Securities Appellate Tribunal Directs NSE To Continue Depositing Revenue From Co-Location In Escrow

It was a partial win for both SEBI and NSE at the Securities Appellate Tribunal on Wednesady.

A gavel sits on a stage. (Photographer: Daniel Acker/Bloomberg News)
A gavel sits on a stage. (Photographer: Daniel Acker/Bloomberg News)

It was a partial win for both the market regulator and India’s largest bourse at the Securities Appellate Tribunal today.

While the National Stock Exchange argued for an interim stay on the Securities and Exchange Board of India’s penalty of Rs 1,000 crore, the market regulator opposed it. The SAT declined to give the NSE a stay but didn’t direct a payment to SEBI’s Investor Protection and Education Fund either. Instead, it has asked the bourse to deposit Rs 624 crore in a fixed deposit with SEBI within two weeks.

The appellate tribunal was hearing the NSE’s appeals against SEBI’s April 30 order where the market regulator had concluded that the stock exchange did not exercise requisite due diligence while putting in place tick-by-tick architecture. SEBI was investigating complaints made back in 2015 that the NSE had given preferential access to some co-location clients, thereby giving them a trading advantage. The regulator had concluded that there wasn’t sufficient evidence to say that the NSE committed fraudulent and unfair trade practice. And so, it had directed the bourse to disgorge Rs 624.89 crore with 12 percent interest per annum from April 2014.

To be clear, the stock exchange has already been depositing a portion of earnings from the co-location business in an escrow account, according to SEBI’s earlier instructions. The NSE’s counsel Somasekhar Sundaresan argued before the SAT today that the exchange should be allowed to maintain only the amount equivalent to SEBI’s penalty—Rs 624 crore—in the escrow account, which currently has Rs 2,344 crore. The SAT declined this request and further directed the NSE to continue depositing revenues from the co-location services in the escrow account.

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The second plea of the NSE regarding an enquiry against its employees Mahesh Soparkar and Deviprasad Singh was also turned down by the SAT. In its April 30 order, SEBI had noted that Soparkar and Singh failed to discharge their duties but had left it up to the NSE to fix their accountability. Sundaresan argued that the NSE has already sworn on oath that there has been no wrongdoing and that there was no pressing anxiety to conduct an enquiry against the two employees. The SAT disagreed and directed the NSE to initiate an enquiry and submit a report within six months. However, in the interim, it has barred SEBI or the NSE from taking any coercive action against these employees.

The appellate tribunal said since several interim orders have been passed by it, the co-location matter and whether the NSE gave preferential access to some entities requires further consideration. And so, it has given SEBI six weeks to respond to the NSE’s appeal. Thereafter, the exchange will get three weeks to respond to that. The case will come up for hearing on July 22.

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