SAT Overturns SEBI’s Penalty on NSE, Ex-CEOs in Co-Location Scam Case

SAT Overturns SEBI’s Penalty on NSE, Ex-CEOs in Co-Location Scam Case

The Securities Appellate Tribunal (SAT), dismissed a Securities and Exchange Board of India (SEBI) order levying a penalty of Rs. 1 crore on the National Stock Exchange (NSE) in the co-location case.

The Appellate Tribunal coram comprising of Justice Tarun Agarwala (Presiding Officer) and Ms. Meera Swarup (Technical Member) also set aside a Rs. 25 lakhs fine imposed on the former exchange Chiefs Ravi Narain and Chitra Ramkrishna.

The brief background of the case is that two separate orders were passed by the Adjudicating Officer (AO) of the SEBI imposing penalties upon the appellants (NSE, Ravi Narain and Chitra Ramkrishna).

The co-location scam dates back to 2015 when the NSE was accused of giving preferential treatment to some brokers. Co-location is the practice of putting a broker's server in the exchange’s data center to speed up data transfer and order execution. The NSE allegedly gave a few brokers faster access to the exchange's systems, giving them an unfair advantage in trading.

In 2019, SEBI’s Whole-Time Member accused the National Stock Exchange of failing to ensure, among other things, that trading was fair, transparent, and open and demanded that the exchange to disgorge Rs. 625 crores.

The SEBI had ordered Narain and Ramakrishna to disgorge 25% of their salary and debarred them from being associated with any listed company or market infrastructure institution.

Thereafter, in January 2023, the SAT overturned the SEBI’s ruling ordering the NSE to disgorge the Rs. 624 crores in illegal earnings and imposed a penalty of Rs. 100 crores for due diligence violations.

The AO of SEBI issued decisions against NSE and its two former chief executives based on the same issue and the same cause of action.

During the hearing the NSE argued that the previous ruling had already served the objective of a punishment, which is to prevent future offences.

The appellants urged that since the regulatory goal is already covered by the previous order, the penalty must be set aside. According to them, the present order was made under the Stock Exchanges and Clearing Corporations Regulations, which were not operational at the time of the violation. The Tribunal had earlier held that it was not applicable to the present case.

However, SEBI said that the penalty was imposed for distinct offenses and should not be included in the current instance.

The SAT remarked that, “two penalties for the same violation cannot be imposed. Since we had already imposed a penalty of Rs. 100 crores upon NSE in our order dated January 23, 2023 which in our opinion is more than sufficient. The impugned order of the AO imposing a penalty of Rs. 1 crore against the appellant, thus, cannot be sustained and is quashed. The appeal of NSE is allowed.”

Moreover, the SAT observed that, Mr. Ravi Narain and Ms. Chitra Ramkrishna cannot abdicate their responsibility for the lapse and while functions may be delegated, duty of care, due diligence could not be abdicated and, consequently, the direction of this Tribunal reducing the period of debarment was passed.

“In view of the aforesaid, we are of the view that for the aforesaid lapse committed by Mr. Ravi Narain and Ms. Chitra Ramkrishna a limited debarment order had been passed by this Tribunal. We find that no further directions are required to be issued and the imposition of penalty in the circumstances is unwarranted,” the SAT ruled.

Accordingly, the SAT set aside the impugned order passed by SEBI, however, the bench affirmed the violations by broking firm OPG Securities and directed the AO to reconsider the quantum of penalty.