Home / Opinion / NSE has far bigger problems than providing unfair access to brokers

A cover-up is always worse than the crime. In the case of National Stock Exchange of India Ltd (NSE), the alleged transgression, first pointed out by a whistle-blower, was that select trading members got faster access to the exchange’s data and systems.

NSE’s recently-filed draft red herring prospectus (DRHP) makes it clear that this allegation is as good as proven. After all, even an independent agency appointed by the exchange has said that there are indications that some trading members got preferential treatment. Even with the dice loaded in its favour—i.e. getting to choose the agency to investigate its systems and processes—NSE has been caught on the wrong foot. It has nowhere to hide. It has submitted the report of the independent agency to the Securities and Exchange Board of India (Sebi) without contesting it, and has asked the regulator to communicate its decision on the matter as soon as possible.

ALSO READ: NSE IPO papers: Audit found unfair access for brokers

All of this calls into question the conduct of the exchange and its top officials and their attempted cover-up in the past two years. Since 2015, when the whistle-blower’s allegation became public, NSE has fought it tooth and nail, even dragging Moneylife, a finance magazine, and its editors to court for publishing stories based on the whistle-blower’s letter. As pointed out earlier, a cover-up is far worse than the crime, simply because the former always involves top officials, while the latter could just be the doing of a few bad elements in an organization. Besides, the independent agency’s adverse observations included this: “Due to absence of protocols related to data retention, email and other information for certain former employees of our company was unavailable." For a critical financial market infrastructure institution, this is unacceptable.

But hardly anyone seems to be adequately worried about the attempted cover-up. After receiving the independent agency’s report with adverse findings, NSE’s board of directors has commissioned a study of its current data dissemination systems, presumably to ensure that issues of preferential treatment and unfair access do not recur. While this is good, it’s far from sufficient. For proper closure, responsibility for past misdemeanours must be fixed, errant trading members must be penalized, and more importantly, top officials who were involved in the attempted cover-up must be taken to task.

It’s worth pointing out here that the exchange’s official stance is that it stands by its earlier public statements and that the independent agency’s views stated in its DRHP are solely the agency’s views. In its books, therefore, it is still innocent and the allegation about providing unfair access is merely that—an allegation. But to continue holding on to that view is akin to living in a fool’s paradise, especially after two independent studies—including one by a Sebi-appointed team—have confirmed the whistle-blower’s main allegation. Besides, the fact that NSE hasn’t contested the agency’s findings and has decided to wait for Sebi’s decree is telling.

ALSO READ: NSE will list only after allegations of unfair access are resolved: Ashok Chawla

From the looks of it, however, it seems unlikely that the previous management will be hauled up by the exchange. Even though the former chief executive officer, Chitra Ramkrishna, suddenly quit, giving the impression that she had to pay a price for the controversy, the parting was amicable. The exchange said in a statement that she quit for personal reasons and board members have repeated this version even in off-the-record conversations.

It seems best, therefore, that Sebi steps in and calls a spade a spade. So far, it has been far too lenient with the exchange, allowing the episode to drag on for nearly two years. If any of the exchange’s statements clearly misrepresented facts to the regulator and/or the court, there should be serious consequences.

In 2010, while rejecting MCX Stock Exchange’s application to commence trading in stocks and other new products, Sebi’s then whole-time director, K.M. Abraham had said, “I find that the applicant has clearly been dishonest in withholding material facts... Given the position of a stock exchange as a first line regulator, I find that this dishonesty on the part of the applicant is serious." In other words, it’s one thing when a trading member misrepresents facts, but far more serious when a stock exchange does the same thing. Hopefully, Sebi deals with the issue with the seriousness it deserves.

ALSO READ: NSE CEO exit: Examining Sebi, NSE board’s roles

It’s also alarming that it’s in this backdrop of a crisis of confidence and credibility that the exchange is going ahead with an IPO. The exchange is in the hunt for a new CEO, and it still doesn’t know what action Sebi will take but found it expedient to file its DRHP within an earlier stated deadline. This reeks of complacency. The least Sebi can do is to quickly issue an order and settle the co-location issue once and for all. If it keeps the issue hanging, retail investors can easily end up being short-changed. Sebi has asked NSE to keep aside all revenues it earns from its co-location facilities pending its final order. This amounts to around 29% of revenues of the exchange. Even if these revenues are not at risk entirely, Sebi’s directive suggests the penalty may be significant.

If the quantum of the penalty is revealed only after the IPO, private equity investors who are participating in the offer for sale will gain at the expense of those buying in the IPO. Hopefully, Sebi decides wisely, and soon.

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