Case BriefsTribunals/Commissions/Regulatory Bodies

Securities Exchange Board of India (SEBI): Dark Fibre/Leased Line connectivity allowed to certain Stock Brokers, the Adjudicating Officer In the matter relating to Dark Fibre/ Leased Line connectivity allowed to certain Stock Brokers, the Adjudicating Officer Suresh B Menon has who was CEO of NSE at the relevant time;observed some irregularities in respect of co-location and corporate governance at National Stock Exchange Limited (‘NSE’) for which it has been penalized with Rs. 7 crores fine. Chitra Ramakrishna, who was CEO of NSE at the relevant time; and Key Management Persons Subramanian Anand, and Ravi Varanasi were fined with Rs. 5 Crores each.

In 2015, a whistleblower approached SEBI alleging various irregularities in respect of Co-location and corporate governance at NSE. A Cross Functional team of SEBI Officials was formed to examine the issues. There were irregularities with respect to certain brokers getting Point to Point (P2P) dark fiber connectivity from Sampark Infotainment Private Limited (‘Sampark’).

The stock brokers and the person associated with the securities market violated the following provisions:

  1. Securities and Exchange Board of India Act, 1992 (‘SEBI ACT’)
  2. Securities Contracts (Regulation) Act, 1956 (‘SCRA’)
  3. Rules and Regulations made under SEBI (Stock Exchanges and Clearing Corporations) Regulations, 2012 (‘SECC Regulations’)
  4. SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to Securities Market) Regulations, 2003 (‘PFUTP’)
  5. SEBI (Stock Brokers and Sub-Brokers) Regulations, 1992 (‘Stock Broker Regulation’)


The NSE’s employees were investigated for the illegal relation with the stock brokers on the basis that they were benefiting from preferential access to the exchange system. Sampark illegally arranged the cabling in the co-location rack of NSE that other stock brokers suffered with lower latency compared to other trading members connected to Sampark. Several other identities indulged in fraudulent and unfair trade practices related to the securities market.

The Court observed:

  1. The mode of communication adopted for making changes to the existing circulars violated the principle of transparency.
  2. Preferential treatment was shown by NSE by allowing Sampark to provide P2P connectivity.
  3. W2W had a lower latency advantage due to the manner in which P2P connectivity was provided through Sampark
  4. NSE facilitated the arrangement between Sampark and Reliance in an attempt to give post facto legitimacy to an unauthorized activity of Sampark.
  5. NSE acted fraudulently, without any verification of license facilitated an arrangement to regularize and give ex post facto legitimacy to an unauthorized activity of Samaprk and thereby NSE failed in ensuring fair, equal and transparent access to all its members.
  6. NSE did not maintain and preserve the books of account and document.
  7. W2W and GKN, in collusion with the employees of NSE and Sampark made significant profit due to unfair latency advantage available with them.

Noticing that the act on the part of the Noticees had a huge impact on the market, the Court observed,

“Stock Brokers like W2W and GKN made unfair gains at the cost of other stock brokers who had complied with the guidelines and circulars of NSE, in this regard.”

Order and Penalty:

The Court, exercising the powers conferred upon it under Section 15-I of the SEBI Act, 1992 read with rule 5 of the Adjudication Rules, imposed monetary penalties on all the Noticees.

NSE Limited was penalized Rs 5 Crores charged under Section 15-HA of the SEBI Act, 1992, Rs. 1 Crore charged under Section 15-HB of the SEBI Act, 1992 and Rs. 1 Crore under Section 23-H of the SCRA, 1956. Chitra Ramakrishna, Subramanian Anand and Ravi Varanasi were fined with Rs. 5 Crores each. Remaining Noticees have been fined with penalties ranging from R. 10 Lakhs to Rs. 6 Crores.

The Noticees have been directed to pay the said amounts within 45 days of the receipt of the order by the way of Demand Draft in favor of “SEBI- Penalties Remittable to Government of India”.

