The Securities Appellate Tribunal (SAT) on Monday decided to set aside some of the orders issued by the Securities and Exchange Board of India (SEBI) against the National Stock Exchange (NSE) in the NSE co-location (Colo) scam of 2015. In its order, SAT has come down heavily on SEBI's handling of the case; however, this has given NSE and its officials a huge reprieve.
In para 255, the Tribunal notes, "...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 the investigation was limited and not made under Section 11(4) (of SEBI Act) 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 or enquiry instead of delegating it to NSE to conduct an investigation. It is strange, and it does not stand to reason as to how SEBI directed NSE to conduct an investigation against itself. It is clear that a casual approach was adopted."
The bench of justice Tarun Agarwala (presiding officer) and justice MT Joshi (judicial member) also expressed surprise over contradictions in the findings arrived at on the same issue in two separate orders issued by SEBI. These orders were passed by the whole-time member (WTM) of SEBI against NSE, Mr Narain and Ms Ramakrishna and OPG Securities Pvt Ltd.
For example, SAT says, on the issue of early login, the WTM, in the order against NSE, held that early log in by trading member (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 or issue."
In its order, the Tribunal set aside the disgorgement of Rs624.89 crore (excluding interest at 12% per annum-pa) ordered by SEBI from NSE. "...the direction for disgorgement was unwarranted but the appellant NSE cannot be allowed go scot-free and is required to pay the price for the lack of due diligence on account of human failure to comply with the circular in letter and spirit...we are of the opinion that NSE should pay a sum of Rs100 crore (to Investor Protection and Education Fund -IEPF) for this lapse which is not expected from a first level regulator and which would act as a deterrent."
It may be recalled that this work was outsourced to a Hyderabad-based management school through NSE itself and a complete report is not in the public domain, despite a change at the head of SEBI and NSE.
On NSE’s former managing directors and chief executive officers (MD&CEOs), Chitra Ramkrishna and Ravi Narain, although SAT held them responsible for failing in their duties, it says the disgorgement cannot be made from their salaries.
It then set aside the SEBI direction to disgorge 25% of the salary from Mr Narain and Ms Ramkrishna. "The direction prohibiting Mr Narain and Ms 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," it added.
Sources say that some drama preceded the dictation of the order and everybody present had to switch off their mobile phones. SAT has asked SEBI to probe links between NSE and OPG Securities. The Tribunal also asked the market regulator to re-calculate the disgorgement amount of OPG Securities.
SAT affirmed the finding by SEBI WTM about the violations committed by OPG. However, it says, "the direction of the WTM directing OPG and its directors to disgorge Rs15.57 crore along with interest at the rate of 12% per annum from 7 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."
"…we direct the WTM to consider the charge of connivance and collusion of OPG and its directors with any employee or officials of NSE. Further, the WTM will decide the issuance of direction, penalty concealment or destruction of vital information and will further reconsider issues relating to crowding out other market participants," SAT says.
In April 2019, SEBI had ordered the disgorgement of profits from NSE and salaries of the former MD&CEOs. The regulator had also asked the Exchange to disgorge Rs624.89 crore along with interest calculated at the rate of 12%pa to the IEPF investor education and protection fund).