News headlines are sometimes stranger than fiction. When reports screamed that the Securities and Exchange Board of India (Sebi) had barred the National Stock Exchange of India Ltd (NSE) from accessing the securities market for six months, people were understandably confused. After all, most Indians access that market, or at least a part of it, through NSE’s trading platforms. The exchange had to clarify that all its trading operations will continue to function as usual. The temporary prohibition Sebi spoke of was on NSE’s much-delayed plan to sell its own shares through an initial public offering. Sebi’s order only means that NSE will have to wait half a year before issuing its own shares to investors at large. It’s not just this aspect of the order that gives the impression that India’s stock market regulator has made a mountain out of a molehill.
The exchange was under the scanner for the so-called “co-location scandal", which allegedly involved early access to sensitive data given by insiders to some brokers, who were suspected of making money off it. Yet, after multiple years of investigation and a number of forensic audits, the regulator has found no conclusive evidence of fraud. In short, NSE’s co-location scam was no scam at all, in Sebi’s own words. “At the outset, as the allegation of fraudulent and unfair trade practices levelled against the Noticee No. 1 (NSE) stands disproved, the same can no longer survive against the employees (of NSE)," wrote a whole-time member of Sebi in his 30 April order. So why impose a hefty fine, adding up to about ₹1,200 crore, including interest, on the exchange? The order states that while there was no fraud, the NSE did not exercise adequate due diligence while selecting its trading architecture, thereby creating an environment in which information dissemination was asymmetric. Did this asymmetry unfairly enrich any of NSE’s trading members? If so, it has to be backed by evidence. But one of the audits conducted on the NSE suggests that trading members who logged into its trading system first, presumably to exploit the weakness in question, made less profit than some of those who logged in later.
If anything, Sebi’s order exonerates employees whose reputations got tainted by a scandal that wasn’t proven to be one. But the fine presumes that every rupee of profit that NSE made by providing co-location services was ill-gotten. This is the amount that Sebi has sought to disgorge. And, that’s not all. Sebi has also raised the bar on expectations from top decision-makers at stock exchanges, who act as first-line market regulators. But this raises awkward questions about Sebi’s own role as the chief regulator. Appointments of top officials at exchanges are always vetted by Sebi. Besides, the order states: “The MD and CEO of a stock exchange cannot abdicate his/her responsibility by citing limited knowledge in certain spheres of the business activities." So, in Sebi’s view, NSE’s top executives can’t defend themselves by saying they were unaware of technical nitty-gritty. But this raises the bar for Sebi officials as well. It’s clear that its own top officials were ill-equipped to handle the NSE co-location issue, which is the reason it dragged on for so long. All said, it looks like a case of the buck being passed along for nothing.