According to SAT, if trades are executed due to negligence or breach of duty they cannot be considered material mistake and therefore not qualify for annulment
Holding on to the sanctity of trades on the exchanges, the Securities Appellate Tribunal (SAT) on Thursday upheld National Stock Exchange (NSE)'s decision to refuse Emkay Global Financial Services plea for annulment of erroneous trades executed in October 2012.
At the same time, SAT has asked NSE to review trades executed by Emkay with two brokers - Inventure Growth and Securities and Prakash K Shah Shares and Securities.
The case relates to orders entered by a dealer of Emkay on 5 October 2012, that had led to a flash-crash of over 900 points (fall of 15.5%) in the NSE's benchmark index Nifty, forcing the bourse to temporarily halt trading.
Emkay had approached SAT after NSE refused to accept its request for annulment of the erroneous trades.
In a final ruling dated 26th August, SAT has upheld NSE's contention that norms related to trades on exchange should be inviolable "to ensure sanctity of dealings on the exchange".
"If trades are executed due to negligence or breach of duty they cannot be considered material mistake and therefore not qualify for annulment," SAT said.
As per the tribunal, 'material mistake in the trade' would be attributable to unforeseen circumstances, which vitiate sanctity of the trades executed on exchange.
"Breach of duty/negligence would not be unforeseen circumstance that can be said to vitiate the trades executed on the exchange," SAT said.
Among others, SAT noted that Emkay had not installed a "validation mechanism" before entering sell orders and was also negligent in transmitting erroneous trades from the dealer's terminal to the NSE's server by ignoring four to five level checks that were available in the system.
Moreover, SAT also rejected Emkay's contention that NSE's trading system was faulty and in violation of market norms on grounds that the matter was pending before Sebi and it "would not be proper" for the tribunal to comment on the same.
However, SAT noted that while Emkay Global during the trades had incurred losses of Rs51 crore on account of sell orders, two counter-parties - Inventure Growth and Securities and Prakash K Shah Shares and Securities - had made huge profits running into several crores of rupees.
According to SAT, violations committed by - Inventure Growth and Prakash K Shah Shares - "were serious violations" and NSE should have considered that the trades were "vitiated" on account of such violations by the two brokers.
Accordingly, the matter in this regard has been remanded back to NSE for fresh consideration.
Giving more teeth to SEBI for clamping down on illicit money-pooling schemes and other frauds, the Government has notified a new law empowering the regulator
The union government has notied the Securities Laws Amendment Act that would empower market regulator Securities and Exchange Board of India (SEBI) to pass orders for attachment of properties, arrest of defaulters and to access call data records.
The Securities Laws Amendment Act, which was cleared by Parliament earlier this month, amends all legislations governing capital markets, would also facilitate setting up of a special SEBI court to fast-track investigation and prosecution process, including by granting approval for search and seizure operations in suspected cases of frauds.
The Act, which has come into force through a gazette notification dated 25th August, is part of the government and regulators’ efforts to tighten the noose around fraudsters in the wake of several cases of illicit money-pooling activities including by ponzi operators in various parts of the country.
The new Act has as many as 57 clauses to amend various sections of the SEBI Act and two other related legislations.
The Bill was passed by the Lok Sabha on 6th August and in Rajya Sabha on 12th August.
The notification comes more than one year after the first ordinance was promulgated in July 2013 to grant these additional powers to SEBI. The ordinance was promulgated for the second time in September last year, followed by a third ordinance in January, as a bill could not be passed in Parliament at that time to grant permanent powers to SEBI.
The third ordinance also lapsed late last month, leaving SEBI without these extra powers which were used by the regulator in nearly 1,500 cases during their validity period.
The ordinance, which had 30 clauses, was brought in against the backdrop of lakhs of small investors being duped by numerous fraudulent investment schemes across the country, like in the alleged Saradha scam in West Bengal.