The National Stock Exchange of India (NSE) has challenged the colocation orders of the Securities and Exchange Board of India (Sebi) on the ground that they are unsustainable, arbitrary, and disproportionate.
The protracted legal battle is a rare instance of an exchange challenging the market regulator’s orders.
NSE had filed petitions with the Securities Appellate Tribunal (SAT) for interim relief and full relief. This seeks staying of the Sebi order till the petition for full relief is heard as the "orders will cause grave and irreparable damage to the financials and reputation of NSE" and no additional interest is levied on the disgorgement amount. The petition for full relief involves setting aside the orders in their entirety.
The petitions have been reviewed by Mint.
SAT will on Wednesday hear the petition for interim relief.
NSE has alleged that Sebi orders have not made a case that any trading member got any advantage because of preferential access.
Sebi had on 30 April passed three orders against NSE, directing it to deposit Rs1,200 crore in an investor fund and barring it from accessing capital markets for six months, besides clawing back a chunk of salaries from two of its former chief executive officers, for lapses in its algorithmic trading systems and co-location services.
Sebi found that NSE had failed to provide 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 by logging-in first, thereby having an unfair advantage over others.
The markets regulator alleged that NSE was a party to fraud on its trading platform as it had allowed preferential treatment to two trading members. These members were allowed to use services of an unauthorized ‘dark fibre’ vendor, Sebi said, levelling a penalty of nearly Rs80 crore (including interest) on the exchange.
NSE was also asked in September 2016 to deposit revenues from its colocation service in an escrow account pending investigations. The amount in this account stood at Rs2,344 crore as on 21 May 2019. .
NSE had asked Sebi to withdraw these directions but this was not done.
“Therefore, despite completion of investigation, issuance of showcause notices and indeed passing of the order deciding the matter, the appellant (NSE) has continued to be penalized," NSE said in its plea.
As an additional interim relief, NSE has sought that directions to deposit colocation revenues in the escrow account be removed and the funds released.
NSE in its appeal against the first Sebi order said that the directions and disgorgement are bad in law. The directions are punitive and not remedial, and have no correlation with the alleged wrong, it said. The disgorgement amount has no legal basis, is disproportionate and has been calculated incorrectly, and there is retrospective application of law, NSE claimed in the petition.
A Mint article of 1 May had pointed out that disgorgement for NSE ideally should be Rs350 crore.
The exchange also claimed in the plea that Sebi orders are silent on key issues. The first dissemination of data did not result in first receipt of data, brokers who logged-in first did not get any ‘pecuniary gains’ or monetary advantage, and access to secondary server was equitable, it said.
“The order suffers from material errors of facts and law. It has also failed to decide on a single beneficiary of the alleged unfair access and concluded that NSE TBT architecture (tick-by-tick information dissemination system) was not fair and equitable," said the petition.
NSE claimed that the charge “it was party to fraud on its platform" in the second order makes unwarranted findings on the credibility and integrity of the exchange.
Two brokerage firms Way2Wealth and GKN Securities were allowed to connect their racks on the NSE colocation platform to BSE colocation servers through an unregistered service provider, Sampark Infotainment. This resulted in an alleged latency advantage.
NSE claimed that according to the forensic audits that formed the basis of the Sebi orders, “no advantage accrued to the trading members due to the said connectivity and that there is no evidence of collusion".
“It suffers from errors of facts and reasoning and is replete with fundamental contradictions," NSE claimed.
The exchange also said that the charge of fraud is based on “an assumption of unfair advantage followed by speculation of exploitation by trading members".
An NSE spokesperson chose not to comment on the ground of appeal.