NSE Colo Scam: SAT Quashes, Drastically Reduces Penalties Slapped by SEBI on 19 Entities, Including NSE's Top Executives
Moneylife Digital Team 15 December 2023
Terming the adjudication orders passed by the Securities and Exchange Board of India (SEBI) as arbitrary and violative of the principles of natural justice, the securities appellate tribunal (SAT) has quashed and drastically reduced penalties imposed against 19 entities. The case is related to the SEBI investigation into dark fibre connectivity provided by Sampark Infotainment Pvt Ltd in collusion with employees of the National Stock Exchange of India Ltd (NSE), with the stockbrokers and the role of the stockbrokers who allegedly benefited from the preferential access to co-location (colo) facility by way of point-to-point (P2P) connectivity from an unauthorised service provider. 
Referring to its August 2023 order, the SAT bench of Justice Tarun Agarwala (presiding officer) and Meera Swarup (technical member) says it found that the show-cause notice issued by the whole-time member (WTM) and adjudicating officer (AO) (of SEBI) are on the same cause of action. "We have already given our findings against the WTM's order and therefore hold that the findings given by this Tribunal will squarely apply in the present proceedings against the order of the AO to the said noticees." 
On 28 June 2022, the AO passed a common order imposing penalties of different amounts against 19 entities that filed appeals before SAT. 
NSE was slapped with a penalty of Rs7 crore by SEBI. However, the tribunal quashed the penalty. While quashing the Rs1 crore each penalty imposed on Ravi Varanasi, Nagendra Kumar and Devi Prasad Singh, all top executives of NSE, the bench, however, upheld a fine of Rs5 lakh each against these three under section 15HB of the SEBI Act.
SAT, while quashing a Rs3 crore penalty imposed on Chitra Ramakrishna, former managing director and chief executive officer (MD&CEO) of NSE, reduced the Rs1 crore penalty imposed on her under section 15HB of the SEBI Act to Rs25 lakh.
The tribunal also reduced the Rs1 crore penalty each imposed on Way2Wealth Brokers Pvt Ltd to Rs20 lakh and MR Shashibhushan to Rs10 lakh.
While setting aside the penalty of Rs4 crore imposed in GKN Securities Pvt Ltd, SAT cut the Rs1 crore penalty imposed under section 15HB of the SEBI Act to Rs20 lakh.
The Rs1 crore penalty each imposed on Sonali Gupta, Om Prakash Gupta and Rahul Gupta is also quashed; while changing the Rs10 lakh each penalty term, SAT asked the three partners of GKN Securities to pay Rs10 lakh jointly and severally.
SAT also quashed the Rs3 crore penalty imposed on Sampark Infotainment Pvt Ltd and the Rs1.10 lakh penalty levied upon Prashant D'Souza. "However, for the violation found by us, Sampark will pay a penalty of Rs25 lakh, and Prashant D'Souza will pay a penalty of Rs10 lakh under section 15HB of the SEBI Act," the bench says.
The tribunal set aside the AO order imposing a penalty of Rs4 crore on Anand Subramanian, ex-group operating officer of NSE. The bench also quashed the Rs10 lakh penalty on Netaji Patil and penalties slapped on Mohit Mutreja, Prashant Mittal, Rima Srivastava and Jayant Bhusare.
In August 2023, SAT directed the market regulator to refund Rs72.58 crore with interest deposited by NSE, Way2wealth Brokers and GKN Securities. SAT also dismissed SEBI's prohibitory orders against Ms Ramkrishna, NSE's top executives Mr Varanasi, Mr Kumar and Mr Singh, and Mr Shashibhushan, Ms Gupta, Omprakash Gupta and Rahul Gupta.
According to SAT, a portion of the revenue earned by NSE through its colo facility cannot be made part of disgorgement. "Revenue earned by NSE from colo facility is not an unlawful gain and, thus, the direction to disgorge an amount from the revenue earned is wholly erroneous and illegal."
While setting aside directions passed by SEBI's WTM restraining Ms Ramakrishna, Mr Varanasi, Mr Kumar and Mr Singh from NSE, Mr Shashibhushan, Ms Gupta, Omprakash Gupta and Rahul Gupta from holding any position in any exchange, clearing corporation or depository for two years, the tribunal had allowed the market regulator to impose a penalty, if any. (Read: NSE Colo Case: SAT Asks SEBI To Refund Rs72.58 Core to NSE, Way2wealth Brokers & GKN Securities)
The Colo case dates to 2015 when Moneylife first published a letter by a whistle-blower going by the name Ken Fong in June 2015. The whistle-blower alleged that NSE officials were selectively allowing a few brokers to reap massive profits through preferential access to its colo servers in the form of early log-in or access to servers with low trading loads. 
SEBI received another complaint on 3 October 2015 alleging that Way2wealth Brokers Pvt Ltd (W2W) was permitted to utilise point-2-point (P2P) dark fibre connectivity from Sampark Infotainment Pvt Ltd who was an unauthorised service provider, thereby conferring a latency advantage to W2W which, in turn, resulted in the substantial increase in a turnover during April to August 2015.
Based on the complaint, SEBI constituted a cross-functional team (CFT). Based on the preliminary findings given by the CFT and after that based on the recommendations given by the Technical Advisory Committee (TAC) of SEBI, an expert committee was constituted to examine the allegations made in the complaints further. The expert committee submitted a report, which was accepted by the TAC. The recommendations of the TAC were communicated to NSE, based on which Deloitte Touche Tohmatsu India LLP was appointed to conduct a forensic investigation.
The investigation revealed various irregularities, based on which two show-cause notices dated 22 May 2017 and 3 July 2018 were issued by WTM in respect of P2P connectivity installed by two brokers of NSE, W2W and GKN Securities between the co-location services i.e. (Colo) facility on NSE and colo centre at BSE Ltd during April – May 2015 by engaging an unauthorised service provider i.e. Sampark and, further allowing the two stockbrokers to continue to avail the services of Sampark even after getting to know that Sampark did not possess the necessary license from the department of telecommunications (DoT).
The NSE Colo scam has been documented by Moneylife editors Sucheta Dalal and Debashis Basu in their book Absolute Power: Inside Story of the National Stock Exchange's Amazing Success, Leading to Hubris, Regulatory Capture and Algo Scam, released in June 2021. 
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