[Dark Fibre/Leased Line connectivity allowed to certain Stock Brokers by NSE, In re, ADJUDICATIONORDER Ref. No. ORDER/SBM/ASR/2022-23/17390-17407, order dated 28.06.2022]

Business NewsNews

Mr Anand Subramanian had been asked to pay a sum of Rs 2,04,87,575 (Rupees Two Crore Four Lakh Eighty-Seven Thousand Five Hundred and Seventy-Five Only) to the Securities Exchange Board of India (SEBI).

In the event of non-payment of the dues, SEBI shall recover the money by one or more of the following modes:

  • Attachment and sale of your movable property
  • Attachment of your bank accounts
  • Attachment and sale of your immovable property
  • Arrest and detention in prison
  • Appointing a receiver for the management of your movable and immovable properties

The above-said demand notice was issued in the matter of Governance Issues of the National Stock Exchange and the amount has to be paid in 15 days.

Securities Exchange Board of India

Certificate No. 4699 of 2022

[Dt. 26-4-2022]

Case BriefsDistrict Court

Rouse Avenue, District Court, New Delhi: Sanjeev Aggarwal, Special Judge (PC Act) (CBI)-02, dismissed a bail application Anand Subramanian while observing that,

“…investigations are going on and the investigating agency is in the process of removing the secret veil to show to the Court the true face of this Himalyan Yogi, who is as elusive as anecdotal Himalyan Yeti.”

During 2010 to 2014, Sanjay Gupta owner and promoter of OPG Securities Private Limited abused the server architecture of the National Stock Exchange (NSE) in criminal conspiracy with unknown officials of NSE.

Sanjay Gupta along with the help of his brother-in-law and other unknown persons, managed the data centre staff of NSE who passed the information regarding switching on time of NSE exchange servers.

OPG Securities was also given access to servers that were technologically latest and least crowded at that particular period, which resulted in OPG being the first one to log in on the Exchange Server of NSE.

Unfair access to co-location facility was also obtained by Sanjay Gupta which helped his company to get geta before everyone else which allowed a split-second faster access to the data feed of NSE.

Further, source information revealed that on receiving the complaints of exploitation of TBT architecture by OPG Securities Pvt. Ltd., SEBI conducted enquiry and according to its Technical Advisory Committee (TAC) report, OPG Securities gained materially by exploiting the TBT architecture of NSE.

In order to ensure the favorable report from SEBI in the on-going enquiry being carried out against the role of OPG Securities Pvt. Ltd in the misuse of TBT architecture of NSE, Sanjay Gupta dishonestly and fraudulently influenced the official of SEBI for which bribe money was exchanged between Sanjay Gupta and some unknown officials of SEBI.

One Ajay Narottam Shah had been instrumental in exploitation of NSE TBT architecture. Source revealed that he had collected NSE trade data in the name of carrying out research and subsequently, passed it to private persons who in turn developed an algo software named ‘Chanakya’ which was later sold to selected brokers.

OPG securities had been illegally trading in certain countries and also raised funds from abroad.

Hence, the above stated information revealed offences punishable under Sections 120 B and 204 of Penal Code, 1860 and Section 66 of the IT Act 2000 alongwith Sections 7,12 and 13(2) read with 13(1)(d) of PC Act 1988 against Sanjay Gupta, Aman Kokrady, Ajay Narottam Shah, M/s OPG Securities Pvt. Ltd., unknown officials of SEBI & NSE and other unknown persons for entering into criminal conspiracy for attempt to give and receive bribe, abuse of official position, unfair access of TBT servers of NSE for wrongful gain, for manipulating the server of NSE and for destroying the electronic evidences.

Analysis and Decision

Court expressed that the main duty of the SEBI is to regulate the Indian Capital Markets, it monitors and regulates the stock markets and protects the interests of the investors by enforcing rules and regulations.

SEBI has no powers to determine the criminality of the accused in offences other than with which the SEBI Act deals, though some times, there may be some overlapping, as observed earlier while deciding the anticipatory bail application of co-accused Chitra Ramkrishna, although it is a completely different matter that all this while the SEBI has looked other way with regard to launching criminal proceedings against the present accused as well as other accused persons involved in the co-location scam, despite being the market watch dog.

