NSE Co-Location Scam: SAT Sets Aside Disgorgement Orders Against NSE, Ravi Narain And Chitra Ramakrishna
The appellate tribunal said that the NSE had neither indulged in any unethical act nor unjustly enriched itself.
The National Stock Exchange didn't indulge in any unethical acts, nor did it unjustly enrich itself, the Securities Appellate Tribunal said on Monday, while setting aside the market regulator's April 2019 order.
"The direction to disgorge must be in relation to any transaction or activity which is in contravention of the provisions of the SEBI Act or its regulations. The directions to disgorge can be done when it's found to be engaged in illegal acts, and not necessarily in every case should a direction to disgorge be passed, because some provisions of the Act have not been adhered to," the SAT said.
According to the court, "The lack of due diligence was not on account of contravention of any law, but on account of human failure to comply with circulars completely in letter and spirit."
However, the tribunal has directed the NSE to pay Rs 100 crore towards SEBI's investor protection and education fund for its failure on the due diligence front.
The NSE, as a first level regulator, has the frontline responsibility for regulation of market and has a mandate to ensure compliance by the trading members to its own norms and circulars, the appellate tribunal said.
The amount payable by the exchange has to be adjusted from the amount already deposited by it. The regulator is directed to refund the excess amount with interest within a period of six weeks back to NSE.
The appellate tribunal also set aside the Securities and Exchange Board of India's disgorgement order against Chitra Ramkrishna and Ravi Narain.
"Directions to disgorge 25% of salary from Ravi Narain and Chitra Ramakrishnan is set aside. The direction prohibiting Chitra Ramakrishna from associating with any listed company or market infrastructure institution, or any other market intermediary for five years is also set aside and substituted for a period undergone by them," the SAT held.
Neither Ravi Narain nor Chitra Ramakrishna has made any profit or wrongful gain, which is a prerequisite of issuance of directions of disgorgement under Sec. 11 and 11B of SEBI Act, the court said.
The direction of SEBI to disgorge 25% of the salary is "patently erroneous" and must be set aside, according to the court. Powers for disgorgement under the SEBI Act cannot be extended to salary as it's a reward for one's labour and cannot be "unfair gain"', the court said.
The provision for disgorgement, according to the court, are equitable and must be enforced as such.
"In our opinion, directions for disgorgement from salary amounts to penal recovery and becomes punitive and not equitable," the court said.
The court, while absolving the former chiefs of their responsibility, did not fail to spell out their liability.
"Neither of them, as MD and CEO of the exchange, can abdicate their responsibility for lapses in their monitoring. At the end of the day, they are responsible for the day-to-day affairs of the exchange and the responsibility falls squarely upon them," the court said.
In April 2019, SEBI had ordered the NSE to disgorge Rs 624.89 crore with 12% interest p.a. from April 2014 towards SEBI’s Investor Protection and Education Fund. It had concluded that the NSE violated Stock Exchanges and Clearing Corp. Regulations. It had also ordered similar punishment for two of the exchange’s former leaders, Ravi Narain and Chitra Ramkrishna.
However, in the matter of OPG Securities Pvt., the court while reaffirming the order of SEBI has asked the Whole Time Member to recalculate the quantum for disgorgement based on its observations.
It has also asked SEBI to consider adding charges of connivance or collusion on the part of the company's directors with any employees of NSE.
SEBI had imposed a penalty of Rs 5.2 crore on OPG Securities and its directors for its involvement in the co-location scam.