Sebi's Sins
Sins forgotten cannot be judged. SAT had observed grave contradiction in Sebi orders:
"Two separate orders of the same date were passed by the same Officer (Whole Time Member, WTM), one against NSE, Mr. Ravi Narain and Ms. Chitra Ramkrishna and the other order was passed against OPG (the trading member or TM). 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 OPG created an advantage. The WTM held that a TM who logs in first would disseminate 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 give 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 sufficient to state that the same officer who has passed the orders on the same date cannot make a different analysis on the same subject / issue." The conflict.
SAT On NSE
"We, however, found that there was laxity at the hands of the employees of NSE in the distribution of IPs (internet protocol address) 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 with. The decision taken by NSE not to implement the load balancer does not appear to be a bonafide decision."
Further, "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 access to the secondary server by the TMs. NSE should have placed a defined policy for use of the 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."
Here, SAT's observations seems to have found credence in a report by audit firm Deloitte that had revealed how load-balancing was done manually by NSE staffers in the Colocation facility and brokers got a preference in this. The information of the server with the lowest load was passed on by the exchange staff to brokers, who connected to the fastest machines very often, investigations had established.
Cut To 2024: Sebi's Clean Chit
On September 13, 2024, by cherry picking extracts from the earlier SAT order, Sebi gave a clean chit to NSE and its officials on the charges of colluding with brokers in Co-location. Sebi could not find even a lower rung official to have colluded with the TMs or brokers. On the reasoning that Sebi had not investigated appropriately, SAT had asked Sebi to probe deeper and further. But Sebi comes up with no evidence despite there being admitted legal positions that sincerely points towards 'Preponderance Of Probabilities.'
"All the evidences /material /objective facts which have formed the basis of current SCN (Show Cause Notice) were also part of the earlier SCN and were examined by Hon’ble SAT and based on such examination, it was held that there was no evidence to suggest violation of PFUTP (Prevention of Fraudulent Unfair Trading Practices) Regulations or SECC (Securities Contract) Regulations by NSE and its employees. When these evidences /material / objective facts did not lead to violation of PFUTP or SECC Regulations, they cannot lead to determination of collusion / connivance where the establishment of violation would additionally require presence of “conspiracy” or “secret or indirect consent or permission” making such establishment of violation more difficult," said Kamlesh Varshney, incumbent Sebi WTM, in his September 13, 2024 order.
Due to the absence of sufficient material / evidence /objective facts on record in this case, the test of ‘preponderance of probability’ fails to produce enough justification for establishment of collusion/connivance between OPG and its directors with the noticees, Varshney said.
Furher Varshney says in his order that a communication dated December 05, 2023 was sent by Sebi to Deloitte (Author of the forensic Reports dated December 2016 and July 2018), enquiring “whether there was any collusion between the Exchange employees, trading members and /or any other third parties with respect to preferential treatment related to TBT (Tick by Tick Data) dissemination? Varshney says, the above communication was sent as it was not clear from Project Regler Report what was the findings on the term of reference about whether there was any collusion between the Exchange employees, trading members and/or any other third parties with respect to preferential treatment related to TBT dissemination.
In response to the said query, Deloitte, vide an email dated December 05, 2023, replied that it had reviewed the data and basis review of the above mentioned data sets, it did not identify any financial transactions or calls between employees of the exchange and trading members. But was Deloitte even mandated to have it in its scope to study the financial transactions of NSE employees or personal call records?
Further, Sebi says it dropped charges of Fraud in co-location case, “in absence of facts pointing towards collusion of employees with trading members, or proof of specific discrimination towards any specific member or accrual of monetary benefits/ unjust enrichment to any employee or TM, etc.”
Significantly, Deloitte says responses from NSE were oral and did not match the documents found in their probe. Key details of Deloitt's findings and how it proves connivence of NSE staff can be read in Part 2 of this story. No probe has ever been conducted by Sebi or any other agency with regard to bribery to NSE staff and hence Sebi cannot say they did not find any of this. Also, as per the SC set precedents, Sebi does not require any of these to hold anyone guilty of fraud.
Unfair Access
To understand the whole scandal and how Sebi may have twisted it, it is necessary to know what is 'unfair trading practices' as per principles laid down by the Apex court. Then, 'Connivence' will emerge clearly after putting the 'unfair trading practices' to the test of 'Preponderance of Probabilities,' the principles of which are laid down by the SC a religious code to be followed by Sebi that is conveniently ignored.
Consider this: An act or practice is unfair based on facts and circumstances surrounding any transaction. In the context of PFUTP Regulations, a trade practice is unfair if the conduct undermines good faith dealings and ethical standards of business.
SC's landmark judgement in Rakhi Trading Pvt. Ltd.v. Sebi (2018) 13 SCC 753, is a test of unfair dealing. In it, the SC held that the practice, which does not conform to the fair and transparent principles of trade in the stock market, is unfair. In Sebi v. Kanhaiyalal Baldevbhai Patel & Others, 2017 SCC Online SC 1148, the SC held "the concept of unfairness to be broader than and include the concept of deception or fraud."
"Thus, OPG repeatedly connecting to the secondary server almost on a daily basis without any valid reason 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," Justice Agrawala said in his order, which Sebi heavily relied upon. SAT had reminded the matter back to Sebi to reinvestigate connivence between broker and NSE in the light that unfair trading practice was established.
Here, attention must be paid to 'logging onto Secondary Serve' considered 'Unfair.' Secondary server was a backup or reserved server with less load that would enable faster trading and data transmission. It is like travelling on a road reserved for VVIPs rather than using the lane where the general public travels - naturally, the reserved lane will have less traffic and hence faster travel. Fact that some TMs or brokers took the reserved lane or accessed the reserved server repeatedly in spite of warnings was judged unfair. But who gave the brokers the TM, the idea to log into backup servers and informed them about the timings of when the servers would start? Naturally, the information came from NSE staff, since timing of starting of the servers was never fixed. Also, millions of other general public and retail investors were not aware of the dark games being played inside NSE colocation or even the existence of such servers.
Did the NSE stop brokers from logging into Secondary Servers (just warnings cannot be enough) or investigate the reasons why they were logging in repeatedly? No. NSE was a mute spectator to the rape of its systems!
Imagine if a cop said that robbers did not heed their repeated warnings and continued looting the bank and there was nothing much they could do? Or for that matter an armed cop stood as a mute spectator or provided the space for rape? NSE is a First Level Regulator... Sebi sees no connivence in this?
Varshney found it fit to hike the disgorgement of illicit profit earned by stockbroker OPG Securities through unfair access to NSE servers from Rs 15.75 crore to Rs 85.25 crore plus 12 percent interest from May 2015. But the same Sebi says the cop, as in the NSE officials, who let the broker earn illicit profits and provided him uninterrupted illegal access to trading systems and informed him about the inside workings of the systems, did not collude.
The second part of this opinion piece examines how brokers got inside information on NSE's trading systems from the officials, both directly and indirectly and how top officials facilitated it.
Thou Shall Misjudge: Sebi's Co-location Verdict (Part 2) Analysis of on record material, legally admitted facts and investigation reports indicating Connivence of NSE Officials with brokers that Sebi ignored. Key conduits were dropped from Show Cause Notices, which could prove collusion beyond doubt via the test of 'Preponderance of Probability.' Sebi's verdict is perverse and corrupted by twisted narratives and logic and defeates Supreme Court's landmark orders. 
