracting the provisions of 127

PFUTP Regulations. The WTM held that the

dissemination of information which is in breach of the

stipulation contained in SECC Regulations cannot

automatically attract the rigors of PFUTP Regulations,

without there being any proof to indicate fraud. The

WTM held that in the absence of any fraud or collusion

or connivance the possibility of fraud was non-existent.

134. The WTM, however, found that the dissemination of

information at different stages of the technology process

was inequitable and that NSE failed to ensure a level

playing field for the TMs subscribing to the TBT data

feed of NSE. The WTM found that there was no

equitable distribution of allocation of IPs and that absence

of load balancer provided an advantage and disadvantage

to certain TMs on the basis of their login rank on a

particular day and that non-inclusion of randomizer gave

a fair advantage for a TM who logged in first coupled

with the fact that there was failure on the part of NSE to 128

monitor frequent connection to the NSE server by certain

TMS. The WTM held that all these factors point out to

violation pertaining to fair and equitable access to

information as provided under Regulation 41(2) of the

SECC Regulations, 2012 and, therefore, came to the

conclusion that NSE did not comply with the provisions

of Regulation 41(2) of the SECC Regulations in "letter

and spirit" and, accordingly, violated the said provision as

well as Regulation 42(2) of the Regulations.

135. While arriving at the aforesaid conclusion, we find

that the WTM has taken into consideration the circular of

13th May, 2015, which in our opinion has nothing to do

with the present controversy in as much as the alleged

violation is for the period 2010 to April, 2014 as during

this period NSE had used the TBT architecture for

dissemination of data before introducing MTBT system. 129

136. Before we proceed further, it would be appropriate to

refer to Section 4 of the SCRA Act, 1965 which provides

as under:

―4. Grant of recognition to stock exchanges.

(1) If the Central Government is satisfied, after making such inquiry as may be necessary in this behalf and after obtaining such further information, if any, as it may require,--

(a) that the rules and bye-laws of a stock exchange applying for registration are in conformity with such conditions as may be prescribed with a view to ensure fair dealing and to protect investors;‖

137. Section 4 provides that the Central Government may

grant recognition to the stock exchange with a view to

ensure fair dealing and with a view to protect the

investors.

138. In exercise of the powers conferred by Section 4,

Section 8A and Section 31 of the SCRA Act read with

Section 11 and Section 30 of the SEBI Act, SECC 130

Regulations were framed on 20th June, 2012 for the

purpose of requiring recognition, ownership and

governance in stock exchange. Regulation 41(2) of the

SECC Regulations, 2012 provides as under:

"Regulation 41(2):

The recognised clearing corporation and recognised stock exchange shall ensure equal, unrestricted, transparent and fair access to all persons without any bias towards its associates and related entities.‖

139. A perusal of the aforesaid provision indicates that a

stock exchange is required to ensure equal, unrestricted,

transparent and fair access to all persons. Clause 4(i) of

the circular dated 30th March, 2012 issued by SEBI is

extracted hereunder:-

"Guidelines to the stock exchanges and the stock brokers

4. Stock exchanges shall ensure the following while permitting algorithmic trading:

(i) The stock exchange shall have arrangements, procedures and system capability to manage the load on their systems in such a manner so as to 131

achieve consistent response time to all stock brokers. The stock exchange shall continuously study the performance of its systems and, if necessary, undertake system upgradation, including periodic upgradation of its surveillance system, in order to keep pace with the speed of trade and volume of data that may arise through algorithmic trading. (Emphasis supplied)‖

140. The aforesaid circular provides that the stock

exchange will ensure that it shall make all arrangements,

procedures and system capability to manage the load on

their systems with regard to algorithm trading in such a

manner so as to achieve consistent response time to all

stock brokers. Clause 3 of the SEBI circular dated 13th

May, 2015 provides as under:

―In order to ensure fair and equitable access to the co-location facility, stock exchanges shall:

3.1. provide co-location/ proximity hosting in a fair, transparent and equitable manner.

3.2. ensure that all participants who avail co-

location/proximity hosting facility have fair and equal access to facilities and data feeds provided by the stock exchange.

132

3.3. ensure that all stock brokers and data vendors using co-location/proximity hosting, experience similar latency with respect to exchange provided infrastructure.‖

141. Under this circular, a stock exchange was required to

ensure that all participants which avail Colocation facility

have fair and equal access to facilities and data feeds

provided by the stock exchange.

142. Based on the aforesaid provisions, regulations and

circulars, the WTM came to the conclusion that NSE has

violated Regulation 41(2) and 42(2) of the SECC

Regulations, 2012.

143. Admittedly, the WTM found that NSE has not

violated any provisions of the PFUTP Regulations and

has not committed fraud. In this regard, the WTM

observed that the charge leveled under Regulations 3 and

4 of the PFUTP Regulations were not only vague but

were unsubstantiated. None of the ingredients as 133

provided under Regulation 2(c)(1) and 2(c)(9) of the

PFUTP Regulations applied to NSE. There was no

"knowing misrepresentation", "active concealment",

"false promise", "representation made in a reckless and

careless manner", "fraudulent act or omission",

"deceptive behavior", "false statement" etc. which are all

ingredients of fraud and, therefore, Regulation 3(a), 3(b),

3(c) and 3(d) were not attracted. The WTM, on the

aforesaid basis, rightly came to the conclusion that no

case of fraud or inducement was made out against NSE

under Regulations 3 and 4 of the PFUTP Regulations.

144. The WTM, however, came to the conclusion that

Regulation 41(2) and 42(2) of the SECC Regulations,

2012 were violated by NSE in "letter and spirit". The

WTM found that there was inequity at different stages of

the technology process i.e. TBT architecture and,

accordingly, in paragraph 10.1 of the impugned order

held that NSE had not exercised the requisite due 134

diligence while putting in place the TBT architecture and

that the same created a trading environment in which the

information dissemination was asymmetric, which cannot

be considered fair and equitable and, consequently, the

failure of NSE to ensure equitable and fair access violated

Regulation 41(2) of the SECC Regulations, 2012. In

paragraph 8.3.3.10, the WTM held that the

omission/commission on the side of NSE was in violation

of Regulation 41(1) and 42(2) of the SECC Regulation

read with Clause 4(i) of the circular dated 30th March,

2012.

145. The conclusion drawn in paragraph 10.1 of the

impugned order that the dissemination was asymmetric is

based on the findings given in paragraph 8.3.3.7 of the

impugned order, namely, inequitable distribution in the

allocation of IPs, absence of load balancer, non-inclusion

of randomizer and failure to monitor frequent connection

to the secondary server.

135

146. In the instant case, the inequitable distribution as held

by the WTM in paragraph 8.3.3.7 has nothing to do with

the TBT architecture. As held earlier in the preceding

paragraphs the dissemination of information/tick/data

from the PDC stage to the POP Receiver and thereafter to

the Ports were random, namely, there was randomness in

the dissemination of data from the PDC stage right up to

the Port. No fault has been found in the dissemination of

data in the TBT architecture. The data was disseminated

from the Ports to the Colo rack of the TMs and every TM

had equal, unrestricted, transparent and fair access.

147. The allocation of IP was to be distributed equitably by

the NSE team. This was a human intervention and had

nothing to do with the TBT architecture. We have

already held that there was no requirement of a

randomizer to be installed, namely, after the Port and

before the Colo rack as there was randomness in the

dissemination of the data. Even otherwise, such addition 136

of a randomizer had nothing to do with the existing

architecture or the distribution of its data. Similarly,

installing a load balancer was an additional

hardware/software to be installed in the architecture for

better distribution of the IP allocation but the same had

nothing to do with the dissemination of the data by the

TBT architecture. Similarly, failure to monitor frequent

connection to the secondary server was a human failure

and had nothing to do with the functioning of the

dissemination of the data by the TBT architecture.

148. Thus, the finding of the WTM that because of

inequitable distribution in the allocation of IPs, absence

of load balancer and non-inclusion of randomizer and

failure to monitor frequent connection to the secondary

server did not ensure a level playing field for TMs

subscribing to the TBT data feed of NSE and,

consequently, NSE failed to provide equal, unrestricted

and fair access is wholly erroneous.

137

149. The choice of architecture chosen by NSE was never

doubted. There is no charge against NSE with regard to

the choice of the TBT architecture. In fact, it has come

on record that many countries were using the TBT

architecture. Considering the evidence that has come on

record and, upon an analysis of the evidence made by us,

we are of the view that there was a randomness in the

dissemination of the data/information/tick in the TBT

architecture starting from the PDC stage till the Ports and

there was clear, unrestricted, transparent and fair access

to all the TMs who received the data in their Colo rack

from their respective Ports. We, thus, hold that there was

no violation of Regulation 41(2) of SECC Regulations.

150. We also find that the conclusion drawn in paragraph

10.1 of the impugned order is based on the finding given

in paragraph 8.3.3.7, namely that the dissemination of

data was asymmetric which could not be considered as

fair and equitable and, consequently, resulted in violation 138

of Regulation 41(2) of the SECC Regulations. In the first

instance, this finding is purely perverse and cannot be

accepted in as much as the choice of architecture was

never disputed by the respondent. There was some

randomness in the dissemination of data even from the

Port to the Colo rack. It seems that the WTM has

confused itself between randomness in the dissemination

of a tick to that of dissemination of the tick being

asymmetric. The randomness of the dissemination of the

tick ensured clear and fair access and, consequently, the

finding that since the dissemination of information was

asymmetric therefore there was failure on the part of NSE

to ensure equal and fair access is patently erroneous.

151. There is another aspect, the WTM in paragraph 10.1

of the impugned order holds that NSE did not exercise

due-diligence while putting in place the TBT architecture

and, therefore, violated Regulation 41(1) of the SECC

Regulations. The choice of the TBT architecture was 139

finalized and put into place in the year 2010 when the

SECC Regulations, 2012 had not come into existence

and, therefore, compliance of Regulation 41(2) at the

stage of putting in place the TBT architecture would not

and cannot arise. Thus, at the stage when the TBT

architecture was installed the SECC Regulations had not

come into existence and, therefore, invoking Regulation

41(2) for failure of NSE to exercise due diligence while

putting in place the TBT architecture does not arise. We

are of the opinion that Regulation 41(2) of the SECC

Regulation cannot be invoked for placing the TBT

architecture which had already been placed in 2010. The

Regulation is prospective in nature and cannot have

retrospective application.

152. The charge is violation of Regulation 42(2) of the

SECC Regulations. This provision relates to maintenance

of books of accounts and records by the recognised

clearing corporation and has nothing to do insofar as NSE 140

is concerned. Thus, finding of the WTM that NSE has

violated Regulation 42(2) is patently erroneous.

Similarly, the circular of 2015 is not applicable. The

period when the TBT architecture was in use was from

2010 to 2014. The circular of 2015 is prospective in

nature and cannot apply retrospectively.

153. However, the circular of 30th March, 2012 is

applicable which stipulates that the stock exchange while

promoting algorithm trading will ensure that all

arrangements, procedures and system capability to

manage the load on their systems in such a manner so as

to achieve consistent response time to all stock brokers

and shall continuously study the performance of its

systems and, if necessary, undertake system upgradation.

