[The following update has been brought to you by our Editor, Subhra Tripathy, in light of the complexity of the matter.]
The Securities and Exchange Board of India (SEBI), vide its order dated April 30, 2019, has directed the National Stock Exchange (NSE) to pay INR 624.89 crore (plus interest as applicable) for violation of the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations 2012 (SECC Regulations). SEBI also barred the NSE from accessing the securities market for six months.
The case pertains to complaints received by SEBI in 2015, in relation to NSE’s co-locations facilities. It was alleged in these complaints that due to the dissemination protocol of the tick-by-tick (TBT) data feed, those trading members who connected first to NSE’s servers were able to access trading data faster. One trading member, namely OPG Securities, used the NSE system to its advantage, with help from NSE and allied staff members.
In its order, SEBI has dealt with the requirement of the stock exchange to ensure equal, unrestricted, transparent and fair access to all persons. SEBI has stated that while there was a lack of sufficient evidence to conclude that NSE has committed any fraudulent or unfair trade practice, it had been established beyond doubt that the stock exchange did not exercise requisite due diligence while putting in place tick-by-tick architecture. This amounted to a violation of the SECC Regulations that provide for equal, fair and transparent access to all persons.
Hence, SEBI has passed inter alia the following orders against NSE:
NSE is required to disgorge INR 624.89 crore with 12% interest p.a. from April 2014 towards SEBI’s Investor Protection and Education Fund. This would amount to a total of about INR 1000 crore, which is required to be paid within forty-five days.
NSE is prohibited from accessing the securities market directly or indirectly for a period of six months. This is likely to impact NSE’s plans for an initial public offer in the near future.
SEBI also ordered former NSE chief executives Ravi Narain and Chitra Ramkrishna to disgorge 25% of the salaries drawn in the years 2011-13 and 2014 respectively and prohibited them from associating with any listed company or stock exchange for five years for their alleged role in the matter.
Ravi Varanasi, head of business development, and Suprabhat Lala, assistant vice president, have been barred from holding any position with any stock exchange for three and two years, respectively.
NSE is required to review all the third party agreements, containing any data sharing provisions, signed by it from 2009 onwards and take necessary legal actions in case of any irregularity or breach of terms and conditions.
NSE is required to prepare a detailed documented policy with respected to data usage and data sharing with external entities in a fair & transparent manner.
SEBI passed five separate orders on the co-location case – including against the (i) NSE, (ii) OPG Securities, (iii) Ajay Shah, (iv) Sampark Infotainment, and (v) NSE’s corporate governance.
With respect to OPG Securities, SEBI alleged that the stock-broker had gained an advantage over other members by consistently connecting to the tick-by-tick servers first. OPG Securities utilized information from an employee of Omnesys Technologies, wherein NSE holds a substantial shareholding, as well as collaboration from NSE staff to switch on to the fastest servers or access the least crowded servers. NSE failed to take any action to prevent this despite having knowledge of the situation.
Consequently, SEBI had barred OPG Securities and its directors, Sanjay Gupta, Sangeeta Gupta and Om Prakash Gupta, from accessing the securities market for five years.
The Securities Appellate Tribunal (SAT) has partially stayed SEBI’s order barring three brokers, including OPG Securities and others, from accessing the securities market. Earlier, SEBI had allowed these brokerages to close their open positions in the futures and options and currency derivatives segments within 2 months. Further, the SAT has also stayed the SEBI orders that barred certain NSE executives, including Ravi Varanasi and others, from holding any position with a market player for two years.
SEBI had found that NSE had entered into data sharing arrangements with related parties (Infotech Financial Services Pvt. Ltd., Ajay Shah and others). However, the agreements were prone to conflicts of interest and misuse of data. Consequently, SEBI had directed NSE to initiate legal proceedings against inter alia Ajay Shah and Infotech. Ajay Shah was also barred from holding a management position or associating with any exchange, clearing corporation and brokerage firms for two years. Infotech was prohibited from providing services to any SEBI-registered firm for a period of two years.
The SAT has stayed SEBI’s orders against Ajay Shah and Infotech. The SAT observed that the matter involving Ajay Shah and others dated back to 2009 and in ten years there were no complaints against them and, therefore, the balance of convenience was in their favour.