Almost four years after Securities and Exchange Board of India issued its historic and largest disgorgement order against National Stock Exchange of India and two of its former managing director and chief executive officers in the co-location matter, the Securities Appellate Tribunal set aside the penalty this week.To set the context, under the co-location facility of the NSE, preferential access to tick-by-tick data of the stock exchange was provided to certain trading members (brokers) that allowed them to benefit by faster order execution (latency). The load balancer, a facility to map IPs to equitably distribute the connection across the POP server and eliminating the time lag in receipt of data packets by various trading members, was not implemented effectively. One of the fundamental principles of the securities market is to ensure equal access to all the market participants and per SEBI this very principle was violated and the NSE along with its then senior management failed to oversee these irregularities.The entire issue came to light in 2015 through a whistleblower complaint, and after various examinations, inspections, audits SEBI ultimately passed a disgorgement order in 2019 for Rs 624.9 crore on the NSE with 12% interest from April 1, 2014 (totaling to more than Rs 1,000 crore). SEBI also ordered Ravi Narain and Chitra Ramkrishna to disgorge 25% of their salary during their respective tenures as managing director and chief executive officer of the exchange. Various reporting in the media tagged it as ‘The Scam'.SEBI has extremely wide and varied powers. Exercising the same, it also issued subsequently penalty orders against the NSE, and its former MD and CEOs in the same matter, imposing penalty of Rs 1 crore on the exchange and Rs 25 lakh each on the two individuals. To note, this order is still pending in appeal at the SAT.In appeals against the disgorgement order, the SAT has held that the failure of the NSE to take necessary steps such as implementation of load balancers has led to failure to ensure fair, transparent and equal access by the NSE to all its trading members. There was human failure due to which preferential access to servers by certain trading members was not monitored. However, the SAT held that such lapses cannot be attributed to unethical acts of the NSE. According to the appellate tribunal, disgorgement can be directed only in cases where a person has made profit through illegal or unethical acts and mere failure to comply with the provisions of the act cannot lead to an order of disgorgement. Thus, the failure of the NSE at best could have led to imposition of penalty or issuance of direction but a disgorgement order cannot be issued. Hence, SEBI's order of disgorgement against the NSE was set aside.In the context of then MD and CEOs, the SAT held that there was no finding by SEBI that either Ravi Narain or Chitra Ramakrishnan has made profit or wrongful gain and in absence of any such finding the direction of disgorgement against them cannot stand and was thus, set aside. The SAT has also set aside SEBI's order prohibiting Ravi Narain and Chitra Ramkrishna from associating with any listed company or a market infrastructure institution or any other market intermediary for a period of five years and instead, substituted the prohibition to the time period already undergone by them.What is particularly noteworthy that the SAT's position with respect to disgorgement order has been consistent since the very introduction of the concept of disgorgement in India. SAT, under then Presiding Officer, Chief Justice N K Sodhi, in one of the very first cases on disgorgement in 2007, National Securities Depository Ltd. vs SEBI, had held that persons who have made illegal or unethical gains alone could be asked to disgorge their ill-gotten profits. This was in the context when in IPO scam (Roopalben Panchal Scam): SEBI issued disgorgement order against depositories NSDL and CDSL first for failure to do due diligence by allowing certain key operators, financiers and afferent account holders to create multiple demat accounts by use of photographs from Shaadi.com and ultimately cornering the retail quota in as many as 21 IPOs. The SAT had set aside SEBI's disgorgement order while laying the concept, issued remarks against SEBI and nudged the regulator to review the manner in which it was dealing with the case. Then SEBI resisted the then SAT. To an extent, the current case in the context of the NSE and the current SAT order has stark similarities.It needs a mention that India's Securities Appellate Tribunal has been ahead of even the U.S. Supreme Court which as recent as in June 2020 in the matter of Liu vs Securities and Exchange Commission, with a majority of 8:1 upheld the power of the SEC to direct disgorgement as an equitable remedy but required those funds to be paid back to the