In the instant case, we find that there was inequitable

distribution of the IP connection which resulted in

unequal load on various Ports. We also find that NSE

should have provided a load balancer to equalize the load 141

on each server. We also find that no laid down policy or

SOP was made to monitor frequent connection to the

secondary server and, thus, there was a violation of

circular of 2012.

154. The SCRA Act was framed with the object of

preventing undesirable transaction in securities. The Act

required all contracts in the securities to be dealt only on

a recognized stock exchange. The Act conferred a larger

responsibility upon the exchanges to ensure that

undesirable transactions do not take place. In U.P. Stock

Exchange Broker's Association and Ors. v. Securities

and Exchange Board of India & Anr., (2014) 3 Comp.

LJ 462, the Allahabad High Court held:

―51. Stock exchanges provide what is described as "the first layer of oversight". In many areas, stock exchanges are self-regulators. As self-regulatory organizations, stock exchanges have a front-line responsibility for regulation of their markets and for controlling compliance by members of rules to which they are subject. They ensure, in that capacity, compliance of the requirements established by the 142

statutory regulator. Apart from the regulation of members, market surveillance carried on by stock exchanges in certain jurisdictions regulates issuers. They do so by ensuring that the stocks of issuers are reliably traded and that issuers meet standards of corporate governance. In exercising these powers, stock exchanges may face issues involving a conflict of interest. Such conflicts of interest have to be handled and addressed effectively within the regulatory framework.‖ (emphasis supplied)

155. The Jalan Committee report found that the

information must be accessible to everyone and must be

governed by a transparent and efficient market economy.

156. Considering the aforesaid, we are of the view that the

TBT architecture provided equal, unrestricted, transparent

and fair access of data disseminating from its TBT

architecture to the TMs. There was no violation of

Regulation 41(2) and 42(2) of the SECC Regulations.

Further, the circular of 2015 is not applicable but there is

a violation of the 2012 circular. However, there was a

human failure while allocating IPs to TMs of various

Ports and that there was inequitable distribution of IPs. 143

In this regard, a load balancer should have been placed in

the system to ensure equitable distribution of the IPs. We

also find that there was a human lapse in putting the

system in place to monitor frequent connection to the

secondary server by certain TMs whereby these TMs

bypassed the load in the primary servers.

Issue no.4

157. Liability of employees of NSE for violation of PFUTP

Regulations and SECC Regulations.

158. 16 employees were issued notice and were charged

for violating Section 12A(a), (b) and (c) of the SEBI Act

read with Regulations 3 and 4 of the PFUTP Regulations,

2003, Part A and Part B of schedule II of SECC

Regulations read with Regulation 26(1) and (2) of SECC

Regulations and clause 3.8.1 of SEBI master circular

dated 31st December, 2010. The WTM after considering

the replies and the evidence exonerated all the noticees of

the charge of violation of PFUTP Regulations. The 144

WTM found that no fraud was committed by any of the

16 employees/noticees and exonerated 12 of the

employees from all the charges. The WTM, however,

found that Mr. Ravi Narain and Ms. Chitra Ramkrishna,

noticee nos.2 and 3 being Managing Directors of the

Stock Exchange (NSE) during the relevant period were

liable for the breaches of the provisions of SECC

Regulations. The WTM found that these noticees held

the senior most management position in NSE and being

in charge of the affairs of the conduct of the stock

exchange business, cannot limit their role to the non-

technology issues of the exchange and cannot abdicate

their responsibilities by citing limited knowledge in

certain spheres of business activities. The WTM came to

the conclusion that they were vested with the general and

overall responsibility of ensuring the implementation of

the principle of equal, fair and transparent access, under

Regulation 41 of SECC Regulations and were therefore 145

responsible for the overall efficiency of the stock

exchange which they failed to do so.

159. The WTM also found Mr. Mahesh Soparkar and Mr.

Deviprasad Singh, noticee nos.9 and 10 responsible for

not monitoring the unauthorized connection in the

secondary server. The WTM found that these two

employees headed the Project Management Team (PMT)

and were responsible in enforcing discipline with respect

to the connections established by TMs in the secondary

server. The WTM came to the conclusion that being

Head of the PSM Team it was their responsibility to

inform the Colo team with regard to the unauthorized

connections being done by certain TMs on the secondary

server and should have followed it up with the Colo team

for stopping the connection of these TMs to the server.

The WTM found that these two noticees failed to

discharge their duties as PSM Team Heads and, 146

consequently, directed NSE to initiate enquiry under its

employees Regulations.

160. Insofar as Mr. Ravi Narain and Ms. Chitra

Ramkrishna is concerned, the WTM directed them to

disgorge 25% of their salary drawn for the financial year

2010-11 to 2012-13 and further prohibited them from

associating with any listed Company or market

infrastructure institution or any other market intermediary

for a period of five years.

161. Insofar as NSE is concerned, the WTM directed NSE

to disgorge a sum of Rs.624.89 crores along with interest

calculated at the rate of 12% per annum from April 01,

2014 and further prohibited NSE from accessing the

securities market for a period of six months from the date

of the order. The WTM further directed NSE to carry out

system audit at frequent intervals, after through appraisal

of the technological changes introduced from time to

time, reconstitute its Standing Committee on Technology 147

at regular intervals to take stock of technological issues,

and frame a clear policy on administering whistle blower

complaints. The aforesaid direction has been passed

under Section 11 and 11B of the SEBI Act.

162. Even though Section 11 had no provision for

disgorgement of an amount, the Supreme Court held that

the powers given to SEBI under Section 11 included the

powers to issue directions for disgorgement. However,

Explanation to Section 11B was inserted by Act no.27 of

2014 which provided a direction for disgorgement of an

amount equivalent to the wrongful gain or loss averted.

For facility, the explanation to Section 11B is extracted

hereunder:

"11-B. Power to issue directions and levy penalty.

.............

Explanation.--For the removal of doubts, it is hereby declared that the power to issue directions under this section shall include and always be deemed to have been included the power to direct any person, who 148

made profit or averted loss by indulging in any transaction or activity in contravention of the provisions of this Act or regulations made thereunder, to disgorge an amount equivalent to the wrongful gain made or loss averted by such contravention.‖

163. From the above provision, it follows that any

direction to disgorge must:

a. be made in relation to any transaction or activity;

b. such transaction or activity ought to be in

contravention of the provisions of SEBI Act or the

Regulations made thereunder;

c. the person directed to disgorge must have made

profit or averted losses from such activity or

transaction; and

d. an amount equivalent to the "wrongful gain" made

or "loss" averted by such contravention may be

disgorged.

164. The contention of NSE is, that the direction to

disgorge was made without providing an opportunity to 149

show that the quantification is inappropriate. It was

urged that the show cause notice failed to indicate the

nature of the measures or directions which the authority

proposed to take under Section 11 and 11B of the Act. It

was contended that the statutory authority was bound to

set out the exact nature of the measures which it proposed

to take in the show cause notice and by not providing the

requisite measure in the show cause notice the order of

disgorgement was wholly illegal and in violation of the

principles of natural justice. In support of his submission,

the learned counsel placed reliance in the case Gorkha

Security Services v. Govt. of NCT of Delhi & Ors.

(2014) 9 SCC 105, wherein the Supreme court held:

―22... However, it is equally important to mention as to what would be the consequence if the noticee does not satisfactorily meet the grounds on which an action is proposed. To put it otherwise, we are of the opinion that in order to fulfil the requirements of principles of natural justice, a show cause notice should meet the following two requirements viz: 150

i) The material/ grounds to be stated on which according to the Department necessitates an action;

ii) Particular penalty/action which is proposed to be taken. It is this second requirement which the High Court has failed to omit.‖

165. It was also contended that NSE had been exonerated

of the charges of fraud and unfair trade practices under

the PFUTP Regulations. There is no finding of collusion

or connivance with any TM. It was contended that the

impugned order records that in the absence of any

collusion or connivance with the TMs no violation of the

provisions of PFUTP Regulations is made out. It was

also contended that the charge of discrimination against

any specific TM or accrual of any monetary benefit or

unjust enrichment was also not proved and, consequently,

contended that NSE did not indulge in any specific

discrimination towards any specific TM which was in

contravention of the SEBI Act, Rules or the Regulations. 151

It was contended that issues surrounding the functioning

of a technology, namely, the TBT architecture cannot be

considered either a transaction or an activity inviting

directions under Section 11 and 11B of the SEBI Act. It

was contended that since the TBT architecture was not

under challenge no direction for disgorgement could have

been passed.

166. It was also urged that before a direction of

disgorgement could be passed it was necessary for the

respondent to give a finding of ill-gotten gains or unfair

profit or unjust enrichment made by NSE by the ill-gotten

or unethical acts. It was contended that only a wrong

doer who had made gains from the wrong doing can be

asked to disgorge. In support of his submission, NSE

relied upon the decision of this Tribunal in Karvy Stock

Broking Ltd. v SEBI, 2008 SCC Online SAT 74, wherein

this Tribunal held:

152

―(5) Before we deal with the contentions of the parties, it is necessary to understand what disgorgement is. It is a common term in developed markets across the world though it is new to the securities market in India. Black's Law Dictionary defines disgorgement as ―The act of giving up something (such as profits illegally obtained) on demand or by legal compulsion.‖ In commercial terms, disgorgement is the forced giving up of profits obtained by illegal or unethical acts. It is a repayment of ill-gotten gains that is imposed on wrongdoers by the courts. Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Disgorgement of ill-gotten gains may be ordered against one who has violated the securities laws/regulations but it is not every violator who could be asked to disgorge. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. Since the chief purpose of ordering disgorgement is to make sure that the wrongdoers do not profit from their wrongdoing, it would follow that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity. In a disgorgement action, the burden of showing that the amount sought to be disgorged reasonably approximates the amount of unjust enrichment is on the Board.‖ 153

167. In National Securities Depository Ltd. v. Securities

and Exchange Board of India, 2007 SCC OnLine SAT

208, this Tribunal held:

―We do not think that the Board could direct the appellants to disgorge the aforesaid amount without first determining their guilt and whether they had made any illegal gains. Again, it is not that every erring entity is held liable to disgorge the amount. Persons who have made illegal or unethical gains alone could be asked to disgorge their ill gotten profits.‖

168. It was urged that there has to be a causal link between

the amounts directed to be disgorged and the alleged

unjust enrichment derived from the violation. In this

regard, reliance was made in Sec. & Exch. Comm'n v.

Wills, 472 F. Supp. 1250, 1276 (D.D.C. 1978), which

held:

―33. Further, the Commission has failed to demonstrate the appropriateness of such a drastic remedy here. It is not necessary to decide the precise nature of the causal link which the SEC must show between defendants' violations and the profits in question; in this case plaintiff has failed to demonstrate any reasonably close link between 154

defendants' 1974 and 1975 corporate compensation and their illegal conduct...

