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.
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.
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.
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.