It was alleged that the co-accused Chitra Ramkrishna by misusing her official position had appointed the accused in NSE and re-designated the pose of accused as Group Operating Officer and advisor to MS without bringing the same to the notice of NRC and the Board and substantial powers alike to that of MS were delegated to the present accused and he was in knowledge of important and confidential information regarding the working of NSE.

Being posted at NSE, it was the public duty of the accused to protect the interest of common investors, rather he indulged in criminal conspiracy and caused huge advantage to various trading members/brokers, thus he had committed grave economic offence.

There were no allegations that the accused tried to abscond at any point of time. However, with regard to tampering and influencing the witnesses, considering that the accused was holding a pole position in NSE, there were strong chances that he may influence the relevant witnesses or tamper with evidence.

The Bench expressed that, the investigations are going on and the investigating agency is in the process of removing the secret veil to show to the Court the true face of this Himalyan Yogi, who is as elusive as anecdotal Himalyan Yeti.

Considering the grave and serious allegations against the present accused, no bail was granted. [Anand Subramanian v. CBI, 2022 SCC OnLine Dis Crt (Del) 11, decided on 24-3-2022]

Case BriefsTribunals/Commissions/Regulatory Bodies

Competition Commission of India (CCI): Coram of Ashok Kumar Gupta (Chairperson) and Sangeeta Verma and Bhagwant Singh Bishnoi (Members) addressed the allegations against the National Stock Exchange for alleged contravention of provisions of the Competition Act.

Present matter was filed against National Stock Exchange of India Limited for alleged contravention of Section 4, particularly Sections 4(2)(b)(ii) and 4(2)(c) of the Competition Act.

What were the allegations against NSE?

  • Indulged in practices of granting preferential market access to select brokers
  • Creating artificial information asymmetry
  • Market Manipulation in relation to co-location facilities
  • Uniform fee charged from all members towards co-location services, but allegedly uniform benefits have not been accorded to all trading members who had paid for the service.

Analysis, Law and Decision

While analysing the matter, Coram noted that the co-location facility was in vogue since 2009. Further, it was added that the choice of technology, which had been alleged to have created distortions, ceased to exist as far back as in 2016 and there seems to be confidence instilled in the system, with 188 members of the exchange availing the facility and the sectoral regulator specifying guidelines for adherence by the exchange for provision of such facility. As submitted by the Informant, even the charges payable for availing such facility have been considerably reduced.

Commission observed that

Mere pendency of matters in alternate forums does not axiomatically place any embargo on the Commission to halt its mandate in discharging its statutory obligations, in the face of any alleged anti-competitive conduct which is brought or comes to its notice.

Co-location facility creates a divide between two classes of trading members

NSE stated that the said facility was made available on a first come first serve basis and essentially there is no pick and choose. Further, it added that it is not the only exchange in India providing co-location facility, even other exchange like BSE is providing the same.

Coram stated that in the present case,  the consumers are the trading members who were looking for the co-locational facility for algorithmic trading.

Abuse of dominant position by NSE in provision of co-location facility?

Commission noted the submission of NSE that at the time of introducing co-location services, SEBI had not prescribed any specific technology to be used and that it had a choice between two technologies:

  • TCP/IP technology, and
  • MTBT

NSE, after studying practices of some leading international stock exchanges providing co-location services, came to a decision to have TCP technology as it provided market safety, reliability, integrity and accessibility.

Commission agreeing with the above submission that if there had been a bonafide choice of a particular technology, coupled with the fact that the sector regulator did not observe any instance of fraudulent conduct in violation of SEBI (PFUTP) Regulations, 2003 in the provision of the co-location facility which had been the mainstay of the allegations against NSE, then it ought not to be found in contravention of Section 4 of the Act.

Should the co-location facility be stalled as it is in itself anti-competitive?

A robust exchange acts as a backbone of the financial system and the provision of co-location facility by exchanges help increase volumes of trades manifold and provides liquidity to investors. This augurs well for the market, the companies and the economy.

Commission stated that to stop the co-location facility will be retrograde. Further noting that the Sectoral Regulator, SEBI did not stop the co-location facility in any manner since its introduction and had recognised the said service.