35. When the amounts to be disgorged cannot be related with sufficient certitude to defendants' securities law violations, the SEC's disgorgement request takes on the character of a plea for punitive relief. The cases, however, are unanimous in refusing to accede to such a demand. See, e.g., SEC v. Manor Nursing Centers, Inc., supra, 458 F.2d at 1104-05; SEC v. Texas Gulf Sulphur Co., supra, 446 F.2d at 1308.‖

169. In S.E.C. v. Wyly, 56 F. Supp. 3d 260, the US District

Court of the Southern District of New York, set aside a

SEC disgorgement order for failure to establish a causal

nexus between the alleged wrongful conduct and

wrongful gains sought to be disgorged. The Court held:

―Here, the SEC cannot satisfy its burden to reasonably approximate a disgorgement amount merely by proving the violations and then calculating the total profits on each of the trades during the existence of the unlawful scheme. Unlike each of the cases discussed above, there is no evidence here that the defendants' unlawful conduct--that is, the scheme to hide beneficial ownership by failing to disclose transactions-- resulted in any market distortion, price impact, or profit tied to the violation. Nor is there evidence 155

that the scheme was motivated by the expectation of such profits. Without proof, a court cannot speculate about the impact of the Wylys' failure to disclose on share price...

To hold otherwise would create a per se rule requiring disgorgement of all profits made by those who fail to properly disclose their beneficial ownership of securities--regardless of whether that failure resulted in unlawful trading, market manipulation, or distortion. Such a rule would eliminate the requirement that the government provide a reasonable approximation of the profits that are causally connected to the violation. There would be no need for any approximation-- reasonable or otherwise--if the required disgorgement is always one hundred percent...

As a matter of law, the SEC cannot show that all of the profits on all of the sales by the IOM trusts throughout this extensive time period are reasonably connected to the Wylys' continuous failure to disclose beneficial ownership.‖ [Emphasis supplied]

170. The D. C. Circuit Court in the case of S.E.C. v. First

City Fin. Corp., 890 F.2d 1215, 1231 (D.C. Cir. 1989)

held:

―11. Since disgorgement primarily serves to prevent unjust enrichment, the court may exercise its equitable power only over property causally related to the wrongdoing. The remedy may well be a key to 156

the SEC's efforts to deter others from violating the securities laws, but disgorgement may not be used punitively. See SEC v. Blatt, 583 F.2d 1325, 1335 (5th Cir.1978); SEC v. Manor Nursing Centers, Inc.,

458...

Although the SEC bears the ultimate burden of persuasion that its disgorgement figure reasonably approximates the amount of unjust enrichment, we believe the government's showing of appellants' actual profits on the tainted transactions at least presumptively satisfied that burden. Appellants, to whom the burden of going forward shifted, were then obliged clearly to demonstrate that the disgorgement figure was not a reasonable approximation. Defendants in such cases may make such a showing, for instance, by pointing to intervening events from the time of the violation. In SEC v. MacDonald, 699 F.2d 47 (1st Cir.1983) (en banc), the First Circuit reversed a district court order requiring the defendant to disgorge all profits from an illegal insider trade when the defendant had held on to the stock for more than a year. The court restricted the amount to a figure based on the price of the stock ―a reasonable time after public dissemination of the inside information.‖ Id. at 55. Similarly, the Second Circuit in SEC v. Manor Nursing Centers, Inc., 458 F.2d 1082 (2d Cir.1972), refused to extend the disgorgement remedy to income subsequently earned on the initial illegal profits. In those cases, the defendant demonstrated a clear break in or considerable attenuation of the causal connection between the illegality and the ultimate profits.‖ 157

171. It was, thus, urged that the direction of disgorgement

has been made in the absence of any finding of any ill-

gotten or wrongful gain and that the basis of

disgorgement is on the finding of contravention of

Regulations 41(1) and 42(2) of SECC Regulations read

with SEBI circular of 2012. It was further urged that on

the basis of a finding of the WTM that there was lack of

due diligence on the part of the appellant in placing the

TBT architecture, it still did not warrant a direction of

disgorgement under Section 11 and 11B of the SEBI Act

without even attempting to establish what gains were

made or loss averted as a result of the alleged lack of due

diligence.

172. It was also contended that direction of disgorgement,

in the instant case was punitive and was not remedial in

nature. In support of his submission, the learned counsel

placed reliance upon a decision of this Tribunal Dushyant 158

N. Dalal v. SEBI, Appeal No. 182 of 2009, decided on

November 12, 2010.

173. It was also urged that the direction for disgorgement

was also disproportionate. It was contended that the basis

for calculation of disgorgement was based on the

percentage of NSE revenue from the operations which

included co-location and non-colocation operations which

could not be taken into consideration. At best, the

disgorged amount could be taken for those transactions

which were against the Acts, Rules and Regulations. It

was contended that the profits sought to be disgorged

were not profits that NSE had earned from the alleged

acts of "omissions/ commissions"

174. On the other hand, SEBI has supported the order of

the WTM and the directions issued under Section 11 and

11B. The contention of the respondent is, that the

impugned order has been passed in terms of the powers

conferred under Section 11 and 11B of the Act and 159

Section 12A of the SCRA Act. It was contended that the

powers are wide and designed to account for any and all

eventualities which may not have been contemplated at

the time of framing the Regulations and that the measures

illustrated in Section 11 and 11 B are only indicative and

cannot be taken to be fetters on the powers of the

respondent to pass directions in the interests of the

protection of the participants of the securities market.

175. The respondent placed reliance in SEBI v. Alka

Synthetics Ltd., AIR 1999 Guj 221, wherein the Gujarat

High Court held :

―As and when new problems arise, they call for new solutions and the whole context in which the SEBI had to take a decision, on the basis of which the impugned orders were passed cannot be said to be without authority of law in face of the provisions contained in section 11 and ....... It is clearly made out by a plain reading of the language of the section itself that the SEBI has to protect the interests of the investors in securities and has to regulate the securities market by such measures as it thinks fit and such measures may be for any or all of the matters provided in sub-section (2) of section 11 and in due discharge of this duty cast upon the SEBI as a 160

part of its statutory function, it has been invested with the powers to issue directions under section 11B. ....... Thus, so far as the authority of law in the SEBI to issue such directions is concerned, such authority to take measures as it thinks fit is clearly discernible on the basis of the provisions contained in section 11 read with section 11B of the SEBI Act. ...... We have to, therefore, consider and interpret the power of the SEBI under the provisions so as to see that the objects sought to be achieved by the Act is fully served, rather than being defeated on the basis of any technicality......... The duty and function had been entrusted to take such measures as it thinks fit and in order to discharge this duty, the power is vested under section 11B. ..... The authority has been given under the law to take appropriate measures as it thinks fit and that by itself is sufficient to clothe the SEBI with the authority of law.‖

176. Similarly, the Delhi High Court in MZ Khan v. SEBI

(AIR 1999 Del.164) held:

―Under section 11 of the SEBI Act, the SEBI has the power to protect the interests of the investors in securities and to promote the development of, and to regulate the securities market, by such measures as it thinks fit. The power is of a very wide nature and is not hedged in by any restrictions. This power will embrace the power to issue interim orders. The SEBI in a fit case can pass interim orders in the interests of investors and to promote the development of and to regulate the securities 161

market. Under the same provision, it can frame regulations as well for the same purpose. The final orders after the inquiry are contemplated under section 11B of the Act and at that stage it can issue such directions to any person referred to in the section as may be appropriate in the interests of investors and securities market. Both under sections 11 and 11B the duty is cast on the Board to protect the interests of the investors in securities and to promote and regulate the securities market. If at the initial stage it becomes necessary to pass an interim order, the SEBI has been endowed with such a power under section 11 of the Act. In case the provisions of section 11 are construed in a restrictive manner, the interests of the investors in securities and development and regulation of securities market will suffer.‖

177. The Bombay High Court in Ramrakh R. Bohra v.

SEBI (1999) 33 CLA 243 (Bom.) held:

―Section 11B of the SEBI Act is an enabling provision enacted to empower the SEBI to protect the interest of investors and to promote the development of and to regulate the securities market and to prevent malpractices and manipulations, inter alia, by brokers, Such an enabling provision must be construed so as to subserve the purpose for which it is enacted. It would be the duty of the court to further the legislative object of providing a remedy for the mischief. A construction which advances this object should be preferred rather than one which attempts to find a way to circumvent it. In 162

the case of Reserve Bank of India v. Peerless General Finance and Investment Co. Ltd. , the Supreme Court has observed, as under:

―It is a well accepted canon of statutory construction that 'it is the duty of the court to further Parliament's aim of providing a remedy for the mischief against which the enactment is directed and the court should prefer a construction which advances this object rather than one which attempts to find some way of circumventing it... In the matter of construction of enabling statutes the principle applicable is that if the legislature enables something to be done, it gives power at the same time, by necessary implication, to do everything which is indispensable for the purpose of carrying out the purpose in view.... It has been held that the power to make a law with respect to any subject carries with it all the ancillary and incidental powers to make the law effective and workable and to prevent evasion.‖

178. This Tribunal in R.K. Agarwal vs. SEBI, Appeal no.1

of 2001, held:

―One has to view the powers of the Respondent under the provisions of the Act in the context of the objects sought to be achieved by the Act and the duty cast on them in achieving the same. Section 11 and section 11B give enormous authority to the respondent in this regard.‖ 163

179. It was further held that:

―Therefore, in our view, the express grant of statutory power conferred by section 11B carries the authority to use of reasonable means to make such power effective.

If one has regard to the aforesaid principles, it would follow that the power which has been conferred by section 11B to issue direction are of a widest possible amplitude and are exercisable in the interest of investors and in order to prevent, inter alia, a broker from conducting his business in a manner detrimental to the interests of the investors or the securities market. The said power to issue directions under section 11B must carry with it, by necessary implication, all powers and duties incidental and necessary to make the exercise of these powers fully effective including the power to pass interim orders in aid of the final orders...."

