NSE looking for settlement in algo case; may not contest SEBI decision

The National Stock Exchange is looking for a settlement with markets regulator SEBI in the co-location server case, a source in the board familiar with the development said. In 2015, an anonymous whistleblower wrote to SEBI saying that some trading members on the NSE who had subscribed to the exchange’s co-location server facility were getting an unfair advantage by way of faster access to the exchange’s trading engine which disseminates prices. The whistleblower alleged that the trading members were able to do so by colluding with some exchange officials. The probe into the allegations is still underway. The source said that the bourse was willing for a consent plea, under which it would pay a penalty without admitting or denying guilt. “(SEBI’s) Technical Advisory Committee and Deloitte have both are agreed that preferential access to brokers has now stopped and the loopholes have been plugged,” the source said. Settling the dispute is key to NSE being able to go ahead with its planned initial public offering. An audit by consultancy firm Deloitte found that the NSE’s systems were prone to manipulation and abuse, but the report could not say for sure if there was collusion by the exchange officials. SEBI has asked the NSE to set aside the revenues from the co-location services--fees for the server as well as fees earned on the trades coming from the colo server--in an escrow account till the matter is resolved. The NSE has mentioned these factors in its draft red herring prospectus filed with the regulator. and that has caused prospective investors to develop a cold feet as revenues from the co-location server facility account for roughly 35-40% of annual revenues. While SEBI has not explicitly barred the NSE from going ahead with the IPO, merchant bankers feel the exchange may not be able to command a premium valuation since a sizeable chunk of its core revenues is under dispute. The SEBI has issued show cause notices to 14 people, which includes the former top brass Ravi Narain, Chitra Ramakrishna and Anand Subramanian, and 11 senior managers, asking them to explain the lapses in the co-location facility. Narain, Ramakrishna and Subramanian have already quit, and among the 11 senior managers, three have quit. The NSE board will shortly take a call on the employees who have received show cause notices. The exchange can suspend or freeze the pay of employees who are found to be violating the code of conduct, which among other things calls for adhering to ethical practices. The other thorny issue for NSE is the clearance from the regulator for appointing Vikram Limaye as Managing Director and CEO. The NSE board had cleared the proposal in March, but SEBI is yet to approve the appointment. The Securities and Exchange Board of India (SEBI) may approve conditional appointment of Vikram Limaye as the NSE MD and CEO. “SEBI may give conditional approval to Limaye even as his contract with BCCI is still on,” the source said, adding that NSE was okay with a conditional approval subject to Limaye completing his commitment with BCCI. The source said that NSE would start looking for another candidate if the approval does not come in “3-6 months.” The NSE has been headless since Chitra Ramakrishna abruptly quit in December 2016.