Hence, in view of the Commission, no prima facie case exists. [Manoj K Sheth v. National Stock Exchange, Case No. 35 of 2019, decided on 28-06-2021]

Advocates before the Commission:

For the Informant: Mr. Nithyaesh Natraj, Advocate Mr. Animesh Kumar, Advocate Mr. Anirudh, Advocate

For OP: Mr. Neeraj Kishan Kaul, Sr. Advocate, Mr. Somasekhar Sundaresan, Advocate, Mr. Naval Chopra, Advocate
Mr. Aman Singh Sethi, Advocate, Ms. Manika Brar, Advocate and Mr. M. Vasudev Rao, General Counsel 

Additional Information:

What are co-location facilities?

Co-location is the practice of renting space for servers and other computing hardware at a third-party provider’s data centre facility. Co-location helps in the faster movement of data. In the context of co-location services, NSE had on 31.08.2009, announced the launch of co-location services along with the guidelines/ procedure to be followed by members interested in availing co-location facility. Members availing co-location facility are allowed to take one or more leased lines to the co-location facility from different telecom service providers for the purpose of setting up or modifying parameters, trading related activities and hardware, software, network-related access, software download/upload and monitoring and data downloads.

Op EdsOP. ED.

Interest republicae ut sit finis litium, meaning it is in the interest of the State that there should be an end to litigation. In pursuance of this objective, the Indian legal regime adopted various alternative forms of adjudicatory mechanism. The capital market regulator, Securities and Exchange Board of India (hereinafter referred as ‘SEBI’) introduced the consent mechanism efficacy of which has been discussed in this article.


The Code of Civil Procedure, 1908 and the Criminal Procedure Code, 1973 enumerate concepts of ‘compromise’ and ‘compounding of offences’ respectively. Similarly, under Section 15-JB[1] of the Securities and Exchange Board of India Act, 1992 is vested with the power to settle cases of securities law violation in the capital market. The idea was adopted from the success of its US counterpart, the Securities and Exchange Commission. Initially, the consent mechanism was proposed vide circular, Circular No. EFD/ED/Cir-1/2007 that enumerated the Guidelines for Consent Orders, introduced in 2007. The mechanism has evolved over the past years to take the form of the Settlement Regulations, 2018.[2]

The consent mechanism may be defined as “a proceeding in which the regulator and the alleged violator, may at any stage of the proceeding negotiate a settlement in lieu of administrative/civil proceeding, in the process saving cost, time and efforts for the parties involved. The mechanism does not require admission or denial of findings.”

Interpreting settlement orders

To test the proposition in respect of the success of this mechanism, a few cases of settlement have been analysed. The vital question that arises is “Where the interest of investors is at stake, is settlement a viable solution?”

The recent settlement order passed by SEBI in the matter of HDFC AMC (hereinafter referred to as ‘the applicant’) provides insight to the above question. The applicant was served with a show-cause notice for violation of the SEBI (Mutual Funds) Regulations, 1996.  The applicant had invested in the debt instruments of Essel group of companies through its various mutual fund schemes. As per the show-cause notice, the investment made did not adhere to the (Mutual Funds) Regulations, 1996 as it failed to maintain proper due diligence that led to the loss of the unit-holders. In furtherance of the notice, the applicant filed a settlement application with SEBI and the High Powered Committee (constituted under the Settlement Regulations, 2018) agreed to settle the matter. As a part of the settlement terms, the applicant ensured that the unit-holders were compensated along with redressal of their complaints. Further, it was agreed that the settlement amount would be paid by the funds of the applicant.

Certainly, the above order was in the interest of the investors and the regulator. The alleged violations were committed in May 2019, and within a span of a year, the settlement process has been concluded. Settlement in the present case indeed served as an expeditious solution contrary to the prolonged administrative/legal proceedings.

One major concern that has hindered the growth of the settlement mechanism is the conundrum surrounding the settlement of serious offences like insider trading and fraudulent unfair trade practices. It is pertinent to note here that such offences were a part of the initial guidelines issued under the circular in 2007. Subsequently, the amended Settlement Regulations, 2014 removed serious offences based on the severity of such offences. However, the Committee set up under the chairmanship of Justice Dave that drafted the Settlement Regulations, 2018, undertook an alternative approach by vesting discretion with the Board to decide based on facts and circumstances of each case than make it principle based by creating an absolute bar to settle such offences.