180. In Anand Rathi v. SEBI 2002 (2) Bom CR 403 has

held that:

―The SEBI is charged with the duty to protect the public. What will protect the public must involve an exercise of discretionary powers. And so the question of the appropriate remedy is necessarily a matter of administrative competence. To judge the validity of any decision or order passed by the SEBI, normally, the Wednesbury test is to be applied to find out if the decision was illegal and suffered from procedural improprieties or was one which no 164

sensible decision maker could, on the material before him and within the framework of the law, have arrived at. The Court would consider whether relevant matters had not been taken into account or whether irrelevant matters had been taken into account or whether the action was not bona fide. The Court would also consider whether the decision was absurd or perverse. The Court would not, however, go into correctness of the choice made by the authority amongst the various alternatives open to him. Nor could the Court substitute its decision to that of the authority. The application of the principle of proportionality which is sought to be invoked by Dr. Singhvi is debatable qua its application to the executive actions.‖

181. In Karvy Stock Broking Ltd. vs. SEBI, 2007 SCC

OnLine SAT 2, this Tribunal held:

―The primary function and duty of the Board is to protect the interests of the investors in securities and to regulate the securities market. The preamble to the Act which declares the dominant purpose also makes it clear that the Board has been established for this purpose. This duty is performed under sections 11 and 11B of the Act which are the very soul and heart of it. ..... On the basis of the past experience of the Board, a need was felt to amend the Act to enable it to issue directions, whenever necessary, for the purpose of protecting the interests of investors and the securities market. Parliament by Act 9 of 1995 introduced Section 11B with effect from 25.1.1995. This section enables the Board to 165

issue directions to any intermediary of the securities market or any other person associated therewith if it thinks it is necessary in the interests of investors or orderly development of securities market or to prevent the affairs of any intermediary or any other person referred to in Section 12 from being conducted in a manner detrimental to the interests of investors or securities market or to secure the proper management of any such intermediary. For regulating the securities market and with a view to protect the same, the Board started issuing interim orders/directions under this newly added provision to keep the erring intermediaries or other delinquents associated therewith out of the market.... Even under section 11(1) and thereafter with the introduction of section 11B in the year 1995, the power of the Board was very wide and it could take every measure that a situation would demand and issue such directions that it considered necessary including the suspension of an intermediary. Yet, to put everything beyond the shadow of doubt, even the implicit has been made explicit by adding sub section (4) in Section 11 which now expressly authorizes the Board to issue various kinds of orders, "either pending investigation or enquiry or on completion of such investigation or enquiry.

..........

As already observed, section 11 is the very heart and soul of the Act. This provision has been periodically amended and today it is substantially different from what it was at its inception in the year 1992. The scope of the power has been considerably widened. The introduction of sub section (4) 166

in section 11 and various other provisions like section 11B is indicative of the legislative intent. These provisions are meant to arm the Board with authority so as to be able to effectively exercise power and achieve the declared objectives of the Act. It is clear that a common thread runs through the various provisions of the Act and that is to empower the Board to take preventive as well as punitive measures so as to protect the investor and to promote the securities market.

.....

In view of the above, we hold that the word 'inquiry' used in section 11(4) refers to the inquiries held under sections 11, 11B, also to the enquiry under the inquiry regulations framed under section 12(3) and also to the inquiry held under Chapter VIA and it is during the pendency of any of these inquiries that an interim order could be passed with a view to protect the interests of investors or in the interest of the market. It is in this background of the legal position that we have to examine the validity of the impugned order.‖

182. In IL&FS Securities v. SEBI & Ors., A.No.138 of

2019, this Tribunal held:

―Section 11 and 11B gives wide powers to SEBI to protect the interest of investors in securities and to promote the development and to regulate the securities market. Under Section 12A of the SCRA, 1956 SEBI has powers to issue directions to any Stock Exchange, Clearing Corporation or agencies associated with the securities market." 167

183. In Karvy Stock Broking Ltd. v. SEBI, Appeal No.6 of

2007 decided on 2nd May, 2009, this Tribunal held:

―5. Disgorgement is a monetary equitable remedy that is designed to prevent a wrongdoer from unjustly enriching himself as a result of his illegal conduct. It is not a punishment nor is it concerned with the damages sustained by the victims of the unlawful conduct. Disgorgement of ill-gotten gains may be ordered against one who has violated the securities laws/regulations but it is not every violator who could be asked to disgorge. Only such wrongdoers who have made gains as a result of their illegal act(s) could be asked to do so. Since the chief purpose of ordering disgorgement is to make sure that the wrongdoers do not profit from their wrongdoing, it would follow that the disgorgement amount should not exceed the total profits realized as the result of the unlawful activity.‖

184. In Dushyant N. Dalal v. SEBI, Appeal No. 182 of

2009, order dated 12th November 2010, it was argued that

without a specific provision, direction to disgorge cannot

be issued, but this Hon‟ble Tribunal held that no specific

provision in the SEBI Act is required and the power to

order disgorgement is inherent in the Board. The

Supreme Court held:

168

―9. Since disgorgement is not a punishment but only a monetary equitable remedy meant to prevent a wrong doer from unjustly enriching himself as a result of his illegal conduct, we are of the view that there need be no specific provision in the Act in this regard and this power to order disgorgement inheres in the Board.‖

185. In Mahavirsingh Chauhan v. SEBI, Appeal No. 393

of 2018 dated 18th October 2019, it was held by this

Tribunal that:

―21. From the aforesaid, it is clear that a person can be directed to disgorge amount equivalent to the wrongful gain made by him. [...] The order of the WTM is consequently, modified to the extent that the liability of the appellants in question except Rajesh Ranka to disgorge the amount is to the extent of the profit earned by them as calculated by the WTM under Table 9. In the event of failure by these appellants to pay the amount, it would be open to SEBI to recover the amounts in the order of hierarchy stipulated in paragraph 145€ of the impugned order.‖

186. In Gagan Rastogi v. SEBI, Appeal No. 91 of 2015

dated 12th February 2019, this Tribunal held:

―18. [...] that equitable remedy demands that disgorgement has to be made from the point of unjust enrichment or where the chickens come to 169

roost. However, we cannot accept the arguments that no such unjust enrichment has been made by the appellants nor disgorgement has to be made from where the unjust enrichment rests finally. If one entity who has unjustly enriched knowingly transferring those proceeds further to some other entity does not prevent the authorities from disgorging the same from the original beneficiary of unjust enrichment. The choice is clearly that of the authority to pursue and disgorge an illegal gain from any point of a chain, if such a chain exists. Tracing to the last point of the chain is an exercise in futility and is not needed. When the proof of unjust enrichment is right before the eyes of an authority chasing the mirage of further transfers itself cannot be supported.‖

187. Certain case laws on disgorgement under US

Securities Laws were also cited. In this regard, we find

that The Securities Exchange Act, 1934 did not include

any separate statutory provision for disgorgement.

However, in 1971, restitution of unlawful gains was

considered and upheld in Securities Exchange

Commission v. Texas Gulf [446 F.2d 1301 (2d Cir.

1971)].

170

188. In the year 1990, the US Congress conferred statutory

sanction on the remedy of disgorgement by the enactment

of the Security Enforcement Remedies and Penny Stock

Reform Act, 1990, which expressly authorised accounting

and disgorgement in securities laws.

189. In SEC v. Great Lakes Equity [775 F. Supp. 211], it

was held that unjust enrichment is not merely restricted to

what remains in the pockets of the wrongdoer in the

aftermath of a fraud, but rather includes the „value of the

other benefits‟ which accrue to the wrongdoer through a

scheme. These benefits may be in the form of interest free

loans, improved reputation, cost defrayments, etc. Thus,

the definition was given a much wider interpretation by

the authority.

190. Further, in an order instituting cease-and-desist in the

matter of credit-rating agency DBRS, Inc., SEC dated

October 26, 2015 charged the Respondent for

misrepresenting its surveillance methodology for ratings 171

of certain complex financial instruments during three

years and directed the Respondent to disgorge an amount

of USD 2.7 million. In this case, disgorgement was

directed even though there was no wrongful gain or loss

caused. It was thus urged that the concept of

disgorgement cannot be restricted to just recalling

unlawful gains which would lead to it being given a very

narrow interpretation.

191. In another matter of TPG Capital Advisors, LLC,

dated December 21, 2017 SEC charged the Respondent

for inadequate disclosures that involved a breach of

fiduciary duty. It failed adequately to disclose or obtain

the consent of the Funds to its receipt of accelerated

monitoring fees. Despite the practice of receiving

accelerated monitoring fees, TPG did not adopt or

implement any written policies or procedures reasonably

designed to prevent violations of the Advisers Act or its

rules arising from the conflicts of interest associated with 172

the undisclosed receipt of fees. The Respondent was, inter

alia, directed to disgorge an amount of USD 9.4 million

along with interest.

192. Similarly, in the matter of Kestra Advisory Services,

LLC dated July 9, 2015, the Respondent breached its

fiduciary duty to advisory clients by failing to provide

full and fair disclosure regarding two types of

compensation paid to its predecessor firm and affiliated

broker, and the conflicts of interest. Further, the

Respondent did not adopt or implement written policies

and procedures reasonably designed to prevent violations

of the Advisers Act and the Rules thereunder, and was

therefore directed to disgorge an amount of USD 7.2

million along with interest and a civil penalty.

193. It was thus urged that in the US jurisprudence, the

term "disgorgement" has been given a much wider

meaning and the said power has been used even in cases

of violation of statutory obligations and has not just been 173

restricted to cases wherein an unlawful gain has been

made or a loss has been avoided.

194. In Janak Chimanlal Dave vs. SEBI, SAT A.No.446

of 2020, decided on 20th September, 2021, this Tribunal

held:

―The contention that under Section 11B only unlawful gains could be disgorged and since he has incurred a loss no disgorgement can be made against him is erroneous... disgorgement in our opinion is an equitable remedy under Section 11B of the Act meant to prevent the wrongdoers from enriching himself by his wrong by wresting ill- gotten gains from the hands of the wrongdoer. The provisions relating to disgorgement is thus remedial in nature and is not punitive... In our opinion net profit from wrongdoing is the gain made by any business or investment, where both the receipts and payments are taken into account. We are further of the opinion that the appellant will not be allowed to diminish the show of profits by putting in unconscionable expenses or other inequitable deductions even though entire profits of a business may result from the wrongdoings of the appellants and therefore are not entitled for the deductions as prayed by them.‖

195. It was urged that disgorgement from salary can be

ordered. In support of this submission reliance was 174

placed in the matter of SEC v Church of God Inc., 429

F. Supp. 2d 1045, wherein SEC held that:

―Disgorgement of illegal profits and unjust enrichment is an equitable remedy available under the federal securities laws. E.g., SEC v. First City Financial Corp., 890 F.2d 1215, 1230 (D.C.Cir.1989). The court concludes that each defendant should be ordered to disgorge one half of his base salary for 2001, plus interest, as proceeds from the securities law violations. That was the last full year of CEG's operations and of these defendants' employment. But for the securities violations, CEG would have collapsed earlier, so the violations enabled the defendants to continue their employment. There is no magic to the fraction of one-half, but it is intended to reflect in an equitable way the fact that both defendants also provided real and valuable services to CEG and the Church of God for many years, as well as other mitigating factors.‖

196. From the aforesaid decisions, it is clear that SEBI has

wide powers to issue directions for disgorgement under

Section 11 and 11B of the Act. However, explanation to

Section 11B, as inserted by Act No.27 of 2014 gave

specific power to SEBI to issue a direction for

disgorgement of an amount equivalent to the wrongful 175

gain. Further, the direction to disgorge must be in

relation to any transaction or activity and that such

transaction or activity is in contravention to the

provisions of the SEBI Act or the Regulations made

thereunder. Further, the person must have made profit or

averted loss from such transaction or activity.

197. Disgorgement means that the act of giving up

something, namely profit obtained by illegal or unethical

acts. It is a repayment of ill-gotten gains by the wrong

doer. Disgorgement is also an equitable remedy that is

designed to prevent a wrongdoer from unjustly enriching

himself as a result of his illegal conduct. It is not

necessary that in each and every case there should be a

direction to disgorge profits merely because the

provisions of the Act or Regulations have been violated.

