Markets Regulator Sebi Orders NSE To Pay Over Rs 625 Crore In Co-Location Case

Markets regulator Sebi (Securities and Exchange Board of India) on Tuesday directed the National Stock Exchange to disgorge more than Rs 625 crore of profits derived from dissemination of data in the co-location case and barred two former chiefs of the bourse for five years from being associated with market intermediaries. Ravi Narain and Chitra Ramkrishna -- who had served as MD and CEO of the exchange -- have been asked to disgorge 25 per cent of respective salaries drawn during a certain period.

They have also been prohibited from "associating with a listed company or a market infrastructure institution or any other market intermediary for a period of five years," Sebi said in a 104-page order.

According to the order, the exchange has also been prohibited from accessing the securities market directly or indirectly for six months.

The bourse should also carry out system audit at frequent intervals after thorough appraisal of the technological changes introduced from time to time. Further, the exchange has to reconstitute its Standing Committee on Technology at regular intervals to take stock of technological issues and frame a clear policy on administering whistle-blower complaints, as per the order.

Alleged lapses in high-frequency trading offered through NSE's co-location facility came under the scanner of the watchdog after a complaint was filed in 2015.

The bourse "shall disgorge an amount of Rs 624.89 crore... along with interest calculated at the rate of 12 per cent per annum from April 1, 2014, onwards to the Investor Protection and Education Fund (IPEF) created by Sebi", the order said.

Show-cause notices were issued to the exchange and 16 individuals. Out of them, the regulator has let off 14 individuals, including senior exchange official Ravi Varanasi.

Passing the order in the high profile co-location case, the watchdog said the exchange did not exercise requisite due diligence with respect to Tick-by-Tick (TBT) data architecture.

TBT data feed provides information regarding every change in the order book, was disseminated over Tranmission Control Protocol/ Internet Protocol. Under this protocol, the information is delivered one-by-one. TBT data feed was disseminated sequentially in the sequence trading members connected/ logged-in to the server.

"I find that it is established beyond doubt that NSE has not exercised the requisite due diligence while putting in place the TBT architecture. The same created a trading environment in which the information dissemination was asymmetric, which cannot be considered fair and equitable," Sebi whole time member G Mahalingam said in the order.

According to him, the NSE being a market infrastructure institution (MII) cannot be treated at par with other market intermediaries or participants as it derives its power to act as a stock exchange from the recognition granted to it.

Issuance of any direction which would have a bearing on its status as a recognised stock exchange falls outside the scope of these proceedings, he added.

"... I am of the view that an order for disgorgement of a portion of the profits derived from the TBT data dissemination activity during the relevant period, for being transferred to the IPEF... would be an appropriate direction, commensurate with the violations," the order said.

For commutation of the disgorgement amount, the regulator took into account that TBT data dissemination commenced from June 2010 onwards and continued till March 2014. 

An NSE spokesperson said it is in the process of examining Sebi order and will take appropriate steps as may be legally advised.