NSE Co-location Scam: SEBI Orders Disgorgement of Profits from NSE and Salaries of former MDs, Ravi Narain and Chitra Ramkrishna
In five separate orders, the Securities and Exchange Board of India has slammed the National Stock Exchange (NSE), it’s two controversial, former managing directors Ravi Narain and Chitra Ramkrishna and a host of other entities including Professor Ajay Shah and his sister-in-law Sunita Thomas for what is referred to as the co-location scam. 
 
“NSE has committed a fraudulent and unfair trade practice as contemplated under the SEBI (PFUTP) Regulations. It is established beyond doubt that NSE has not exercised the requisite due diligence while putting in place the TBT architecture,” the regulator noted. 
 
Tick-by-Tick (TBT) is a data feed, which provides information regarding every change in the order book on the NSE.
 
The regulator has also asked the exchange to disgorge an amount of Rs 624.89 crore along with interest calculated at the rate of 12 per cent per annum to the Investor Protection and Education Fund (IPEF).
 
SEBI estimated that NSE earned a profit of Rs 624.89 crore during 2010-11 to 2013-14 from its co-location operation. Finding Narain guilty in the case, SEBI has asked him to disgorge 25% of the salary drawn for FY11 to FY13 to the IPEF. In case of Ramkrishna, she has been asked to disgorge a quarter of her salary drawn for FY14. She has also been prohibited from associating with a listed company or a market infrastructure institution for a period of five years.
 
The order is a huge move forward in a long drawn investigation that began when Moneylife published a letter by a whistleblower going by the name Ken Fong in June 2015.  https://www.moneylife.in/article/blowing-the-whistle-on-manipulation-in-nse/42337.html
 
The NSE initially reacted by filing a Rs100 crore defamation against us which was subsequently withdraw by the exchange which also paid up Rs 50 lakh as cost, ordered by Justice Gautam Patel of the Bombay High Court. https://www.moneylife.in/article/nse-withdraws-its-rs100-crore-defamation-suit-against-moneylife-pays-rs50-lakh-as-cost-and-penalty/51608.html
 
A long draw investigation that began in 2015 has finally culminated in the orders issued today. In the first order NSE was is directed to take necessary legal actions against Ajay Shah, Infotech Financial Services Pvt Ltd, Sunita Thomas and Krishna Dagli (Directors of Infotech Financial Services) for violating the provisions of the "Professional Service Agreement" signed with Infotech and for misusing the data made available to them by NSE. NSE has been asked to submit an action taken report in to SEBI, within three months.
 
It may be recalled that SEBI had conducted multiple forensic audits and investigations before issuing two huge show cause notices. 
 
NSE has been directed to review all the third party agreements having a data sharing component/provision therein signed by it from year 2009 onwards and take necessary legal actions against the parties with whom such agreements were signed wherever any actions of irregularity, breach of terms and conditions and other provisions of such agreements are observed. NSE has been asked to submit an action taken report as well within three months.
 
Among other directions, NSE has been directed to prepare a detailed documented policy for data usage and data sharing with external entities in a fair & transparent manner, with due provisions for processes to be followed and disclosures of conflict of interest.
 
Former managing director Ravi Narain and Chitra Ramkrishna, who were part of the founding team of the NSE and ran the exchange like a fief during each of their tenures, have been barred from holding any position in the management and/or in the Board of any Stock Exchange and/or Clearing Corporation or with any market intermediary or their related entity and/or with any company having its securities listed on any Stock Exchanges recognized by SEBI, for a period of three years.
 
In a second order related to “dark fiber” involving unregistered service provider, Sampark Entertainment, SEBI has said that since NSE is a recognised stock exchange and the leading market infrastructure institution, it occupies a pivotal role as a front line regulator. Therefore apart from reformatory steps under section 11, 11(4) and 11B of the SEBI Act, 1992 and Section 12A of the SCR Act, 1956, “considering the gravity of the allegations that have been established…, additional exemplary directives need to be issued could pose an effective deterrence and dis-incentive to the Noticee (NSE) to perpetrate such kind of violations in future so far as administration and governance of its Colo facility is concerned.”
 
SEBI has directed NSE to deposit a reasonable portion of revenue earned by NSE through its co-location facility during 8th May 2015 to 10th September 2015 to the Investor Protection and Education Fund (IEPF) of SEBI. This amounts to Rs.177.43 Crore.
 