Disgorgement should be ordered only where persons have

made gains or averted loss/losses as a result of their

illegal/unethical acts.

176

198. Thus, it becomes essential first to pin point a person

and hold him guilty of making illegal gains and only

thereafter direct him to disgorge the ill-gotten gains.

Further, there must be a finding of ill-gotten gains by ill-

gotten or unethical acts.

199. We are also of the view that the disgorgement

amount should not exceed the wrongful gain made or loss

averted by such contravention. Further, the burden of

showing that the amount sought to be disgorged is

equivalent to the wrongful gain is upon SEBI. In addition

to the above, the direction to disgorge an amount must

establish a causal nexus between the wrongful conduct

and wrongful gains.

200. The primary function and duty of SEBI is to protect

the interest of the investors in securities and to regulate

the securities market. This function is performed under

Sections 11 and 11B of the Act. Section 11B was

introduced by Parliament to enable SEBI to issue 177

directions if it was necessary in the interests of investors

or orderly development of the securities market. The

scope of powers under Sections 11 and 11B has been

considerably widened through various amendments

issued from time to time. The amendments made

indicates the legislative intent, namely to arm SEBI with

such powers so as to enable SEBI to effectively exercise

power and achieve the objects of the Act and to take

preventive measure so as to protect the investors and to

promote the securities market.

201. Disgorgement is not a punishment but only an

equitable remedy to prevent a wrongdoer from unjustly

enriching himself as a result of his wrongful acts. As

stated earlier, disgorgement should be the amount

equivalent to the wrongful gain made or loss averted by

such contravention.

202. In the light of the aforesaid, we have already held

that the inequitable distribution of IPs had nothing to do 178

with the TBT architecture. The dissemination of

information/data from the PDC center to the POP

Receiver and thereafter to the Port were random, namely

there was randomness in the dissemination of data from

the PDC center right up to the Port and no fault has been

found in the dissemination of data in the TBT

architecture. We also find that the data that was

disseminated from the Port to the Colo rack of the TM

was equal, unrestricted and transparent and there was fair

access.

203. We have also found that there was no violation of

Regulation 41(2) of the SECC Regulations. We also

observed that Regulation 41(2) of the SECC Regulations

cannot be invoked for placing the TBT architecture which

has already been placed in 2010.

204. We found that the TBT architecture provided equal,

unrestricted, transparent and fair access to data

dissemination from its TBT architecture to the TMs. We 179

also found that there was lack of due diligence while

allocating IPs to various Ports and that there was unequal

load on various Ports and a load balancer would have

ensured equal distribution of IPs. We also find that there

was a human lapse in not putting the system in place to

monitor frequent connections of certain TMs to the

secondary server.

205. For this lack of human intervention in failing to

monitor frequent connection to the secondary server by

certain TMs, equitable direction under Sections 11 and

11B could be issued, but in our view there was no

occasion to issue a direction for disgorgement. The

direction for disgorgement is patently erroneous since we

do not find any unethical act/acts on the part of NSE.

206. NSE has not indulged in any unethical act nor has

unjustly enriched itself as a result of any wrongful act.

The direction to disgorge must be in relation to any

transaction or activity which is contravention of the 180

provisions of the SEBI Act or its Regulations. The

direction to disgorge can be issued when it is found that

the person has made profit through illegal or unethical

acts and is not necessary that in each and every case a

direction to disgorge should be passed merely because

some provisions of the Act or Regulations have not been

adhered to. 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.

207. We further find that the 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. No doubt 181

that SCRA Act was framed with the object of preventing

undesirable transactions in securities. The Act requires

all contracts in securities to be dealt only on a recognized

stock exchange. A larger responsibility was placed on the

stock exchange to ensure that undesirable transactions do

not take place. In the instant case, the information

disseminated from the TBT architecture was accessible to

everyone through a transparent mode which was equal,

unrestricted and gave fair access. The lapse on the part of

NSE is not ensuring equitable distribution of IPs can only

invite a penalty or a direction under Section 11 and 11B

but under no circumstances a direction in the nature of

disgorgement could be passed in the facts and

circumstance of the present case. In our view, the

direction to disgorge an amount was totally unwarranted.

208. In view of the aforesaid, it is not necessary for us to

go into the question raised by the appellant, namely, that

the respondent was duty bound to set out the exact nature 182

of the measure which it proposed to take in the show

cause notice and that it did not provide the requisite

measures in the show cause notice and, consequently, the

order of disgorgement was in violation of the principles

of natural justice.

209. Insofar as Mr. Ravi Narain and Ms. Chitra

Ramkrishna are concerned, the show cause notice alleged

that Mr. Ravi Narain being the Managing Director and

Chief Executive Officer („MD and CEO‟) of NSE from

2000 to March, 2013 and Ms. Chitra Ramkrishna, being

the Deputy Managing Director from 2008 to 2010; Joint

Managing Director („JMD‟) from 2010 to 2013 and Chief

Executive Officer („CEO‟) from April, 2013 to

December, 2016 and during the relevant period failed to

take any steps to ensure proper systems, checks and

balances so as to provide fair and equitable access to all.

The show cause notice alleged that adherence to the

principle of fair and equitable access was left to the 183

technology team without any specific guidance and, thus,

failed to perform their role in establishing adequate

systems which led to the scenario whereby certain

brokers were allowed to breach the norms of fair and

equitable access. It was also alleged in the show cause

notice that it was the duty of Mr. Ravi Narain and Ms.

Chitra Ramkrishna to prevent manipulation of the system

architecture and ensure fair, transparent and equitable

access and by not taking preventive as well as curative

measures proactively, they facilitated fraud and

manipulation by OPG. It was, thus, alleged that Mr. Ravi

Narain and Ms. Chitra Ramkrishna violated Section

12A(a), (b) and (c) of the SEBI Act read with Regulations

3 and 4 of the PFUTP Regulations and SECC

Regulations.

210. The appellants Mr. Ravi Narain and Ms. Chitra

Ramkrishna sought to make out a case that they were

utterly unaware of the TBT Architecture. It was 184

contended that they had no technical/computer

knowledge and, for that purpose, had employed experts

and took decision on the basis of the advice given by the

experts. It was also contended that Mr. Ravi Apte and

Mr. N. Murlidharan who were the Chief Technology

Officer („CTO‟) were involved in choosing the

technology and that Dr. V.A. Sastry who was a

technology expert with a Ph.D. in computer applications

gave his expert opinion and, consequently, are not

responsible for the alleged violations.

211. The WTM found that Mr. Ravi Narain and Ms. Chitra

Ramkrishna were holding the position of MD and CEO

during the relevant point of time and having held the

senior most management position in NSE and, being in

charge of the affairs of the conduct of the stock exchange

business, could not abdicate their responsibility by citing

limited knowledge on technology issues. The WTM held

that being vested with general and overall responsibility 185

of ensuring the implementation of the principle of equal,

fair and transparent access, as mandated under Regulation

41 of the SECC Regulations Mr. Ravi Narain and Ms.

Chitra Ramkrishna being the MDs during the relevant

period are liable for breach of the provisions of the SECC

Regulations. The WTM consequently directed Mr. Ravi

Narain to disgorge 25% of the salary drawn for the

financial years 2010-2011, 2012-13 and prohibited Mr.

Ravi Narain from associating with any listed company or

a market infrastructure institution or any other market

intermediary for a period of five years. The WTM further

directed Ms. Chitra Ramkrishna to disgorge 25% of the

salary drawn for the financial year 2013-14 prohibited her

from associating with any listed company or a market

infrastructure institution or any other market intermediary

for a period of five years.

212. Mr. Ravi Narain holds a degree in Economics and

according to him does not have any computer technology 186

qualifications. He became the first Deputy Manager of

NSE and became it MD and CEO in the year 2000. Mr.

Ravi Narain ceased to be the MD and CEO on 31st

March, 2017 but continued till June, 2017 as a Non-

Executive Director, after which he left NSE.

213. Ms. Chitra Ramkrishna was with NSE since inception

and is a qualified Chartered Accountant. According to

her, she is not a technical expert nor does she have any IT

qualification. Ms. Chitra Ramkrishna was promoted as

Deputy Managing Director in 2003 and all department

heads were directly reporting to her. After Mr. Ravi

Narain, Ms. Chitra Ramkrishna became the MD and CEO

from April, 2013 onwards and resigned on 3rd December,

2016.

214. We have already held that the TBT architecture

provided equal, unrestricted and fair access to the data

dissemination from its TBT architecture to the TMs. We

also found that there was no violation of Regulation 41(2) 187

of the SECC Regulations. The WTM has also found that

no fraud was found against the appellants Mr. Ravi

Narain and Ms. Chitra Ramkrishna nor were they

facilitating any manipulation done by OPG.

215. We also find that being the head of the institution it is

not necessary that the person should have intricate

knowledge in technical matters and for such purposes

even the head of the institution is required to take

guidance from experts. In this regard, we find that

experts were appointed and decisions were taken based

on the expert advice and policies were implemented. In

this regard, we find that Dr. V.A. Sastry was a technical

expert with Ph.D. in computer applications and had 30

years of experience in the software industry including

with Infosys Ltd. The Board of NSE used to rely on his

technical expertise. This fact has not been disputed in the

impugned order. Further, we find that NSE had Chief

Technology Officers, Mr. Ravi Apte and Mr. N. 188

Murlidharan who as technical experts were involved in

the choosing of the technology, namely, the TBT

architecture for the Colo facility. These persons were

also noticees in those proceedings and their submissions

have been recorded in detail which upon a perusal we

find that these noticees have given detailed reasons

justifying the choice of the TBT architecture. We also

find that these two noticees have been expressly

exonerated of the charges leveled against them with

regard to the choice of the TBT architecture and

facilitating fraud and manipulation by OPG, etc.

216. At the same time, we cannot ignore the fact that Mr.

Ravi Narain and Ms. Chitra Ramkrishna being the MD

and CEO of the stock exchange at the relevant movement

of time cannot abdicate their responsibility by citing

limited knowledge in certain spheres of the business

activities. In the changing scenario in the corporate world

the functions are delegated to professionals who become 189

responsible for their acts and conduct. While functions

may be delegated, duty of care, due diligence, verification

by the top management cannot be abdicated. The MD

and CEO are responsible for the day to day affairs in the

running of the exchange and cannot pass on the

responsibility of non-implementation of the load balancer

or non-monitoring of the secondary server. The

responsibility at the end of the day falls squarely upon the

MD and CEO. The implementation of the Colocation

technology was carried out under the overall supervision

of Mr. Ravi Narain and Ms. Chitra Ramkrishna and,

therefore, they cannot abdicate their responsibility for the

lapse that has been incurred in the monitoring of certain

areas.

217. 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 190

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.

