May 13, 2019

High-frequency misadventure

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National Stock Exchange was fined an unprecedented Rs 624 crore by the Securities and Exchange Board of India in the co-location case for giving preferential access to certain brokers. While the capital markets regulator did not find the leading bourse of the country guilty of any fraud, the order is a warning to market players that such lapses will not be tolerated

It took almost five years for the market regulator, the Securities and Exchange Board of India (Sebi), to bring a conclusion the in infamous co-location case of National Stock Exchange (NSE), with the final judgement passed on April 30, 2019, in voluminous five series orders.

Interestingly, after multiple years of investigations and a number of forensic audits, the regulator could not find NSE guilty of any fraudulent activities or unfair trade practices, though a penalty of around Rs 1,100 crore, including interests for five years, has been imposed on the exchange.

In Sebi’s own words, “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 with any specific trading member (TM), I’m compelled to rule against the possibility of existence of a ‘fraud’.”

However, in the same order, Sebi’s whole-time member G Mahalingam states, “…Even though sufficient evidence is not available before me to conclude that the Noticee No.1, NSE has committed a fraudulent and unfair trade practice as contemplated under the Sebi (PFUTP) Regulations, I find that it is established beyond doubt that NSE has not exercised the requisite due diligence while putting in place TBT architecture.” The regulator has, hence, directed NSE to disgorge Rs 624.89 crore, along with interest at the rate of 12% per annum from April 01, 2014 onwards. The exchange has also been barred from accessing the capital markets for six months.

What is the impact?

Some market experts feel Sebi’s order is contradictory in nature. According to a market expert, the regulator could not find sufficient evidence against Sebi, yet it has imposed a heavy penalty on the exchange, along with the disgorgement of partial salaries of two of its former MDs and CEOs – Ravi Narain and Chitra Ramakrishna.

“The whole issue got dragged for too long. Apart from a little delay in the public issue, no other significant impact is expected on the exchange’s business due to this,” says this person, on condition of anonymity.

NSE, which was set up in 1992 to break the growing monopoly of Bombay Stock Exchange, has its initial public issue lined up for a long time. Now, it will get delayed by a further six months.

Recently, in a telephonic conversation with DNA Money, NSE’s current MD & CEO Vikram Limaye has said, “We are not allowed to access the public market for six months, after that we can go ahead with it. The IPO cannot happen for six months, which is okay since any IPO preparation will take that much of time.”

However, the delay is unlikely to dampen investors’ sentiments, feel experts.

According to legal and financial consulting services firm Corporate Professionals Group founder Pavan Kumar Vijay, the issue at hand is about poor surveillance on NSE’s part.

“No doubt the exchange’s credibility has been affected. There will be now a difference in perception, but it may not affect the IPO. The issue is more about ethical practices than legal, and investors understand that,” he says.

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