MUMBAI: In a complete volte face, the markets watchdog Sebi has thrown out its own case against the NSE and its past management led by chief executive Chitra Ramakrishna and the chairman Ravi Narain over alleged collusion and unfair trade practices, paving the way for the nation’s largest bourse to resume its primary share sale plans which had been stalled since 2016.
The new management of Sebi under Madhabi Puri Buch, who herself is under a volley of allegations including conflicts of interest, has said there was "insufficient evidence", thus closing the case.
Earlier this year, Sebi had rejected a settlement application by the NSE in the co-location case.
In an order released Friday, Sebi whole-time member Kamlesh Varshney disposed of the proceedings against the NSE saying, "There is no dispute to the fact that NSE did not have a detailed defined policy for the use of colo (co-location) facility. It even failed to monitor the use of the secondary server by TMs without having sufficient reason. The defence put forward by NSE about the issuance of welcome email in the form of ‘registration enablement mail’ at the time of providing colo facility to TMs (brokers) can’t be said to be justifying its role as a first-level regulator. The issuance of guidelines without proper monitoring demonstrated a lack of due diligence."
However, he cited insufficient evidence to establish any collusion between brokerage OPG Securities and the NSE and therefore closed the case without any direction.
Varshney held that “due to the absence of sufficient material, the test of preponderance of probability failed to produce enough justification to establish any collusion between brokerage OPG Securities and NSE.”
The latest development removes a major roadblock to the NSE's much-awaited IPO plans, which were derailed following the co-location controversy.
Last month, the NSE restarted the process of its long pending public offering and applied for no-objection from Sebi.
The co-location scam refers to some brokers gaining an unfair advantage by accessing the NSE’s systems, data, and trading facilities by allowing them to place their servers right in the NSE premises, giving them undue advantage in terms of speedy trade execution. The case began in 2015 and has involved several investigation after three whistleblowers complained to Sebi that some brokers got preferential access at NSE’s co-location facility for early login, resulting in huge gains for those brokers to the detriment of other brokers on the same premises.
The scam was based on allegations that NSE officials allowed certain brokers to access its servers and data faster, which gave them an advantage over other traders. It also alleged that the NSE had allowed non-empaneled internet service providers to lay fibre cables on its premises for a select set of traders who were reaping huge amounts of profits.
The Sebi probes had found that the NSE had violated several provisions of the Sebi Act and the stock exchanges and clearing corporations regulations.
Following years of probe, in 2019, Sebi passed an order directing the NSE to disgorge Rs 625 crore plus interest, and also imposed a penalty of Rs 1,000 crore on the exchange. In 2023, the Supreme Court directed Sebi to refund Rs 300 crore to the NSE, which the exchange had deposited under disgorgement orders.
Co-location allows brokers to place their servers on a stock exchange’s premises for a fee, allowing them to receive price data feeds fractions of a second before other participants.
The Sebi probe committee had found that the NSE architecture for dissemination of tick-by-tick data was prone to manipulation and market abuse.
Sebi had identified 15 stockbrokers for investigation in the case and in 2018 the CBI filed a case against OPG Securities for allegedly manipulating the system for two years to get first access to markets when they opened.
Sebi had also directed OPG Securities to disgorge Rs 15.75 crore with interest, which was set aside. The matter was remanded back to Sebi to decide on the quantum of penalty against OPG.
However, Varshney stated that this aspect alone would not help to decide whether there was collusion between OPG Securities and NSE and its directors.
“The fact that OPG was logging on to the secondary server till May 2015, even after the warning in the first half of June 2012, does indicate indirect consent by NSE to OPG. The fact that 93 trading members were logging to the secondary server during this period reduces the probability of collusion,” the order stated.
Varshney also noted that despite multiple forensic reports of Deloitte, EY and the regulators’ external committee, no evidence was reported. Accordingly, the proceedings against all noticees, including the NSE and its officials CEO Chitra Narayan and chairman Ravi Narain, were disposed of without any directions.
However, the apex court refused to stay the Securities Appellate Tribunal's order, which had struck down Sebi’s disgorgement order, directing NSE to pay Rs 625 crore plus interest.