Since NSE has allowed Sampark “to provide P2P connectivity without having proper licence, to a few stock brokers in a preferential manner while denying the same service to other stock brokers and the said illegitimate service continued for a period of four months, SEBI has asked for Rs62.58 crores to transferred to IPEF. Two co-location traders Way-2-Wealth and GKN Securities, were found to have “fraudulently availed of P2P connectivity with the help of an unauthorized Telecom Service Provider (Sampark) at the Colo facility of NSE… in a manner to gain undue advantage in terms of low latency and high bandwidth in data transmission as compared to other stock brokers in securities market.”
 
Hence, SEBI has asked them to deposit an amount equivalent to income from trading in their proprietary trading accounts during the period Sampark was permitted to provide P2P connectivity to them, to the IPEF. This comes to Rs15.34 crores for W2Wand Rs4.9 crore for GKN.
 
NSE was directed to deposit Rs62.58 crore as determined along with interest calculated at the rate of 12% p.a. from September 11, 2015 till the actual date of payment, to IPEF of SEBI within 45 days from the date of this order. NSE was also get its network architecture and infrastructure in its co-location facility and its linkages to the trading infrastructure audited by an independent auditor. NSE was also directed to submit to SEBI, a report duly certified by its MD and CEO and with the comments of its Governing Board certifying that the network architecture and connectivity at its Colo facility and its linkages to the trading infrastructure are in conformity with SEBI’s regulatory norms to provide fair, equitable, transparent and non-discriminatory treatment to all the market intermediaries registered with the Noticee No. 1.
 
NSE has been directed not to introduce any new derivative product for the next six months from the date of this order.
 
Chitra Ramkrishna was directed not to hold any position with any Stock Exchange, Clearing Corporation, Depository or any market intermediary registered with SEBI, or any company listed in any of the stock exchanges for a period of 3 years. Other NSE employees, Subramanian Anand, who was inducted into NSE under very controversial circumstances, and Ravi Varanasi, Nagendra Kumar, Deviprasad Singh all got similar orders.
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    COMMENTS

    nadeem

    1 year ago

    Kudos to Moneylife but there should have been a stronger punishment !

    Suketu Shah

    1 year ago

    The only way to stop such nuisance cases if the losing party must pay the winning party 100 crores ie Chitra and Ravi shd pay Rs 100 crores to moneylife from their pocket or else such nuisance wl go on and on.

    Bapoo Malcolm

    1 year ago

    Next to me is an advocate. She was partially aware of the matter. When she was told the whole story, her first reaction was, "Why is not criminal action taken against the duo?" I agree with her as it is a matter for the Economic Offences wing (EOW) to investigate. It's a fraud on each and every investor. The SEBI may impose fines but the sessions court is where the true action lies.

    She also asked where the Lodha "loss" of Rs. 100 crores lay. Fines and court fees must be approximated to the demands made by the plaintiff. That will reduce the burden on the courts, too.

    Bapoo Malcolm

    1 year ago

    The money has been paid. Unfortunately, it has come through the NSE's coffers, not from personal funds. I believe, from a call to me, that they wanted to write it off as CSR or some such fiddle; donation or something. The 'disgorgement' is good, but it relates to the malhandling of the colocation accounts. Not to the bogus case to shut Moneylife up. That was the court fine.

    There is a definite case for personal action, against the directors, for malicious prosecution. Recently Lodha sued an activist for Rs. 100 crores. It has become a standard figure, fancy, a billion rupees, to intimidate people, in spite of the Supreme Court laying down guidelines, post NSE, on the quantum asked for. The plaintiff pays only Rs. 3 lakhs as filing fees. He pays a lot more for the litigation itself, but that is not the crux of the problem. He considers it a throw of the dice. "If I get something, well and good". Otherwise what is Rs. 10 or 20 lakhs to the big guys? The defendants suffer a horrifying time. But this is a democracy. And thank God for the judiciary. It's the last bulwark for freedom.

    Harish

    1 year ago

    The persons who ordered the defamation suit against Moneylife and Founders should be made to bear the Rs.50 lakhs costs/damages awarded.

    ramchandran vishwanathan

    1 year ago

    This order is a complete sham. The accused would have easily pocketed to the tune of 50,000 cr . None of them have been sent to jail. Only a paltry sum is being proposed as recovery . We seem to be going the US way in handling financial frauds. We must come together & appeal against this order. Really sad day for investors

    Mohan Krishnan

    1 year ago

    Slap in the wrist

    Kalpesh K Avasia

    1 year ago

    Superlative work Sucheta. You have nailed it again. Admire your courage and resilience.

    Bapoo Malcolm

    1 year ago

    What about our friend Guptaji? Have I got the name right? The guy who was sitting in the building with his server.

    Bapoo Malcolm

    1 year ago

    To gorge is to fill your belly by overstuffing it. Comes a time to throw it out. Truth shall prevail. Congratulations.

    murugu selvan

    1 year ago

    wish someone or all accused spend some time in jail. These guys have plenty of money. Evil buggers.

