Employees enter the National Stock Exchange of India Ltd. (NSE) building in Mumbai, India. (Photographer: Dhiraj Singh/Bloomberg)

NSE To Pay Rs 1,000 Crore Disgorgement In Co-Location Case: SEBI Order

Market regulator Securities and Exchange Board of India has ordered India’s leading stock exchange, the National Stock Exchange of India Ltd., to disgorge Rs 1,000 crore for having violated Stock Exchanges and Clearing Corporation (SECC) Regulations. It has ordered similar punishment for two of the exchange’s former leaders - Ravi Narain and Chitra Ramkrishna.

The case pertains to complaints made in 2015 that the NSE gave preferential access to some co-location clients, thereby giving them a trading advantage.

SEBI said, in an order published today, that it didn’t find sufficient evidence to conclude that NSE committed fraudulent and unfair trade practice but it has been established beyond doubt that the exchange did not exercise requisite due diligence while putting in place tick-by-tick architecture. This amounted to a violation of SECC Regulations that provide for equal, fair and transparent access to all persons.

Hence, SEBI has ordered NSE to disgorge Rs 624.89 crore with 12 percent interest p.a. from April 2014 towards SEBI’s Investor Protection and Education Fund. That amounts to a total Rs 1,000 crore, to be paid in 45 days. A disgorgement is the repayment of illegal gains.

To be clear, the exchange has already been depositing a portion of earnings from the co-location business in an escrow account, as per SEBI’s earlier instructions. As of March last year that account held over Rs 800 crore.

SEBI has also prohibited the exchange from accessing the securities market directly or indirectly for a period of six months. While that has no impact on its exchange-related activities NSE has been long waiting to do an initial public offer and will now have to wait six more months.

NSE as a corporate entity should not have been penalised as it does not have mind of its own, said PR Ramesh, advocate and former general manager at SEBI, to BloombergQuint.

Banning NSE for 6 months is actually against the shareholders of NSE who have nothing to do in this matter. May be the role of the board of directors in full could have been examined by SEBI. There is also precedence of no action against BSE but against the President and board of BSE during the 2001 issue.
PR Ramesh, Advocate and Former SEBI General Manager

Last year NSE had filed a consent application with SEBI in an effort to settle the long pending case. BloombergQuint learns that consent application was returned hours before the SEBI order was published.

If it chooses to, NSE can appeal the SEBI order at the Securities Appellate Tribunal and thereafter the Supreme Court.

"NSE is in the process of examining the SEBI order passed today and will take appropriate steps as may be legally advised," said an NSE spokesperson in an emailed statement.

SEBI Acts Against Former NSE CEOs

SEBI has also ordered

  • Ravi Narain, former MD and CEO of NSE, to disgorge 25 percent of the salary drawn for FY11 - FY13 to IPEF.
  • Chitra Ramkrishna, former MD and CEO of NSE, to disgorge 25 percent of salary drawn for FY14 to IPEF.
  • Both Narain and Ramkrishna are prohibited from associating with listed company/market infrastructure institution/market intermediary for 5 years.
Ravi Narain. (Photographer: Jonathan Fickies/Bloomberg News)
Ravi Narain. (Photographer: Jonathan Fickies/Bloomberg News)

Also read: Top NSE Officials ‘Facilitated’ Co-Location Fraud, Says SEBI Show-Cause Notice

The Back Story

In 2015, SEBI received complaints in respect to NSE’s co-location facilities. It was alleged in these complaints that due to the dissemination protocol of the tick-by-tick (TBT) data feed, those trading members who connected first to NSE’s servers were able to access trading data faster. One trading member, namely OPG Securities used the NSE system to its advantage, with help from NSE and allied staff members.

Thereafter several committees probed the matter (pertaining to the years 2009-2016) and show cause notices were issued.

In the order published on Apr. 30 SEBI has primarily dealt with the issue of requirement of the stock exchange to ensure equal, unrestricted, transparent and fair access to all persons, as provided for in the regulations pertaining to stock exchanges.

It said it would deal with the role of trading member OPG Securities in a separate order.

What NSE Did Wrong

After an examination of the several technical reports and NSE’s responses, the SEBI order finds that -

The TCP/IP dissemination system for TBT data did confer an advantage on early loggers in a port compared to others.

The absence of a load balancer and a randomiser, both mitigators, accentuated the problem.

NSE did not have defined policies and procedures around Secondary Server access, except for those mentioned in the ‘NSE Co-location Guidelines’. Secondary servers carried lighter load and in the absence of a strict monitoring system and punitive mechanism, the non-compliant and recalcitrant trading members who routinely connect to the Secondary Servers, were able to harvests the benefits of early access to TBT feeds.

But, in the “absence of any evidence leading to the culpability of any specific employee of NSE or the collusion or connivance from the side of NSE with any specific trading member” the order has ruled against the possibility of existence of a “fraud”.

All the findings in the foregoing observations, lead to the conclusion that the exchange has failed to comply with the provisions of SECC Regulations in letter and spirit, which has given scope to the complaints in question. The stock exchange, as a first level regulator, has a fiduciary duty to the entire ecosystem. Market participants’ confidence in the trading system is based on the presumption that the rules of trading are completely uniform and transparent.
SEBI Order

Hence the order finds no liability under the PFUTP (Prohibition of Fraudulent and Unfair Trading Practices) Regulations but did find a violation of the SECC regulations.

That is also the reason why, though several NSE employees were investigated and named in the show cause notices, the order does not pursue those allegations further.

...as the allegation of fraudulent and unfair trade practices levelled against the Noticee No. 1 (NSE) stands disproved, the same can no longer survive against the employees.   
SEBI Order

Who Was Spared

While applying the principle of equal, fair and transparent access under SECC regulations, the order notes that all directors and key managerial personnel cannot be implicated for a breach committed by the stock exchange. But it doesn’t spare Ravi Narain and Chitra Ramkrishna.

Both having served as chief executive officer and managing director of the exchange, in succession, they could not limit their roles to non-technology issues, the order states.

“The MD and CEO of a stock exchange cannot abdicate his/her responsibility by citing limited knowledge in certain spheres of the business activities.”

Hence the two were found liable for breaches of provisions in the SECC Regulations and ordered to disgorge a portion of their salaries in the relevant years.

Ramkrishna quit the exchange abruptly in December 2016 and Narain, a co-founder of NSE, exited six months later.

BloombergQuint was not able to seek their comments on the SEBI order. So far, NSE had been paying for their legal representation. Both can appeal to the SAT and Supreme Court thereafter.

Chitra Ramkrishna. (Photographer: Dhiraj Singh/Bloomberg)
Chitra Ramkrishna. (Photographer: Dhiraj Singh/Bloomberg)

Among the other 14 employees named in the order - SEBI found that two others, Mahesh Soparkar and Deviprasad Singh, also failed to discharge their duties, but has left it up to NSE to fix accountability as deemed fit and proper. No directions were passed against Anand Subramanian, Ravi Apte and Umesh Jain. And, allegations were dropped against R Nandkumar, Mayur Shindwad, Ravi Varanasi, Sankarson Banerjee, G Shenoy, Suprabhat Lala, Nagendra Kumar SRVS, N Murlidaran and Jagdish Joshi, due to insufficient supporting material.