Co-location case: Sebi directs NSE to pay over Rs 624 crore

Coming down heavily on the National Stock Exchange (NSE) for alleged lapses in high-frequency trading offered through its co-location facility, the Securities and Exchange Board of India (Sebi) on Tuesday directed the NSE to disgorge around Rs 624.890000000 and barred the exchange from accessing the market for funds for the next six months. Sebi also asked two of the NSE’s former chief executive officers — Ravi Narain and Chitra Ramkrishna — to disgorge 25% of respective salaries drawn during a certain period. They have also been prohibited from “associating with a listed company or a market infrastructure institution or any other market intermediary for a period of five years”, Sebi said in its order. The bourse “shall disgorge an amount of Rs 624.890000000... along with interest calculated at the rate of 12% per annum from April 1, 2014 onwards to the Investor Protection and Education Fund (IPEF) created by Sebi,” the order said. In 2015, a whistleblower wrote a letter to Sebi alleging that NSE gave preferential access to a few high-frequency traders and brokers to the exchange’s trading platform, leading to an investigation by the Sebi. NSE’s co-location facility allows low latency and fast execution to trading members. Sebi also directed NSE to take necessary legal actions against Ajay Shah, Infotech Financial Services Private Limited Sunita Thomas and Krishna Dagli (directors of Infotech Financial Services) for violating the provisions of the “professional service agreement” signed with Infotech in connection with LIX project and for misusing the data made available to them by the NSE as per the findings made in the order. It also directed the NSE to submit an action taken report in this regard along with the observation of its Governing Board to the Sebi, within three months from date of the order. The Sebi order also directed Ajay Shah not to hold, directly or indirectly, any position in the management of and/or in the Board of or be associated in any manner and in any capacity, with any stock exchange, clearing corporation, depository, recognised or registered by Sebi and/or with any intermediary registered with Sebi or their related entities and/or with any company listed in any of the stock exchanges recognised by Sebi, for a period of 2 years. “The NSE has committed a fraudulent and unfair trade practice as contemplated under the SEBI (PFUTP) Regulations. It is established beyond doubt that the NSE has not exercised the requisite due diligence while putting in place the TBT architecture,” G Mahalingam, whole-time member of Sebi said in the order. “The same created a trading environment in which the information dissemination was asymmetric, which cannot be considered fair and equitable. This failure of the NSE to ensure equal and fair access, in the facts and circumstances has resulted in violation of Regulation 41(2) of SECC Regulations 2012,” he said. The order said the NSE should carry out system audit at frequent intervals, after through appraisal of the technological changes introduced from time to time; reconstitute its Standing Committee on Technology at regular intervals to take stock of technological issues; and frame a clear policy on administering whistle blower complaints. “As regards Ravi Narain and Chitra Ramkrishna, I note that they had held the position of MD and CEO of NSE in succession, during the relevant point of time. Having held the senior most management position in the NSE and being in charge of the affairs of the conduct of the stock exchange business, they cannot limit their roles to the non-technology issues of the exchange. The MD and CEO of a stock exchange cannot abdicate his/ her responsibility by citing limited knowledge in certain spheres of the business activities,” Mahalingam said in the order. “Undisputedly, they were vested with the general and overall responsibility of ensuring the implementation of the principle of equal, fair and transparent access, as mandated under Regulation 41 of The SECC Regulations. While implementing TBT dissemination architecture at NSE, the essence of “fair and equitable access” was not attempted to be imbibed into the various stages of implementation of the technology and only “safety and reliability” was taken into account,” the order said. A spokesperson for NSE said, “NSE is in the process of examining SEBI Order passed today and will take appropriate steps as may be legally advised.” While arriving at the disgorgement figure, the order said, “NSE’s average net profit margin was 77% across the years 2010-11 to 2013-14. Applying the margin on the NSE’s revenues from co-location facility (excluding rack charges) from 2010-11 to 2013-14, I find that the profit from co-location operation comes to Rs 624.890000000.”