218. We also note that the direction to disgorge 25% of the

salary is patently erroneous. The power under Sections

11 and 11B for disgorgement cannot be extended to

recover money from salary. Salary is a periodical

payment for one‟s labour. As per Black‟s Law

Dictionary Eight Edition salary means compensation for

services. Salary is given to a person as a remuneration

for the work that he does in an organization. Salary is not

a profit nor can it be termed as an unfair gain for the work

which the person has done in the organization. If the

person is not in service/employed, the question of

disgorgement from the salary does not arise. Recovery 191

from salary can only be done when the person is in

service/employed. Disgorgement under Sections 11 and

11B can only be made for illegal or unethical acts through

such transactions or activity which is in contravention to

the provisions of the SEBI Act or the provisions made

thereunder. In the absence of any illegal or any unethical

acts and in the absence of any finding of unlawful gain

being made by them the direction to disgorge 25% of the

salary is wholly illegal and cannot be sustained.

Directions under Sections 11 and 11B are equitable in

nature. Disgorgement has been held to be an equitable

direction. In our opinion, direction for disgorgement

from salary amounts to penal recovery. It becomes

punitive and not equitable.

219. We do not agree with the decision in the matter of

United States SEC v Church of God Inc., 429 F. Supp.

2d 1045, (supra). No reason or analogy has been given

as to why disgorgement from salary was made. In the 192

context of Sections 11 and 11B of the Act, the decision

(supra) is not applicable.

220. Now we take the appeal of OPG. The charge against

OPG and its Directors are as under:

i. First Connect/Early Login to POP Servers - OPG

was alleged to have consistently logged in first

across POP Servers as it was aware of the weakness

of the TCP/IP TBT System architecture and the

advantage of having first login across various POP

Servers in terms of trades. OPG was also alleged to

have designed its trading software in such a way that

it could manage to connect first on the POP Servers

and gain advantage.

ii. Crowding out other market participants - OPG

was assigned multiple TBT IPs to single Ports of

certain POP Servers which enabled it to consistently

be 1st, 2nd, 3rd and even 4th connection to the POP 193

Servers. Thus, it tried to crowd out other TMs from

the TBT platform.

iii. Connection to Secondary/Fall-back Server for

TBT data - Since TMs were permitted to

Secondary POP Server only in case of

disconnections to primary POP Server, the load on

Secondary POP Server was generally very low.

Therefore, OPG, by connecting to Secondary POP

Server almost on a daily basis without valid reasons,

gained unfair advantage over other TMs.

iv. Connivance/Collusion with NSE - OPG displayed

disregard to the norms of NSE and yet NSE

continued to permit OPG to connect to the

Secondary POP Server. The reluctance on the part

of NSE to prevent OPG from accessing the

Secondary POP Server to gain unfair advantage

could only have been possible through active

connivance/collusion of NSE and OPG. 194

v. Unlawful gains- OPG gained materially by being

the first logger as well as by connecting to the

Secondary POP Server.

vi. Conduct of OPG and its Director, Sanjay Gupta,

during SEBI Investigation-OPG acting through

its Director, Sanjay Gupta, had concealed/

destroyed vital information which could have

been helpful in providing better insight and

evidence in arriving at more conclusive findings

in the instant proceedings.

221. Based on the aforesaid charges, for reasons best

known to the WTM only four issues were framed namely:

i. Issue 1: Whether OPG consistently logged in

first across POP Servers on account of being

aware of the weakness of the TCP/IP TBT

System architecture and thereby, gained an

advantage?

195

ii. Issue 2: Whether OPG tried to crowd out other

TMs from the TCP/IP TBT System platform?

iii. Issue 3: Whether OPG Securities gained an

unfair access and advantage by consistently

logging into the Secondary POP Server for

large number of days?

iv. Issue 4: Unlawful gains made by OPG.

222. The WTM exonerated OPG and its Directors on issue

nos.1 and 2 and found OPG and its Directors guilty of

unfair access and advantage by consistently logging into

the secondary POP servers, and on that basis, made unfair

gain of Rs.15.57 crores.

223. The WTM accordingly prohibited OPG from

accessing the securities market and from buying, selling

or otherwise dealing in securities for a period of five

years. The Directors were also restrained from accessing

the securities market for a period of five years. Further, 196

OPG in its capacity as a stock broker was directed not to

take any new clients for a period of one year and further

directed OPG and its Directors to disgorge an amount of

₹15.57 crores along with interest at the rate of 12% per

annum from April 7, 2014 onwards, till the date of

payment.

224. On issue no.1, the WTM after considering the

material evidence on record found that the total number

of first connect by OPG was 137 days out of 528 trading

days during the period February, 2012 to 6th April, 2014.

The WTM upon analysis of the evidence also came to a

conclusion that advantage accruing to the first connect

would not continue throughout the day and depending

upon the load factor in front of each Port, it may get

diffused and diluted in the course of the trading day to a

„probabilistic advantage‟. This conclusion was drawn

considering that while it was possible to identify the POP

server that logs in first to the PDC and the Sender Port of 197

that POP Server which receives the data first, at the

starting point of the trading day, the subsequent changes

in dissemination sequence between the Ports or between

the POP Servers cannot be ascertained because of the

variance in the load factor at various Ports of different

POP servers. This is on account of the fact that the data

correlating the early login or first connect at each Port

level was not available for the relevant period. The

WTM therefore concluded that even though OPG

consistently logged in to the POP server it did not gain

any preferential access to TBT architecture and,

consequently, decided issue no.1 in favour of OPG

holding that even though OPG logged in first across POP

server it did not gain any advantage.

225. On issue no.2, the WTM again came to the conclusion

that even though OPG were allotted several IPs and were

allocated to a single Port enabling it to establish 1st, 2nd,

3rd and even 4th connection to the POP server it did not 198

gain any advantage over other TMs. The WTM held that

since data dissemination occurs first to Port 1 of the POP

server and then to Port 2 and then to Port 3 OPG was

allotted Port 1 on only one primary POP server

(TBTCOLO26) and the secondary POP server

(TBTCOLO27). The WTM came to the conclusion that

assigning multiple IPs to OPG on single Port did not

crowd out the other TMs as data dissemination occurred

first to POP server and thereafter to different Ports and

that similar process of allocating multiple IPs on single

Port were also given to other TMs. Consequently, issue

no.2 was also decided in favour of OPG and its Directors.

226. Even though there was a specific charge that OPG

disregarded the norms of NSE and that NSE continued to

permit OPG to connect to the secondary POP server

further, NSE did not prevent OPG from accessing the

securities market and this was possible only through

active connivance of NSE and OPG. In this regard, we 199

observe that there is no finding or discussion relating to

any connivance of OPG and its Directors with any

employee/officials of NSE. The WTM has also found

that the charge of collusion and connivance of NSE and

OPG was not substantiated as there was no sufficient

evidence. Further, there is a discussion in the impugned

order on the issue that OPG through its Directors

concealed/destroyed vital information but no

consequential penalty/directions has been issued. When

an allegation has been made in the show cause notice, it

was the duty of the WTM to frame as an issue and decide

that matter. We further observe that WTM fell in error in

exonerating the appellant on Issue no.2. Admittedly, the

OPG had multiple IPs to single Ports and established 1st,

2nd, 3rd and even 4th connect to the POP Servers as a result

it gained unfair advantage over other TMs. The tick

received by other TM was after it was received by OPG

causing loss of those few seconds which was 200

advantageous to OPG and disadvantageous to other TMs.

This aspect has not been considered.

227. On issue no.3, the WTM came to the conclusion that

unfair advantage was gained by OPG through its

secondary POP servers connections.

228. On the issue as to whether OPG gained an unfair

advantage and access by consistently logging into the

secondary server for a large number of days, the show

cause notice alleged as under:

i. Based on the above events it is alleged that OPG

displayed disregard to the norms laid by NSE and

yet NSE continued to permit OPG to connect to the

secondary server. The reluctance on the part of NSE

to prevent OPG from accessing the secondary server

ahead of others on continuous basis, allowed OPG

to have free access to secondary server in order to

gain undue advantage. It is alleged that such

regularity of success by OPG would have been 201

possible only with active connivance/collusion of

NSE and OPG.

ii. Since, stock brokers were permitted to access the

secondary server only in case of disconnection to

primary server, the load on the secondary server was

generally very low. Therefore, by connecting to

secondary server almost on a daily basis without

valid reasons, it is alleged that OPG has gained

unfair advantage over other stock brokers. Further,

it is alleged that NSE was aware that OPG has been

generally connecting to the secondary server, NSE

did not take any steps nor took any action. It was

therefore alleged that there was connivance between

OPG and NSE to give preferential treatment to

OPG. It was also alleged that OPG has acted in a

fraudulent manner and had indulged in fraudulent

and unfair trade practices in securities market. 202

229. The WTM after considering the submissions of OPG

and the material evidence on record as well as the TAC

report and Deloitte report came to the conclusion that

OPG was connecting to the secondary server on a regular

basis and at times had logged in only on the secondary

server and did not log on the primary POP server. The

WTM further found that the load on the secondary server

was very low and inspite of several warnings being issued

by NSE to shift to the primary server OPG continued to

ignore those warnings and continued to login on the

secondary server. The WTM did not accept the

contention of OPG that it was facing disconnection issues

which resulted in OPG logging on to the secondary

server. The WTM found that on account of low load on

the secondary server OPG gained advantage over other

TMs who were only logged in to the primary server and,

therefore, on account of low load factor OPG had faster

access to the data dissemination from the TBT 203

architecture. The WTM further found that OPG

displayed complete disregard to the circular and

guidelines as well as the norms laid down by NSE for

moving to the secondary POP server and, consequently,

had indulged in unfair trade practice which was violative

of Regulation 4(1) of the PFUTP Regulations.

230. In this regard, the contention of the learned senior

counsel for OPG is that the NSE circular dated 31st

August, 2009, the Colocation guidelines dated 8th August,

2011 and the updated guidelines dated 16th April, 2012

did not contain restriction on the usage of the secondary

server. These circulars/guidelines only informed the TMs

with regard to the introduction of the Colocation services

at the NSE premises. It only provided the information as

to the facilities that would be made available at the

Colocation and the process for member applications. It

was urged that the guidelines dated 8th August, 2011

which was updated on 16th April, 2012 only provided that 204

―Member's should always check the secondary TBT parameters are working fine with their application in case of non-availability of data from TBT primary source they can move to secondary source‖.

231. It was urged that the updated guidelines only advised

the TMs to connect to the secondary server as against

barring the same and, consequently, the only way to do so

was by initiating a secondary server connection and

staying connected to it. The learned senior counsel

contended that there was no Regulation or norms in

relation to usage of the secondary server and for

reprimanding or punishing a TMs for accessing the

secondary server and, consequently, cannot be charged

for connecting to the secondary server. It was urged that

NSE itself admitted that there was no restriction,

regulation or conditions regarding the usage of

connection of the secondary server and that NSE had left

the usage of secondary server to the discretion of the

TMs. It was contended that since the secondary server 205

was always in active mode, the TMs were free to connect

to the secondary servers at all times. It was urged that

there was no violation of any norms for using the

secondary server.

