When SEBI passed its order against the NSE on the co-location issue, it did seem like a tough order. The regulator ordered NSE to pay nearly Rs.700 crore as disgorged profits and also banned the NSE from capital market access for a period of 6 months. In addition, senior officials of the NSE as well as its two past CEOs, Ravi Narain and Chitra Ramakrishnan were also asked to disgorge part of their salary and also banned them from the capital markets for a fixed period. As of now the NSE has appealed against the SEBI order to SAT and the final order is still awaited. Investors in NSE, who hoped for an exit in the IPO, were not too keen on the NSE fighting the issue and rather preferred that NSE paid the penalty and went ahead with its business. Now the counter appeal against the SEBI order means that the NSE IPO is unlikely to happen in the very near future. Has SEBI been too strict with NSE and what were the reasons for being stringent in its order.
Why the problem is bigger than we care to accept?
NSE earns more than half of its regular revenues from the co-location business. It was in this business that SEBI had found serious lapses. A handful of stock brokers in India, in association with insiders at the exchange, had apparently managed to get preferential access to the exchange server giving them split second earlier access and help them to profit at the expense of other traders. This is something that forsakes the integrity of the market and to that extent SEBI is justified in this order. The quantum of the penalty can be debated but what cannot be denied is that it is a threat to the market integrity and there can be no two opinions about that.
Where does the situation stand now?
Currently, over 40% of NSE’s earnings from the co-location facility are being impounded under SEBI’s orders and placed in an escrow account since December 2016. That is a lot of money since collocation accounts for a bulk of NSE revenues. Now that the order has been challenged by NSE in the SAT, this situation will continue for at least four to six years, before a final judgement from the SAT and the Supreme Court is received. Then, too, it may only be a partial victory, since it is hard to believe any regulator will give it a clean chit, given that multiple reports have established widespread negligence on the part of the Exchange. Legally, SEBI does have a strong case and therefore any protests of NSE become more a matter of opinion and perception than of the core fault.
What happens as the NSE takes the matter to adjudication?
The NSE can pay up and move ahead. The fact that IDBI has sold out means that they do not see the IPO happening anytime soon. The NSE and SEBI are likely to engage a battery of top lawyer and the matter is unlikely to end any time soon. A better thing for the NSE to do would be to pay up and start preparing for its IPO after a period of 6 months. The fact that NSE has chosen to contest the order means that this issue could drag on for a few more years. Interestingly, the total penalty is less than the amount impounded till date by the SEBI in the escrow account and the exchange will be able to move on. The NSE is not the first exchange with such a problem because in the past, both the NASDAQ and New York Stock Exchange (NYSE) have had their problems but have managed to move on.
There is logic in SEBI being strict this time around
It is not just the exchange as an entity that is involved. Senior officials of NSE including advisors like Ajay Shah have played with public trust. SEBI has two orders on the Ajay Shah episode, where he and his sister-in-law, Sunita Thomas (Sunita is married to Suprabhat Lala who headed market operations at NSE), have been indicted along with a few others. The entire episode underlines how the big question is that if such relations existed then why were no questions of conflict of interest raised in the past? More so because the exchange is a first level regulator! The regulator had to intervene more meaningfully when it emanated that Chitra’s close confidante, Anand Subramaniam, was catapulted into the number two position at NSE without appropriate qualifications or appointment processes being followed. Also, there is a certain history to it. NSE was set up to cut the growing power and clout of the Bombay Stock Exchange (BSE) which was operating like a brokers’ club. The professionally run NSE, was supposed to be a shining contrast in online trading services.
It remains to be seen how this case evolves. But with both unlikely to let go, the battle could drag on for a long time.