India's capital markets regulator has barred the National Stock Exchange from raising money from the securities market for six months and imposed a hefty fine, in a move that will not only hamper its treasury operations but also its plans to float an initial public offering.
The decisions of the Securities and Exchange Board of India (SEBI) came after a probe into allegations that the country's largest stock exchange provided high-frequency traders unfair access to its servers located at the bourse for algorithm trading.
The regulator -- announcing its directions via four orders on matters pertaining to co-location, dark fibre and market intermediaries -- has directed the NSE to disgorge Rs 625 crore in ill-gotten gains from giving traders unfair access to the co-location facility. The NSE will have to pay an interest of 12% a year from April 2014 on the ill-gotten gains.
In another order on the use of the so-called dark fibre for communicating messages, the NSE has been told to pay Rs 62.58 crore plus 12% interest from September 2015.
The NSE's total liability may cross Rs 1,000 crore as SEBI found some former top NSE executives guilty of collusion to gave undue advantage to certain favoured brokers.
An NSE spokesperson said in an email that it is examining the SEBI orders and that it will "take appropriate steps as may be legally advised". NSE also issued a separate statement in which it said that the orders do not affect its functioning as a recognised stock exchange and that normal trading in all segments would go on as usual.
Allegations against NSE
The allegations first surfaced four years ago. Financial publication Moneylife first reported in 2015 that brokers were gaining unfair access to the NSE trading platforms, after a whistleblower contacted the publication.
On 8 July 2015, Moneylife’s Sucheta Dalal published an article alleging that some NSE staffers were leaking sensitive data related to high-frequency trading or co-location to a set of market participants so that they could trade faster than competitors. The article was based on a complaint made by an official of a Singapore-based hedge fund to SEBI in January 2015.
In response to the Moneylife article, the NSE filed a defamation suit claiming damages of Rs 100 crore in the Bombay High Court. The court dismissed the case late last year, asking the stock exchange to pay Rs 1.5 lakh each to journalists Debashis Basu and Sucheta Dalal. In addition, the court imposed a penalty of Rs 47 lakh on the NSE to be paid in the form of a donation to Masina Hospital and Tata Memorial Hospital in Mumbai.
In October 2016, the NSE appointed consulting firm Deloitte India to probe allegations that several brokers got unfair access to NSE’s co-location servers for algorithm trading, according to a Mint report at the time.
Two months later, just before the NSE was to file documents for an IPO, Chitra Ramakrishna, its then managing director and chief executive officer, resigned from her position. The bourse filed for an IPO in late December 2016.
In February this year, SEBI told the NSE to re-file its IPO plan owing to a change in the issue size and structure, anticipating the punitive action and the disgorgement order.
What SEBI said
In the matter pertaining to the co-location facility, SEBI directed the NSE to undertake a systemic audit at frequent intervals following a thorough appraisal of the technological changes it introduces.
Co-location refers to bourses allowing members to set up automated trading systems on their premises to reduce the time required for orders to flow between the exchange and the broker’s trading system.
The regulator also said that the NSE needs to reconstitute its Standing Committee on Technology at regular intervals to take stock of technological issues, and frame a clear policy on administering whistleblower complaints.
In the matter pertaining to co-location and dark fibre, SEBI directed the NSE to conduct an audit of its technical infrastructure by an independent system auditor starting 30 June and every six months thereafter for the next three years.
SEBI also directed the NSE not to introduce any new derivative product for next six months.
The regulator ordered Ravi Narain, former vice chairman and shareholder director on the NSE’s board, to disgorge 25% of salary he drew down from 2010-11 to 2012-13. He has been barred from associated with any listed company or market intermediary for five years.
It also ordered Ramakrishna to disgorge 25% of her salary for 2013-4 and barred her from representing any listed company or market intermediary for five years.
The NSE, Narain and Ramakrishna will be required to pay the said amount within 45 days of the order.
Besides, SEBI barred Subramanian Anand from holding any position with a market intermediary or representing any listed company, directly or indirectly, for three years. Anand had left as the NSE’s group operating officer a few months ahead of Ramakrishna's resignation, citing personal reasons.
Update: The story has been modified to incorporate an official statement from NSE.
