NSE May Delay IPO As Investors Seek Clarity On Co-Location Probe
NSE wants to resolve co-location probe before the IPO, says SEBI Chairman
The National Stock Exchange of India Ltd. is likely to delay its initial public offering beyond July as the market regulator is yet to take a final call in a probe into its co-location services and approve the appointment of its new chief Vikram Limaye.
“There were two-three queries (on Limaye’s appointment) which were not clear, and since it is between us and the NSE, I don’t want to say what issues,” Ajay Tyagi, chairman of Securities and Exchange Board of India (SEBI), said on Wednesday. The exchange has replied and the regulator will take a view, Tyagi said while addressing the media after a board meeting on Thursday.
The final decision on the issue of co-location will take some time and the NSE itself wants it to be “sorted out before they go for IPO”, Tyagi said.
SEBI had ordered the probe after allegations of preferential treatment through the co-location facility, which allows traders and brokers to place servers in the NSE building and connect directly to the exchange’s trading systems. The regulator had also raised queries on Limaye's appointment as the next managing director and chief executive officer as he holds additional responsibilities at the Board of Control for Cricket in India.
Limaye, the managing director and chief executive officer at IDFC Ltd., was expected to join NSE on May 2. The NSE board on February 8 approved his appointment, which was followed by shareholders’ nod on March 7.
He has a non-executive role at BCCI and is not required for day-to-day operations of the cricketing body, an NSE official told BloombergQuint on the condition of anonymity. The NSE did not comment on the issue. Limaye couldn’t be reached for a comment.
Co-Location Probe
The exchange is awaiting SEBI’s final orders in the co-location probe. The market regulator had directed the exchange to conduct an independent forensic examination by an external agency. It also asked the NSE to deposit the revenue generated from the service in a separate bank account.
The exchange had launched its co-location services in the financial year 2009-10. Revenue from the service stood at Rs 302.9 crore for the six months ended September 30, 2016, nearly one-third of the total revenue for the period.
“Any adverse SEBI directive on this matter may materially and adversely affect our co-location business, results of operations, business and reputation,” the company said in its draft red herring prospectus.
The NSE would like its prospectus to be approved by the market regulator soon, said the NSE official cited above. The exchange will have up to one year from the date of approval to list, and the co-location issue can be resolved in that period, the official added.
Investors, however, may want to wait. There needs to be some clarity on the co-location issue as an investor would not want an overhang, said one of the shareholders in the exchange who is selling shares in the IPO. An investor who has waited seven to eight years for the IPO can wait another two months, the shareholder said on the condition of anonymity as he is in the blackout period.
Investors are looking to raise up to Rs 10,000 crore from the share sale.
Further Audit
The exchange has appointed EY to audit its systems in the cash and currency segment, said the NSE official. The audit started in mid-April and the consulting agency is expected to submit its report within a month, the official added. The report will then be shared with the market regulator, before it takes a final decision on the issue of co-location.
IPO Timeline
The exchange is expected to start its IPO roadshow as soon the market regulator approves Limaye’s appointment. The exchange wanted to conduct its roadshow over a period of two months, and targeted to launch its IPO in July. But with SEBI yet to confirm Limaye’s appointment and the existing audit of its systems unlikely to be completed before May, the offer may be delayed. The decision to go ahead with the IPO without clarity on the co-location issue may depress valuation of the exchange.
An NSE spokesperson did not respond to BloombergQuint’s emailed queries regarding the IPO.
The market regulator is trying to ensure that the co-location issue does not get repeated, said the shareholder cited above. The regulator has ensured that the technology is fixed and the management, which was at worst complicit or at best complacent, is changed, the investor said. SEBI could impose a penalty to disincentivise the exchange from repeating this act, which it hasn’t so far, the person said. But the people who were responsible – it was an individual transgression and not institutional – are no longer with the exchange and SEBI has ensured that there is enough board oversight, the shareholder said.