SAT Reiterates Show Cause Notices Are Not Appealable, Dismisses Brokers' NSE Co-Location Appeals

Reiterating that a show cause notice is not an appealable order, the Securities Appellate Tribunal has held that such notices cannot be construed as “orders” appealable under Section 15T of the SEBI Act.

A coram of Presiding Officer Justice P.S. Dinesh Kumar and Technical Members Meera Swarup and Dr. Dheeraj Bhatnagar dismissed a batch of appeals filed by multiple stock brokers challenging show cause notices and related communications issued by the Securities and Exchange Board of India in an NSE co-location matter.

“Indubitably, what is challenged in these appeals is the 'show cause notice‟. In our view, by no stretch of imagination, they can be construed as „orders‟ appealable under section 15T of the SEBI Act. A mere procedural irregularity, misdirection or wrong assumption of power by an authority issuing a show cause notice cannot be labelled as an „order‟ appealable under section 15T of the SEBI Act.” the tribunal held.

It further observed, “The matter is at the stage of reply to the show cause notice. We have held that challenge to show cause notice is not tenable.”

The appellants are stockbrokers registered with the National Stock Exchange of India Limited who had availed the co-location facility introduced by NSE in 2010, which allowed members to avail rack space for secondary servers within NSE's premises and thereby enjoy lower latency connectivity.

In 2015, NSE received complaints alleging unfair access in relation to the co-location facility. NSE appointed Deloitte to examine whether there was any breach and unlawful gains through such access.

In 2017, Ernst & Young was appointed to conduct a forensic review and submitted its report in 2018. In 2019, E&Y was again engaged in relation to certain trading members to examine whether there had been any preferential treatment.

After investigation, proceedings were initiated by SEBI's Adjudicating Officer, who held that there was no fraudulent activity committed by the appellants under the PFUTP Regulations. However, penalties were imposed for other violations, and those penalties were paid.

In 2021, while the earlier adjudication proceedings were still underway, SEBI appointed the Indian School of Business to re-examine aspects of the matter. After ISB submitted its report in 2023, SEBI issued fresh show cause notices proposing directions, including disgorgement of alleged unlawful gains.

The brokers then moved SAT, challenging the notices as well as related communications from SEBI.

SEBI opposed the appeals, arguing that a show cause notice is not an executable order and does not by itself give rise to any civil consequences.

Agreeing with the regulator, the tribunal held that Section 15T allows appeals only against orders passed by SEBI or its Adjudicating Officer, and that a show cause notice cannot be treated as such an order.

It also noted that there was a delay of about 480 days from the date of the show cause notices in filing the appeals.

Accordingly, the appeals were dismissed. However, the tribunal clarified that its order would not preclude the appellants from seeking relief before an appropriate forum.

For Appellants: Senior Advocate J P Sen, Pesi Modi, Advocates Yugandhara Khanwilkar, Ragini Singh, Priya Rai, Neville Lashkari, and Rohan Phadke

For Respondent: Senior Advocate Shiraz Rustomjee, Advocates Vishal Kanade, Manish Chhangani, Sumit Yadav, Abhay Chauhan and Atul Agrawal