232. It was also urged that 67 out of 108 TMs were

connected to the secondary server and only directions

under Section 11 and 11B has been issued to OPG which

is arbitrary and discriminatory. It was contended that

during September to October, 2011, OPG faced

disconnection issues with the NSE servers which

continued in the subsequent years. It was contended that

disconnection/disruption of the servers on a trading day

even for a few seconds can result in huge financial losses

and adversely impact the business of OPG. Frequent

disconnection resulted in potential loss of business and

this frequent disconnection resulted in connection to the

secondary server. It was contended that between

December, 2012 to May, 2014 there were a total of 206

35,817 disconnections from the primary server on 357

days which came to 98 disconnections per day. NSE was

aware of such disconnection as OPG made certain

complaints in this regard which remained unattended and

which has not been considered in the impugned order. It

was also urged that in order to avoid trade losses, OPG

connected one or two IPs to the secondary server and

minimal business was conducted through the secondary

server connections.

233. On the other hand, the respondent has supported the

order passed by the WTM and contended that OPG by

consistently logging on to the secondary server gained

advantage over the other TMs as it had less load and,

therefore, the data was disseminated faster to OPG before

it reached other TMs. OPG gained advantage and by not

following the norms laid down by NSE, OPG indulged in

unfair trade practice in securities which was in violation 207

of Regulation 4(1) read with the Code of Conduct as

specified in the Stock Brokers Regulations.

234. We find from the evidence that OPG was connected

to the secondary server in the Futures and Options

Segment on 31% of the number of trading days in the

calendar year 2012; 99% of the number of trading days in

the calendar year 2013; 95% of the number of trading

days in the calendar year 2014 and 38% of the number of

trading days in the calendar year 2015. Further, the

Deloitte report analysed and submitted that OPG was

only connected to the secondary POP server on 63 trading

days in 2012, 248 trading days in 2013, 232 trading days

in 2014 and 92 trading days in 2015. This data clearly

indicates that OPG was trading only through secondary

server as on these many days OPG was not even

connected to the primary POP server.

235. We find that OPG was connected 99% of the number

of trading days in 2013 and 95% of trading days in 2014. 208

Admittedly, the evidence recorded in the Deloitte and

TAC reports shows that the load on the secondary server

was low and less crowded amongst all the POP servers.

The contention of OPG is that business transacted from

the secondary server was minimal is not supported by any

evidence and, in any case, we refuse to believe this

contention when we find that OPG was connected to

secondary server 99% of the trading days in 2013 and

95% of the trading days in 2014 and 248 days in 2013

and 232 days in 2014 when OPG was only connected to

the secondary server and was not connected to the

primary servers on these days. It is therefore hard to

believe that business conducted through secondary server

was low. It was urged vehemently that OPG was facing

disconnection issues from 2012 and there was a total of

35,817 disconnections from primary server on 357 days

between 2012-2014 which led OPG to connect and use

the secondary server. Such allegation has not been 209

proved and some complaints made in this regard cannot

be taken to be the gospel truth regarding disconnection on

all these days as from the logs furnished by OPG itself

one finds that OPG was connecting to the secondary POP

server consistently from 7 a.m. to 7.05 a.m. which

disproves the theory of OPG being disconnected at odd

times of the day during the trading days. The logging on

the secondary server from morning itself prior to the start

of the trading clearly indicated that OPG was

continuously logging in to the secondary POP server

irrespective of disconnection issues relating to the

primary POP server. The contention raised by the

appellant in this regard is clearly an afterthought and

against the material evidence.

236. In this regard, the WTM has analysed the complaints

referred by OPG and found that complaints were only

made in the Futures and Options Segment on five days.

Further, OPG itself stated that disconnection in the 210

primary server was less frequent in 2013. These facts

have not been disputed before us and in view of the

admission that disconnection to the primary POP server

was less frequent in 2013 yet the evidence indicates that

OPG was connected to the secondary server on 248 days

without being connected to the primary server in 2013

and that OPG was connected to the secondary server on

99% of the number of trading days in 2013. In this

regard, the contention that OPG was connected to the

secondary server on account of disconnection issues

cannot be accepted as it is unimaginable that OPG faced

disconnections on 95% to 99% in 2013-2014.

237. We also find that between January, 2012 to June,

2012, NSE had issued several warnings with regard to

connecting to the secondary server and advised OPG to

shift to the primary server. In spite of issuance of

warnings OPG continued to remain connected to the

secondary server which has been analysed and observed 211

in table 20 of the impugned order. This analysis has not

been disputed by OPG before us. This shows scant

regards to the norms and guidelines laid down by OPG

and taking advantage of the laxity by NSE.

238. Since the secondary server was always in active mode

and running without any time lag and in view of the

finding that there was less load on the secondary server as

it was less crowded OPG by consistently logging on the

secondary server had advantage over TMs logged in

normal POP servers. Because of the low load since it as

less crowded on the secondary server OPG gained

advantage in accessing the data faster than other TMs.

The variance in time in terms of millisecond and

microsecond in respect of data was immensely significant

which was to the advantage of OPG when it accessed data

from the secondary server. Since the delivery of the data

can be done only to one recipient at a time OPG 212

connections has to be looked from this aspect and in this

background.

239. Admittedly, the circular dated 31st August, 2009 was

not the only circular issued by NSE with regard to

Colocation facilities. NSE also issued guidelines on 8th

August, 2011 and 16th April, 2012 wherein TMs were

advised to move to the secondary server in case of non-

availability of data from the TBT primary source.

Guidelines was clear that TMs were required to access

the data from the primary POP server and the secondary

POP server connection was to be utilized only when there

was non-availability of data from the primary POP server.

Emails were written to OPG inspite of which they

continued to stay connected with the secondary server.

We are of the opinion that OPG displayed complete

disregard for the norms laid down by NSE in its

circular/guidelines for moving to the secondary server

such disregard for the norms and the manner in which 213

OPG was connected to the secondary server amounted to

an unfair trade practice which, in our opinion, is violative

of Regulation 4(1) of the PFUTP Regulations. In this

regard, Regulation 4(1) of the PFTUP Regulations is

extracted hereunder:

―4. Prohibition of manipulative, fraudulent and unfair trade practices

(1) Without prejudice to the provisions of regulation 3, no person shall indulge in a manipulative, fraudulent or an unfair trade practice in securities market.

Explanation.-For the removal of doubts, it is clarified that any act of diversion, misutilisation or siphoning off of assets or earnings of a company whose securities are listed or any concealment of such act or any device, scheme or artifice to manipulate the books of accounts or financial statement of such a company that would directly or indirectly manipulate the price of securities of that company shall be and shall always be deemed to have been considered as manipulative, fraudulent and an unfair trade practice in the securities market.‖ 214

240. Whether an act or practice is unfair is to be

determined by the facts and circumstances surrounding

the transaction. In the context, the PFUTP Regulations a

trade practice may be unfair if the conduct undermines

the good faith dealing involved in the transactions and

undermine the ethical standards between parties engaged

in the business transactions.

241. In Rakhi Trading Pvt. Ltd.v. SEBI (2018) 13 SCC

753, the Supreme Court held that practice which does not

conform to the fair and transparent principles of trade in

the stock market is unfair trade practice.

242. In SEBI v. Kanhaiyalal Baldevbhai Patel &

Others, 2017 SCC Online SC 1148, the Supreme

Court held that the concept of unfairness appears to be

broader than and includes the concept of „deception‟ or

„fraud‟.

243. Thus, OPG repeatedly connecting to the secondary

server almost on a daily basis without any valid reason 215

and ignoring the warning and advice given by NSE for

the purposes of gaining unfair advantage over other TMs

is, in our opinion, an unfair trade practice which is

prohibited under Regulation 4(1) of the PFUTP

Regulations.

244. The show cause notice alleged that OPG gained

materially by being the first logger as well as by

connecting to the secondary server. In this regard, NSE

had appointed ISB to calculate the profits earned by TMs

including OPG especially on days when they logged in

first to the PDC either from the primary server or from

the secondary server. The ISB in its report took 30 days

on sample basis and analysed the same for the period

2012 and 2013 which were the days when OPG had

consistently logged in first. ISB in its report submitted

that OPG made higher profits close to Rs.25 crores when

they logged in early. Based on this ISB report, the show 216

cause notice directed OPG to show cause as to why the

profit of Rs.25 crores should not be disgorged.

245. The WTM after considering the material evidence

held that the computation of profit made by ISB in its

report is on the basis of early login by OPG. The WTM

in paragraph 8.39 of the impugned order held that the

computation based on analysis of first login cannot be

adopted. In view of the finding given by the WTM in

paragraph 8.13 that the first connect early login did not

give any unfair advantage to OPG and that only a

probabilistic advantage could be gained by TMs on

account of early login on such POP servers, the WTM on

the aforesaid basis held that the computation of unfair

gains as made out in the show cause notice to the extent

of first login made by OPG cannot be accepted or

adopted.

246. The WTM, however, took into consideration table

A11 and A15 of the ISB report and based on the 217

calculations made in table XXI of the impugned order

came to the conclusion that OPG had made a profit of

Rs.15.57 crores on account of unauthorized connection to

the secondary server.

247. In our opinion, the calculation of profits made on the

basis of ISB report is patently erroneous. Admittedly, the

ISB report was made on the allegations that OPG by

being the first logger/early connection gained materially

for the purpose of analyzing the profits the sample taken

of the trading made in the Futures and Options Segment

was on the basis of OPG logging in first on those days.

248. When a categorical finding has been given by the

WTM and we have also arrived at the same finding that

early login or first logger did not create any advantage the

basis of calculation of profits or unlawful gain cannot be

made under this criterion.

249. The ISB report used First-In-First-Out (FIFO)

methodology to calculate both intraday and overnight 218

profits. Intraday profits are profits generated through

positions that are opened and closed on the same day.

Overnight profits are profits generated through positions

opened on a prior day and closed on that particular day.

The definition of various profit terminologies used in the

anaysis is as under:

i. First Prop: Profits made by the trading

member from proprietary trades on days

when he logged first into a Port located on the

server which connected first to the PDC.

ii. Non-First Prop: Profits made by the trading

member from proprietary trades on days

when he was not the first to log into any

server Port.

250. A perusal of the terminology „First Prop‟ indicates

that the profits made by the TM is on the basis of its

trades made on days when he logged in first into a Port. 219

251. The WTM has calculated the unlawful gain on the

basis of table A11 and A15 of the ISB report. A perusal

of the aforesaid tables indicates that the calculation has

been made on the basis of „First Prop‟ and „Non-First

Prop‟. The „First Prop‟ analysis is based on when OPG

logged in first. When the WTM has given a finding that

early logging in does not give any advantage and could

only be given a probabilistic advantage the question of

calculating profits on the basis of early login becomes

wholly erroneous. The WTM could only consider

probabilistic advantage, if any, which the OPG may have

gained by being the first logger.

252. Thus, on this aforesaid short point, the calculation of

unlawful gain made by the WTM cannot be accepted.

253. Admittedly, seven reports of experts were considered

while passing the impugned order. OPG submitted a

report of another expert which is called the „Pasumarthy

Report‟ which report was rejected by the WTM. OPG 220

submitted that there are infirmities in the investigation

carried out by SEBI and there are deficiencies in the

report submitted by Deloitte, TAC, EY etc. The appellant

contended that the Pasumarthy Report should be taken

into consideration.