    Disclose exposure to IL&FS, RBI tells banks
    The Reserve Bank of India (RBI) on Wednesday directed banks and financial institutions to disclose their outstanding to IL&FS and its group companies including provisioning required as per income recognition and asset classification (IRAC) and actual provisioning made against NPAs.
     
    The circular comes after National Company Law Appellate Tribunal's (NCLAT) order dated February 25 said "no financial institution will declare the accounts of 'Infrastructure Leasing & Financial Services Limited' or its entities as 'NPA' without prior permission of this Appellate Tribunal". The RBI, however, has since then contested the view and said that banks should classify the accounts of IL&FS and its companies as NPAs.
     
    The central bank also asked the banks to declare the "position of provisions which are required to be made as per IRAC norms" and the "position of provisions actually held".
     
    Earlier this month, during a hearing in the NCLAT, RBI's counsel Gopal Jain said that true reflection in the books of the banks is important for fair accounting because it has early warning signals.
     
    It is the obligations of the banks to mark any loan as NPA after a default of 90 days, and they cannot be relieved from doing that, said the RBI, adding that it is a process which every bank has to follow.
     
    Disclaimer: Information, facts or opinions expressed in this news article are presented as sourced from IANS and do not reflect views of Moneylife and hence Moneylife is not responsible or liable for the same. As a source and news provider, IANS is responsible for accuracy, completeness, suitability and validity of any information in this article.
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    Corporate Governance Practices Missing from SEBI’s Proposed Structure of Differential Voting Rights
    The basic principle behind the issuance of shares with differential voting rights, commonly known as ‘DVRs’ in India and dual class shares or ‘DCS’ in the international context, is to enable the companies to raise capital without dilution of control and decision-making power in company. 
     
    In promoter or founder-led companies where promoters or founders are instrumental in the success of the company, such structures enable them to retain decision-making powers and rights vis-a-vis other shareholders either through retaining shares with superior voting rights or issuance of shares with lower or fractional voting rights to public investors.
     
    The concept was first recognised under the Companies (Amendment) Act, 2000 followed by similar provisions adopted by the Companies Act, 2013. However, the current practical scenario depicts a different picture, as the provisions of SEBI (Listing Obligations and Disclosure Requirements) Regulations, 2015 do not permit DVRs with higher or superior voting rights. 
     
    Subject to certain conditions, DVR shares with lower voting rights are permitted. Till date, only five listed companies have used this structure in India. Strict pre-condition and corporate governance norms, unavailability of investors due to lack of awareness are some grounds of company’s reluctance from adopting this idea.
     
    SEBI’s Consultation Paper to restructure the issuance of DVRs
     
    On 20 March 2019, SEBI came out with a consultation paper on issuance of shares with differential voting rights. 
     
    The paper provides that the matter of issuance of shares with DVRs was deliberated in the Primary Market Advisory Committee of SEBI (Committee) and a group (DVR Group) was constituted amongst the Committee members to do an in-depth study of the proposal of introduction of shares with DVRs in India.
     
    The consultation paper addresses the norms for issuance of shares with DVRs under two categories – 
     
    a) issuance by companies whose equity shares are already listed on stock exchanges;
    b) companies with equity shares not hitherto listed but proposed to be offered to the public. 
     
    The basic objective behind allowing shares with differential voting rights is to raise equity without dilution of promoter control or to allow the promoters and founders to maintain control as they would hold shares with superior voting rights.  
     
    Therefore, considering SEBI’s proposed structure, there will be four categories of companies, which can issue DVRs:
     
    1) Equity listed companies – as per this consultation paper;
     
    2) Unlisted companies, which are intending to get their equity listed—as per this consultation paper;
     
    3) Unlisted companies, not intending to list their equity shares—as per Section 43 of the Companies Act, 2013 (Act) read with Rule 4 of the Companies (Share Capital and Debenture) Rules, 2014;
     
    4) Private companies—exempted from applicability Section 43 of the Act, if either its memorandum or articles of association so provides—vide notification number GSR 464(E) dated 5th June 2015.
     
    Need for DVRs in India
     
    In order to maintain the current growth phase in India, it is necessary for companies to raise capital to sustain this growth. Companies with high leverage or asset light models, may prefer equity over debt capital. Raising DVRs will reduce the dilution of founder and promoter stake, which may otherwise be the case.
     
    The protection of founder and promoter’s stake or control is especially relevant for new technology entities, which have asset light models, with little or no need for debt financing. However, these entities generally raise funds through equity, which dilutes the promoter’s and founder’s stake, thereby diluting control. Considering the issue, the consultation paper states that retaining founder’s interest and control in the business is of great value to all shareholders and this can be achieved by:
     
    c) Issue of shares with superior voting rights (SR) to founders and/or
    d) Issue of shares with lower or fractional voting rights (FR) to raise funds from private/ public investors.
     
