NSE Co-Location Case: SEBI’s Rs 625 Crore Disgorgement Order Set Aside


Sebi had instructed NSE to release profits in excess of Rs 687 crore. (File)

New Delhi:

In a relief to NSE, the Securities Appellate Tribunal on Monday overturned Sebi’s order which had resulted in payout of profits worth Rs 625 core in the co-location case but ordered the exchange to pay Rs 100 crore to the regulator over the lack due diligence on the case.

Sebi had directed the National Stock Exchange (NSE) in April 2019 to issue winnings worth more than Rs 687 crore comprising an initial amount of Rs 625 crore along with 12 per cent annual interest in the matter.

The regulator also imposed a six-month ban on the stock exchange from launching new derivative products, barring certain current and former executives from trading and instituting strict measures against stockbrokers. Further, Sebi Ravi Narain and Chitra Ramkrishna – who had served as MD and CEO of the exchange – had ordered the release of 25 percent of the respective salaries received during a specified period.

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The case relates to alleged counterfeiting of high-frequency trading offered through NSE’s colocation facility, with some entities allegedly given preferential access to high-frequency trading.

NSE colocation facility allows stock brokers to rent specific racks and co-locate their servers and systems within the exchange building. The primary goal of NSE co-location services is to reduce latency for connectivity to the exchange’s trading systems for Direct Market Access (DMA), algo trading, and Smart Order Routing (SOR).

While Sebi’s return order was overruled, SAT said NSE had not committed any violations of SECC regulations. These relate to exchanges and clearing houses.

SAT noted that there was a lack of due diligence on the part of NSE in assigning IPs to different ports and that there was an unfair distribution of IPs. In addition, certain trading members could not monitor the frequent connections to the secondary server.

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According to the appeals court, NSE was not guilty of unethical acts or unjustly enriched itself. It has not adhered to its own standards and guidelines and has not followed the circular.

“The instruction for disgorgement was unfounded, but the requesting NSE cannot go unpunished and must pay a price for the lack of due diligence due to human failure to comply with the letter and spirit of the circular,” SAT said in its 232-page order .

Accordingly, the tribunal ordered NSE to deposit an amount of Rs 100 crore into the Investor Protection and Education Fund established by the Securities and Exchange Board of India (Sebi).

With regard to former NSE officials, the appeals court overturned Sebi’s instruction requesting the release of 25 percent of Narain and Ramkrishna’s salary, citing that there was no fraud, unfair business practice or collusion by them with a trade member.

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However, SAT said the two officials cannot abdicate their responsibility for the shortcomings in oversight in certain areas.

Further, the directive prohibiting Narain and Ramkrishna from associating with any listed company or market infrastructure institution for a period of five years has been overruled and replaced by the period they undergo.

With regard to OPG Securities, SAT has confirmed the violations committed by Sebi. However, it has overruled Sebi’s direction who asked OPG and its directors to spend Rs 15.57 crore along with interest. In addition, it has asked Sebi to decide again within four months on the amount of the provision.

It also asked Sebi to consider the allegations of complicity and conspiracy of OPG and its directors with employees/officers of NSE.

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