NSE Co-Location Case: Twists, Turns And Way Forward

SAT's scathing remarks against SEBI creates a need for introspection for the markets regulator, writes Sumit Agrawal.

NSE Co-Location Case: Twists, Turns And Way Forward

Almost four years after Securities and Exchange Board of India issued its historic and largest disgorgement order against National Stock Exchange of India and two of its former managing director and chief executive officers in the co-location matter, the Securities Appellate Tribunal set aside the penalty this week.

To set the context, under the co-location facility of the NSE, preferential access to tick-by-tick data of the stock exchange was provided to certain trading members (brokers) that allowed them to benefit by faster order execution (latency). The load balancer, a facility to map IPs to equitably distribute the connection across the POP server and eliminating the time lag in receipt of data packets by various trading members, was not implemented effectively. One of the fundamental principles of the securities market is to ensure equal access to all the market participants and per SEBI this very principle was violated and the NSE along with its then senior management failed to oversee these irregularities.

The entire issue came to light in 2015 through a whistleblower complaint, and after various examinations, inspections, audits SEBI ultimately passed a disgorgement order in 2019 for Rs 624.9 crore on the NSE with 12% interest from April 1, 2014 (totaling to more than Rs 1,000 crore). SEBI also ordered Ravi Narain and Chitra Ramkrishna to disgorge 25% of their salary during their respective tenures as managing director and chief executive officer of the exchange. Various reporting in the media tagged it as ‘The Scam’.

SEBI has extremely wide and varied powers. Exercising the same, it also issued subsequently penalty orders against the NSE, and its former MD and CEOs in the same matter, imposing penalty of Rs 1 crore on the exchange and Rs 25 lakh each on the two individuals. To note, this order is still pending in appeal at the SAT.

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