The question that requires attention is that “Has the discretion vested with the Board regarding the nature of offences to be settled been exercised wisely by it?”

On observation of previously adjudicated cases that have been settled, it was noticed that only those cases where market interests and market impact was limited and loss to the investors was minuscule, were taken through the settlement route. In  Abhay Gandhi and Kiran Abhay Gandhi, the CEO of Ranbaxy Laboratories Limited, was charged under the  Prohibition of Insider Trading Regulations, 2015[3] for selling shares while in possession of Unpublished Price Sensitive Information, the matter was settled by remitting an amount of Rs Thirty-five lakhs, that would have been evaluated considering the profit made by the applicants, the multiplier for deciding penalty as provided in  Chapter VI[4] of the Settlement Proceedings Regulations, 2018.    

Settlement – An Antidote to Litigation?

On considering the above proposition, it raises two further questions.

1. Will SEBI in all cases allow the settlement process?

2. Is the settlement mechanism a full proof mechanism where the interests of SEBI, stakeholders and investors can be balanced?

To answer the former, the essential grounds for the basis of the settlement are laid down exhaustively under the purview of Regulation 10 of the Settlement Regulations, 2018. The Board established under Section 5 of the Act may reject matters for settlement that have a wide impact on investors, are repetitive in their defaults or the person making the application is a wilful defaulter. SEBI has adopted a stringent approach in accepting applications for Consent Orders. For instance, NSE was alleged to have deals with brokers and unduly favouring and assisting them in unauthorised trading, and it applied for settlement. SEBI rejected the NSE settlement application and ordered disgorgement by asking them to pay over INR 1000 Crores.

After the infamous IL&FS scam where credit rating agencies were under the scanner for not changing the credit rating of the instruments before the default, SEBI based on a reasoned order categorically stated that the matter involved wide market impact including an adverse effect on the interest of the investors thereby questioned the integrity of the market, and rejected ICRA’s application for settlement.   

To answer the latter, no mechanism can be a panacea, it comes with its fragilities. In the author’s opinion, the biggest drawback of this mechanism is that it may undermine the problem which may in a certain point of time be the tip of the iceberg. To illustrate, in the case of Yes Bank, it was charged for violating the disclosure norms prescribed in Regulation 30 of the SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015, that required the disclosure of material information.

Yes Bank as per the settlement order made selective disclosure of divergence and partially concealed the report the issued by RBI and its settlement then, concluded the matter but all those along with a gamut of other issues including a liquidity crisis and failure of the corporate governance bounced back together and led to its collapse. Therefore, in certain cases, it may not be possible for the regulator to see through and understand the actual reasons behind the violation, divergence. 

The way ahead

The increasing role of the consent mechanism can be witnessed from the fact that an average of ten settlement orders were passed in the year 2019. It is evident that the Settlement Regulations, 2019 have ushered a fresh air in the arena of ‘Consent Orders’. Certain key features of the regulations are that transparency is ensured by vesting limited discretion with the Board. The penalty payable by the applicant is derived based on a comprehensive multiplier on consideration of the number of defaults, the stage of proceedings along with the stage at which settlement is introduced. It will not be a misnomer to say that capital market regulations in India have evolved tremendously along with the market and provided an effective adjudication process that serves the need of the hour. In cases where all three chords of prompt action, investor interest, and effective enforcement are struck, it is only then the underlying objective of consent orders will be achieved in its essence.

*Legal professional, with an avid interest in Securities Law and previously worked with KPMG as a part of the Forensic Investigation Team.

[1] Section 15-JB, Securities and Exchange Board of India Act, 1992    

[2] Securities and Exchange Board of India (Settlement Proceedings) Regulations, 2018

[3] The SEBI (Prohibition of Insider Trading) Regulations, 2015 

[4] Ch. VI, SEBI (Settlement Proceedings) Regulations, 2018