defrauded investors as they cannot belong to the government and held that the disgorgement is limited to the wrongdoer's calculated net profits, so as to avoid transforming an equitable remedy into a punitive sanction.The SAT has over the decades taken the consistent view and SEBI's disgorgement order against the NSE and individuals was found lacking in establishing or calculating illegal or unethical gains.However, it is not that the SAT did not find any irregularity in the colocation matter. Exercising rare powers under Rule 21 of SAT (Procedure) Rules, 2000 it imposed a penalty of Rs 100 crore on the NSE for its failure to meet the standards expected of a first level regulator. The SAT itself noted that there are no parameters to quantify the lapses committed by the NSE but the amount is high enough to act as a deterrent. The SAT also upheld the findings of SEBI against OPG Securities, one of the trading members who was charged with utilising the lapses of the NSE, but remitted the matter back to SEBI to decide the quantum of disgorgement. The SAT held that OPG Securities kept utilising secondary server despite several communications by the NSE to shift to primary server, and thus benefiting in terms of milliseconds and microseconds which gave it advantage over other trading members. Thus, the SAT held that OPG Securities deployed unfair trade practices and violated SEBI (Prohibition of Fraudulent and Unfair Trade Practices) Regulations, 2003.The SAT also directed SEBI to consider the charge of connivance and collusion of OPG and its directors with any employee/officials of the NSE. The SAT also upheld direction of SEBI whole-time member which had directed the NSE to initiate enquiry against its employees.The whole saga, which is far from over, has certainly taken a new turn post the order of the SAT. The order said that SEBI was slow and casual in its approach and taking twists and turns depending upon what transpires at the parliament floor. The SAT further noted that even after SEBI took up the matter, it did not conduct investigation/enquiry itself but ironically delegated investigation to the NSE, showing its lack of seriousness despite the grave charges. The SAT order even observed that two orders by the same whole-time member on the same day arrived at contradictory findings and the sole distinction was that one order was with respect to the NSE and its officials while the other order was with respect to OPG Securities. One such example given by SAT in the order itself is with respect to the benefit of early log in by a trading member. In the order against NSE, SEBI WTM held that early log in by OPG Securities created an advantage for it over other trading members. However, SEBI whole-time member in the order against OPG Securities held that early log in by OPG Securities did not provide it with any unfair advantage. This raises the question of how based on same facts and on same issues, different conclusions can be derived by the same official in the orders issued on the very same day.Thus, the scathing remarks by SAT against SEBI from the stage of investigation to the issuance of order by the whole-time member creates a need for introspection for SEBI. However, one has to wait and see whether these orders will in fact lead to any relook by SEBI of its procedures or SEBI would resist and prefer an appeal against the order fully or at least to get these remarks removed.As far as remedial measures are concerned, to SEBI and NSE's credit, since the time NSE's co-location related issues were highlighted, SEBI has tightened the noose on the exchanges. The NSE has also changed its order execution protocol in the co-location facility to multi-cast TBT from April, 2014 and hence possibility of such a recurrence is miniscule. Looking at this background, one can debate the order of Securities Appellate Tribunal. Also, co-location facilities are mainly used by institutional investors and brokers for their proprietary trades and retail investors have negligible presence here.Also, the exchange now has a totally new management, and one has to wait to see whether they would prefer an appeal against the order or would rather take some learnings and bury the hatchet. More so because it is looking to come out with its IPO in due course.Altogether from a legal perspective, if the SAT Order is appealed in Supreme Court, it will be at least the second opportunity for the apex court to set the limits and law of disgorgement. An appeal against the 2:1 judgment of SAT upholding SEBI's disgorgement of Rs 447 crore plus interest against Reliance Industries is awaiting determination.Sumit Agrawal is Managing Partner, Regstreet Law Advisors, author of a book on SEBI Act & a former SEBI Officer. The views expressed here are those of the author, and do not necessarily represent the views of BQ Prime or its editorial team.