254. Upon a perusal of the Pasumarthy Report, we find that

it deals with several allegations which has been dealt in

the impugned order and has been dropped as highlighted

in paragraph no.8.13 and 8.15 of the impugned order.

Further, the Pasumarthy Report does not dwell into the

unauthorized connection by OPG to the secondary server.

Further, in our view, the Pasumarthy Report does not

submit its own finding. It only relies on the findings of

earlier expert committee‟s report. The Pasumarthy

Report has not based its findings on independent research

and, therefore, in our opinion the WTM rightly rejected

the Pasumarthy Report.

221

255. Before we conclude, we must observe that when

serious allegations were made against a first level

regulator, namely, NSE, SEBI should have been proactive

and should have conducted the investigation 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. The scope of investigation was limited

and not made under Section 11(4) but was conducted by

another agency under Section 11C. In our opinion,

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.

222

256. We also find that two separate orders of the same date

were passed by the same Officer (WTM), one against

NSE, Mr. Ravi Narain and Ms. Chitra Ramkrishna and

the other order was passed against OPG. We find that

there are contradictions in the findings arrived at on the

same issue. For example, on the issue of early login, the

WTM, in the order against NSE held that early log in by

TM and OPG created an advantage. The WTM held that

a TM who logs in first would be disseminated the data

first at the start of the trading day and, therefore, has an

advantage over other TMs. On the other hand, the WTM,

in OPG matter held that the early log in by OPG did not

make any unfair advantage. This anomaly is one such

instance and there are more. It is not worthwhile to cull

out all the contradictions but it is suffice to state that the

same Officer who has passed the orders on the same date

cannot make different analysis on the same subject/issue. 223

257. To conclude, we find that all the charges leveled in

the show cause notice has not been proved. Many of the

charges were dropped by the WTM himself while passing

the impugned order. The WTM held that the charge of

fraud and unfair trade practice by NSE under PFUTP

Regulation is not made out. The charge that NSE and its

employees have colluded with TMs, especially OPG has

not been made out. The allegation of suppression of

material facts and non-cooperation by NSE with the

investigating authorities has not been made by the WTM.

258. We also find that early log in by TM did not create

any advantage with regard to dissemination of data. May

be a probabilistic advantage is obtained by a TM on

account of early login, but in the absence of any further

evidence on this aspect, no adverse orders can be passed.

We also hold that there was randomness in the

dissemination of data in the TBT architecture and, 224

therefore, there was no requirement to add a randomiser

to the existing TBT architecture.

259. We, however, found that there was laxity at the hands

of the employees of NSE in the distribution of IPs which

resulted in unequal distribution of IPs on the servers. We

have opined that a load balancer should have been

employed which would have allocated IPs of TM evenly

to the servers at the time of log in itself. The load

balancer would equally distribute the load at every stage

and would have ensured fairness, equality and

transparency in the system which NSE was mandated to

comply. The decision taken by NSE not to implement the

load balancer does not appear to be a bonafide decision.

260. We also found that NSE failed to monitor the

secondary server which led many TMs especially OPG to

misuse it to their advantage. NSE failed to follow its own

norms and guidelines framed for such purpose. NSE

should have placed a mechanism to check unauthorised 225

access to the secondary server by the TMs. NSE should

have placed a defined policy for use of secondary server

and a mechanism ought to have been placed for

monitoring connection by TM on the secondary server

since it was an active server.

261. We also find that the WTM further held that failure to

place the randomizer or load balancer in the TCP IP

dissemination protocol, cannot be categorised as breach

of the principles of "fairness and equity" attracting the

provisions of PFUTP Regulations. The WTM held that

the dissemination of information which is in breach of the

stipulation contained in SECC Regulations cannot

automatically attract the rigors of PFUTP Regulations,

without there being any proof to indicate fraud. The

WTM held that in the absence of any fraud or collusion

or connivance the possibility of fraud was non-existent.

262. We also find that the charge that NSE has violated

Regulation 41(2) and 42(2) of SECC Regulations is not 226

proved. NSE provided a level playing field for TM

subscribing to the TBT data feed of NSE and provided

equal, unrestricted and fair access from the TBT

architecture. We, however, found that the circular of 30th

March, 2012 was not followed by NSE.

263. We also found that the WTM exonerated OPG and its

Directors on issue of first login and crowding out other

TMs. We, however, affirm the findings of the WTM that

OPG gained an unfair access and advantage by

consistently log in to the secondary server and made

unlawful gains.

264. We, however, find that for violation of the circular,

there can be no disgorgement by NSE or by Mr. Ravi

Narain and Ms. Chitra Ramkrishna. Insofar as Mr. Ravi

Narain and Ms. Chitra Ramkrishna are concerned, the

order of disgorgement cannot be sustained. We also find

that order of disgorgement against NSE also cannot be

sustained.

227

265. We have already held that NSE did not commit any

violation of Regulation 41(2) of the SECC Regulations.

We have also found that TBT architecture provided

unrestricted, transparent and fair access to data

dissemination from its TBT architecture to the TMs. We

have also found that there was lack of due diligence while

allocating IPs on various Ports and that there was

inequitable distribution of IPs. We also found that a load

balancer should have been placed for equitable

distribution of the IPs. We also found that there was

failure to monitor frequent connections to the secondary

server by certain TMs. Even though NSE has not

indulged in any unethical act or has unjustly enriched

itself the direction to disgorge, in our opinion, cannot be

sustained. However, NSE has not adhered to its own

norms and guidelines and has not followed the circular.

The SCRA Act confers a large responsibility upon the

exchange to ensure that undesirable transactions do not 228

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 TMs 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. However, the 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.

Though there are no parameters to quantify the lapse

committed by NSE but taking into consideration all facts

and circumstances of the case and the factors

contemplated under Section 15J of the SEBI Act read

with 23J of the SCRA Act and in exercise of the powers

confirmed upon this Tribunal under Rules 21 of the 229

Securities Appellate Tribunal (Procedure) Rules, 2000,

we are of the opinion that NSE should pay a sum of

Rs.100 crores for this lapse which is not expected from a

first level regulator and which would act as a deterrent.

266. In view of the reasons given in the preceding

paragraph:

a. We set aside the order of the WTM directing

disgorgement of an amount of Rs.624.89 cores

alongwith interest at the rate of 12% p.a. against

NSE.

b. Directions given by the WTM prohibiting NSE from

accessing the securities market, directly or

indirectly, for a period of six months and, further,

directing NSE to carry out system audit at frequent

interval after thorough appraisal of the technological

changes introduced from time to time is affirmed.

c. We direct NSE to deposit a sum of Rs.100 crores to

the Investor Protection and Education Fund created 230

by SEBI. This amount will be adjusted by SEBI

pursuant to the deposit already made by NSE vide

our interim orders dated 22nd May, 2019 and 17th

May, 2021. The excess amount alongwith interest

accrued shall be refunded by SEBI within six weeks.

The appeal of NSE is partly allowed.

d. The direction to disgorge 25% of the salary from

Mr. Ravi Narain and Ms. Chitra Ramkrishna is set

aside.

e. The direction prohibiting Mr. Ravi Narain and Ms.

Chitra Ramkrishna from associating with any listed

Company or a market infrastructure institution or

any other market intermediary for a period of five

years is set aside and substituted for the period

undergone by them. The appeals for Mr. Ravi

Narain and Ms. Chitra Ramkrishna are allowed.

f. The direction of the WTM directing NSE to initiate

enquiry against its employees is affirmed. 231

g. The violations committed by OPG as found by

WTM is affirmed. However, the direction of the

WTM directing OPG and its Directors to disgorge

Rs.15.57 crores alongwith interest at the rate of

12% p.a. from 7th April, 2014 onwards is set aside.

The matter is remitted to the WTM to decide the

quantum of disgorgement afresh in the light of the

observation made above within four months from

today.

h. In addition to the above, we direct the WTM to

consider the charge of connivance and collusion of

OPG and its Directors with any employee/officials

of NSE. Further, the WTM will decide the issuance

of direction/penalty concealment/destruction of vital

information and will further reconsider Issue No.2

relating to crowding out other market participants. 232

i. All other directions issued against OPG and its

Directors are affirmed. The appeal is partly

allowed.

j. The intervention applications as well as the appeal

of Mr. A. Kumar are rejected.

267. In the circumstances of the case, parties shall bear

their own costs.

268. This order will be digitally signed by the Private

Secretary on behalf of the bench and all concerned parties

are directed to act on the digitally signed copy of this

order. Certified copy of this order is also available from

the Registry on payment of usual charges.

Justice Tarun Agarwala Presiding Officer

Justice M.T. Joshi RAJALAKS Digitally signed by Judicial Member HMI RAJALAKSHMI 23.1.2023 HARISH HARISH NAIR Date: 2023.01.23 RHN NAIR 15:47:55 +05'30' 233

GLOSSARY Sr. Abbreviation Description No.

1. Algo - Algorithmic

2. CD - Currency Derivatives

3. CEO - Chief Executive Officer

4. CFT - Cross Functional Team

5. CM - Cash Market

6. Colo - Colocation Services

7. CTO - Chief Technology Officer

8. Deloitte - Deloitte Touche Tohmatsu India LLP

9. DMA - Direct Market Access

10. EY - M/s. Ernst & Young LLP

11. FSB - Front Side Bus (FSB) speeds

12. HFT - High Frequency Trading

13. IPEF - Investor Protection and Education Fund created by SEBI.

14. IRF - Interest Rate Futures 234

15. ISB - Indian School of Business

16. JMD - Joint Managing Director

17. MD and CEO - Managing Director and Chief Executive Officer

18. MTBT - Multi-cast Tick By Tick

19. NSE - National Stock Exchange of India Ltd.

20. Omnesys - Omnesys Technologies Pvt. Ltd.

21. OPG - OPG Securities Pvt. Ltd.

22. PDC - Primary Data Centre

23. PFUTP - Securities and Exchange Board of Regulations India (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003

24. POP Server - Point of Presence Servers or dissemination servers

25. PSM Team - Project Support and Management Team

26. SCRA - Securities Contracts (Regulation), Act 1956

27. SEBI - Securities and Exchange Board of India 235

28. SEBI Act - Securities and Exchange Board of India Act, 1992

29. SECC - Securities Contracts (Regulation) Regulations (Stock Exchanges and Clearing Corporations) Regulations, 2012

30. SOP - Standard Operating Procedure

31. TAC - Technical Advisory Committee

32. TBT - Tick-By-Tick mechanism

33. TCP/IP - Transmission Control Protocol/ Internet Protocol

34. TM - Trading Member

35. UMLO - Unique Multi-Leg Option

36. WTM - Whole Time Member, SEBI.

Justice Tarun Agarwala Presiding Officer

Justice M.T. Joshi Judicial Member RAJALAK Digitally by signed

SHMI RAJALAKSHMI 23.1.2023 HARISH NAIR HARISH Date:

2023.01.23 RHN NAIR 15:48:43 +05'30'