SEBI’s Show-Cause Notice Means NSE Co-Location Probe May Be Headed For Closure
Electronic ticker boards indicate the latest stock figures inside the atrium at the National Stock Exchange (NSE) in Mumbai, India (Photographer: Dhiraj Singh/Bloomberg)

SEBI’s Show-Cause Notice Means NSE Co-Location Probe May Be Headed For Closure

National Stock Exchange of India Ltd. can now expect a closure to the market regulator’s investigation into alleged preferential access to a few high-frequency traders and brokers, which has delayed approval for its initial public offering.

The probe into the exchange’s co-location service entered the final phase as the regulator has issued show-cause notices to the exchange and 14 others, including former managing directors Ravi Narain and Chitra Ramkrishna. While Ramkrishna resigned in December, Narain continues on the board as a shareholder-director.

The exchange and officials have to respond within 21 days. NSE is seeking legal advise, said a person aware of the matter requesting anonymity. The show-cause notice should be seen as a positive as it brings certainty to eventual closure to the probe, the person said.

The Securities and Exchange Board of India is probing co-location trades between 2010 and 2015. The service allows traders and brokers to place servers in the NSE building and connect directly to the exchange’s trading systems and contributes a third of its revenue. The exchange has been directed by SEBI to transfer revenue generated from the service since September 1 last year to a separate bank account.

NSE had disclosed in its prospectus filed with the regulator in December 2016 for its IPO that “SEBI received certain complaints against its co-location facility, including among others, allegations that the exchange had provided unfair access to the co-location facility to select trading members”.

An NSE spokesperson refused to comment on the investigation.

The notices have been issued under Section 12 of the Securities Contracts (Regulation) Act, 1956, and 26(2) and 41(2) of the Stock Exchanges and Clearing Corporations Regulations, 2012, said another person aware of the show-cause notice.

The SCRA rules give the regulator power to probe and impose penalties. The SECC regulations relate to a code to “establish a minimum level of business/professional ethics” among key management personnel for a “fair and transparent marketplace” and to “ensure equal, unrestricted, transparent and fair access to all persons without any bias towards its associates and related entities”.

NSE had indicated in its IPO prospectus that the investigation could result in damages. “In case of any non-compliance or alleged non-compliance with applicable laws or regulations, we could be subject to investigations, censures, fines or other judicial or administrative proceedings that may result in additional regulation of our business, substantial penalties, loss of reputation or client confidence or restrictions on our operations or claims for damages.”

IPO Delay

A final SEBI order would take at least three months, after which the exchange and individual employees will have to take a call on an appeal, based on the outcome. SEBI is yet to approve Vikram Limaye's appointment as the exchange's managing director and chief executive officer. Which means, the IPO could be pushed to the end of the year.

It will be a bad idea to go for an IPO till this news is hanging on NSE’s head because it impacts pricing, said the second person quoted above.

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