    International Scenario
     
    The global market has witnessed a mixed response to the concept of DVRs, while many countries have permitted the listing of companies with dual class shares or DCS (internationally used term for DVRs), some countries like UK, Australia, Spain, Germany and China do not permit the issuers with DCS structure for listing. 
     
    Singapore and Hong Kong have recently permitted DCS structures with detailed checks and balances. Considering the international scenario, the consultation paper from SEBI has provided a detailed comparison of the issuance and listing of DCS structure in internal jurisdictions, the summary of which is presented below:
     
    • 700 public companies in the US have DCS structures, predominant listed ones being Google, Facebook, Snapchat, Nike and Alibaba. There is ongoing debate in the SEC about the continuation of DCS

     

    • Hong Kong and Singapore recently allowed DCS to encourage more new technology firms to list.

     

    • In the UK, DCS structures were used in the 1960s to protect corporations from hostile takeovers or for the Queen to have ‘golden share’, before institutional investors expressed strong opposition to such structures. DSC is presently not allowed in the UK. 

     

    • Over the past decade, a number of European governments have implemented or debated the use of different voting rights.

     

    • US, Canada, HK, Singapore, Denmark, Spain, Sweden and Italy allow dual-class shares. Germany, Spain, China, Australia disallow listing of shares of companies with DCS structures.
     
    Recommendations of the DVR Group
     
    Pre-conditions
     
    A company would be entitled to issue DVR Shares, subject to following pre-conditions:
     
    • issue of DVR shares must have been be authorised in the articles of association of the company; and
    • the issue of DVR Shares should be authorized by a special resolution passed at a general meeting of the shareholders.
     
    • for companies already listed, by way of e-voting as per Companies Act, 2013
    • The notice should mention specific matters, including but not limited to, size of issuance, ratio of the difference in the voting rights, rights as to differential dividends, if any, sunset clause, coattail provisions, etc., as made applicable by SEBI regulations to be notified in this regard.
     
    Requirements for both the categories
     
    Category I: Companies whose equity shares are already listed—issuance of FR shares;
    Category II: Companies whose equity shares are proposed to be listed—issuance of SR shares.
     
    ”Coattail”  Provisions for Issuance of SR Shares 
     
    Post-IPO, the SR shares shall be treated as ordinary equity shares in terms of voting rights (i.e. one SR share-one vote) in the following circumstances:
     
    a) provisions relating to appointment or removal of independent directors and/or auditor;
     
    b) in case there is a change in control of the company;
     
    c) any contract or agreement of the company with any person holding the SR Shares, in excess of the materiality threshold prescribed under Regulation 23 of the SEBI (Listing Obligations and Disclosure Requirement) Regulations, 2015;
     
    d) voluntary winding up of the company;
     
    e) any material changes in the company’s AoA or MoA, including but not limited to, undertaking variation in the voting rights of the shareholders, changing the principal objects of the company, granting special rights in favour of a particular shareholder or shareholder groups and such other items as may be prescribed by the SEBI;
     
    f) initiation of a voluntary resolution plan under the Insolvency and Bankruptcy Code, 2016;
     
    g) extension of the validity of the SR shares after completion of five years from date of listing of ordinary equity shares; and
     
    h) any other provisions notified by SEBI in this regard from time to time.
     
    Conclusion
     
    The major benefits of DVRs structure highlighted in the DVR Group Report are as follows:
     
    1. DVRs promote fund raising without diluting control;
     
    2. In a promoter led companies, DVR structure will enable such promoters to retain control, the decision-making powers and other rights in the company;
     
    3. DVRs structure acts as defense mechanism for hostile takeover.
     
    The recommendations by DVR group seems to extend a hand of opportunity to listed companies and those companies including, newly incorporated companies, who intend to issue DVRs but do not have a consistent track record of distributable profits as stated in the existing ICDR regulations for three years. 
     
    The sunset clause in case of SR shares shall keep a check on the tenure of the DVRs, however, the provisions requiring companies issuing the DVRs to observe better corporate governance practices is missing in the proposed structure of DVRs. Further, there might be instances where the interest of minority shareholders could be adversely affected by the holder of SR shares, therefore, certain checks and balances to prevent the misuse of the instruments should be imposed by SEBI to protect the interest of the shareholders as well as the genuine issuers. 
     
    (Both Nikita Snehil and Shaifali Sharma work in the corporate law division at Vinod Kothari & Co)
     
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