Bourse told to pay up nearly ₹1,000 crore, can’t access capital markets for six months
Former NSE CEOs Ravi Narain and Chitra Ramakrishna have been docked a portion of their salaries
The markets regulator on Tuesday cracked the whip on National Stock Exchange of India Ltd (NSE), directing it to deposit nearly ₹1,000 crore in an investor fund and barring it from accessing capital markets for six months, besides clawing back a chunk of salaries from its two former CEOs, for lapses in its algorithmic trading systems and co-location services.
In a set of five orders issued on Tuesday, the Securities and Exchange Board of India (Sebi) asked NSE to “disgorge" its profits from co-location worth ₹624.89 crore at 12% interest to the Investor Protection and Education Fund (IPEF). The amount with interest would add up to about ₹1,000 crore. The Sebi order also pushes back NSE’s much-delayed ₹10,000 crore initial share sale well beyond six months.
The Sebi order said NSE had failed to ensure equal and fair access to all members when they were using its algorithmic trading platform and co-location services. Between 2011 and 2014, under co-location services, some brokers trading from the same premises where NSE’s algorithmic trading servers were located were able to get faster access to the trading systems, thereby gaining an unfair advantage over others.
Sebi also punished Ravi Narain and Chitra Ramakrishna, NSE’s two former CEOs and founding members. Narain, who was heading the exchange between 2010 and 2013, was asked to deposit 25% of his salary for the three fiscals in IPEF, while Ramakrishna, who was the CEO of the exchange starting fiscal 2014, must deposit 25% of her salary for that fiscal. She stepped down as CEO in December 2016.
The strictures against the two, which called the episode “bad governance" on the part of NSE, include a bar on associating with any listed company or a market infrastructure institution (MII) or any other market intermediary for five years.
In his 104-page order, G. Mahalingam, whole-time member of Sebi, said there was “lack of sufficient evidence to establish fraudulent conduct by NSE".
“I find that it is established beyond doubt that NSE has not exercised the requisite due diligence while putting in place the TBT (tick-by-tick) architecture. The same created a trading environment in which the information dissemination was asymmetric, which cannot be considered fair and equitable," the order said. TBT is an information dissemination system where market data is sent out one by one in a sequential manner.
An NSE spokesperson said the exchange was in the process of examining the Sebi order and would take appropriate steps as might be legally advised. Narain and Ramakrishna could not be reached immediately for a comment.
The orders will not impact the functioning of NSE and it will continue to run when markets open on Thursday.
“We are examining the order and are exploring legal options," said Vikram Limaye, chief executive of NSE.
In a separate order, Sebi barred Delhi-based OPG Securities Pvt. Ltd from accessing capital markets for five years and fined it ₹15.57 crore for securing unfair access to NSE’s systems.
In other orders, Sebi pointed to conflict of interest in NSE’s dealings with technology firm Infotech Financial Services Pvt. Ltd and academic Ajay Shah. Sebi said there was misuse of market-related confidential information and sensitive data by Shah, his wife Susan Thomas and sister-in-law Sunita Thomas.
“The data so received from NSE was being misused for the purpose of developing algo-based trading software for their commercial gains," said S.K. Mohanty, whole-time member of Sebi.
Sebi directed NSE to initiate legal proceedings against Shah, Sunita Thomas and Infotech. Shah was also barred from holding a management position or associating with any exchange, clearing corporation and brokerage firms for two years. Sunita Thomas and Infotech cannot provide services to any Sebi-registered firm for a period of two years.
Suprabhat Lala, associate vice-president of NSE and Sunita Thomas’ husband, was also barred from positions at MIIs for two years.
In the last order running into 200 pages, the regulator found lapses in the use of so-called dark fibre by certain trading members in violation of NSE’s own policy norms.
Dark fibre refers to a dedicated communication line through which messages travel faster than regular lines because of the absence of other traffic. As such, there is nothing illegal about using such faster connectivity infrastructure.
Sebi held that NSE had been taking inconsistent positions and its conduct broke its own rules right from the time when a non-registered member, Sampark, was granted permission in April 2015 to lay dark fibre cable for two brokerage firms, Way2Wealth and GKN Securities.
Sebi also asked NSE to deposit an additional sum of ₹65.2 crore, which is the profit earned from co-location services between May 2015 and September 2015 at 12% interest in IPEF.
Ravi Varanasi, chief of business development at NSE, was also barred from holding positions in MIIs and associating with listed companies for a period of three years due to lapses on his part in NSE’s dark fibre policy.