NSE Dark Fibre Case: Supreme Court To Hear SEBI's Appeal Next Year

The Supreme Court of India will hear SEBI's appeal on Jan. 25 in the coming year against the Securities Appellate Tribunal's ruling that the NSE permitted an unauthorised service provider to access its network without proper credential verification.

This case involves two brokers, Way2Wealth and GKN Securities, who allegedly used an unauthorised service provider, Sampark, to set up a special data connection between the NSE and BSE in 2015. This violated NSE's rules, which only allowed certain approved telecom providers.

Despite lacking the necessary licenses, Sampark provided these brokers with faster connectivity. When SEBI investigated, it issued orders against the brokers and NSE for allowing this practice.

Aggrieved by the order of the SEBI, an appeal before the SAT was filed. The appellate tribunal found their actions negligent but not fraudulent. SAT reduced some penalties while maintaining restrictions on the brokers' operations. Resultantly, SEBI appealed against this decision before the apex court.

As per the copy of SEBI's appeal reviewed by NDTV Profit, this provider installed fibre infrastructure that violated NSE policies, granting two trading members an unfair advantage through improved latency.

It is further mentioned that despite discovering the unauthorised status of the service provider, NSE took no action, allowing these trading members to continue benefiting from the illicit service while denying similar opportunities to others in the market.

In the appeal, SEBI raises several important legal questions. First, it asks whether the SAT erred by not recognising that NSE violated Regulations by failing to ensure equal access for all trading members, regardless of how long the violation lasted. SEBI also questions why the SAT did not hold NSE accountable for not referencing its 2009 circular, which led to broker oversight.

Additionally, SEBI points out that NSE's failure to verify Sampark’s licensing allowed unfair advantages for Way2Wealth and GKN, which may have been fraudulent. The regulator asks if the SAT overlooked NSE’s neglect of Millennium's complaints while focusing on potential losses for the other two brokers.

SEBI questions whether directors of entities that gained unfair advantages should be barred from engaging with other listed companies to protect investor interests. It challenges the SAT's decision to downplay the severity of the offense by labeling it negligent, despite evidence of market distortion.

Moreover, SEBI asks if the SAT recognised NSE’s negligence in allowing unauthorised connectivity while conducting arbitrary inspections. Lastly, SEBI questions the SAT’s decision to quash disgorgement orders for trading members who gained advantages through improper practices, creating an uneven playing field.

NDTV Profit has also viewed a copy of NSE’s reply to these contentions.  The NSE argues that it provides a colocation service, enabling trading members to place their servers within NSE premises for better connectivity. These members are responsible for obtaining their own connections to link their servers to their external offices.

The NSE states it was unaware of Sampark's lack of authorisation until July 2015. Once this was discovered, the NSE quickly instructed the trading members to switch to a different provider within a month. The NSE emphasises that there was no intention to commit fraud and that any negligence did not harm the integrity of the market.