All good things must come to an end; and this applies to governments, markets and exchanges alike. Recent global developments have underscored this truth. India’s stock market, which has been the big shining spot for the Narendra Modi-led government, finally cracked under the impact of a stock market crash across Europe, US and Asia. This was after the market had ignored the loss of Parliamentary majority and a Union Budget that pleased no one.
On 5th August, the benchmark NIFTY plummeted 3.3% or 700 points after a ferocious bull run that began in April 2020 and has barely seen a couple of blips. Alongside direct equity investments, Indians have been injecting around Rs20,000 crore per month into mutual funds (MFs), attracting an increase in corporate listings. One media report called it the 'golden period' for initial public offerings (IPOs), with 35 companies raising Rs32,000 crore in the first half of 2024 alone, with many recording substantial oversubscriptions.
This market exuberance was in stark contrast to the national mood. Public anger and discontent are mounting due to crumbling infrastructure, potholed roads, poorly planned modernisation and a relentless rise in taxes, tolls and cess. The middle class is frustrated; the youth are worried about unemployment; and students are distraught over corruption and manipulation in entrance exams for engineering, education and elite public services. Despite these issues, the markets remained buoyant until last week. But what if this change in public sentiment begins to affect market confidence in a prolonged manner?
Ironically, should this happen the National Stock Exchange (NSE), which has emerged as the world’s largest derivatives exchange (in terms of contracts traded), could be badly affected in terms of profitability and plans to list.
For the past three decades, the near-monopoly NSE has been an anomaly. In 1992, it began as a professionally run exchange that kept out brokers and went on to transform, computerise and modernise India’s capital market. It then acquired absurd dominance and absolute power which culminated in 2015 when I exposed the co-location (Colo) scam, which revealed how select brokers benefited from privileged access to high frequency trading. This story is detailed in my book Absolute Power, co-authored with Debashis Basu, published in 2021(Absolute Power: Inside Story of the National Stock Exchange's Amazing Success, Leading to Hubris, Regulatory Capture and Algo Scam).
For nearly a decade since then, the Securities and Exchange Board of India's (SEBI’s) absurdly slow, piecemeal investigation dragged on until February 2023 (Read: Exclusive: 8 Years Later, SEBI Serves Yet Another Notice in Connection with Colo Scam and TAP Architecture). NSE itself contributed to this mess. Its board of directors and managing director (MD) Vikram Limaye, who was brought in to clean up the mess, challenged every SEBI order. While some regulatory orders were partially overturned, this strategy resulted in delayed NSE’s listing and damaged its regulatory clout and kept the issue festering.
Illegal Grey Market
For eight years now, we've seen illogical and hypocritical supervision of the exchange by SEBI. Although NSE filed a draft red herring prospectus (DRHP) in December 2016, it has not been allowed to list due to ongoing investigations. Meanwhile, its shares are actively traded in the grey market, promoted through WhatsApp and Telegram groups and endorsed by major brokerage firms. There are websites that track NSE’s shares with daily price charts and buying options, exactly like formally listed companies (https://stockify.net.in/companies/national-stock-exchange-ltd-nse-unlisted-shares/ or https://unlistedzone.com/ ).
SEBI's lack of oversight and action against this grey market activity in India’s largest market infrastructure institution and first-line regulator is highly questionable. How can one trust SEBI's supervision of listed companies and its stringent disclosure rules and compliance rules, if it ignores grey market trading in NSE? Remember, the finance ministry, ministry of corporate affairs (MCA), and Reserve Bank of India are all represented on SEBI's board. Are they all oblivious of this grey market activity?
Glimmer of Hope
In January this year, under another new MD, Ashish Chauhan, NSE, with approval of its board of directors, has written to SEBI seeking an ‘amicable’ closure to all pending litigation in connection with the Colo scandal of 2015, either by settlement or payment of penalties. I understand that some institutional investors of NSE have asked the exchange to settle the Colo issue and pave the way for listing its shares under threat of legal action.
Until February this year, media reports said that SEBI had rejected NSE’s settlement requests. However, I understand that the regulator is now working on reasonable penalties and settlements, including some non-monetary penalties (like pro bono work or mandatory study courses under regulatory supervision) for NSE’s past and present employees. These will have to be approved by the NSE board, since the Exchange plans to cover the payments on behalf of employees.
In some residual cases, fines imposed by SEBI may be paid without contest and a few appeals are already in the process of being withdrawn. A start was made in July this year when NSE sought to withdraw an appeal before the securities appellate tribunal (SAT) in a case involving the sharing of illegal data by favoured academic consultants with their relatives. NSE will pay the fine imposed by the regulator in that case. Whether SEBI withdraws its appeal pending before the Supreme Court remains to be seen, especially since NSE will end up paying substantial fines and settlement amounts as part of the closure process. If SEBI continues to dither over a decision, it is time the finance ministry steps in and closes this long-drawn investigation which has repeatedly embarrassed the regulator for issuing weak and contradictory orders and repeatedly asking NSE to investigate itself by appointing forensic experts and outside consultants. Meanwhile, both NSE and SEBI have spent substantial sums on legal fees over the past decade on Colo cases alone.
The Back-story
India’s investor population, now exceeding nine million, nearly quadrupled after the COVID lock-down of March 2020. As many as 9 out of 10 investors in the market today have no clue about NSE’s illustrious history, the Colo scam or the hubris of an MD who ran the Exchange like a private fief and told investigators that her work was guided by a ‘Himalayan guru’.
Newbie investors only see it an immensely profitable and near-monopoly institution that would be coveted in any portfolio. Meanwhile, nothing remains constant. NSE’s shares, which have traded between Rs3,400 and Rs 3,700 in the grey market and had briefly soared above Rs5,000+, are already subdued. Any shift in market sentiment will affect its valuation for institutional and retail investors who have been buying the shares for over 15 years and waited patiently for listing. SEBI’s proposals on index derivatives, if implemented, could also affect NSE’s profit by reducing the froth in this segment (Read: SEBI Suggests Changes in Index Derivative Framework To Reduce Speculation, Recommends Fewer Weekly Expiries, Increase in Contract Size by 3-4 Times).
A responsible government and regulator would do well to conclude their unending investigation/litigation and facilitate NSE’s listing (to ensure greater transparency and scrutiny by investors) and shutdown grey market trading which is a blot on SEBI’s own reputation. An NSE IPO and its high valuation will also absorb some of the money that is chasing listed stocks at absurd valuations.
If newcomers to shraremarket do not know the history of colo scam then they should study it. You can't ignore the history of stock mareket. There is ecvery likelihooid that colo scam or equivalent may happen again any time. Therefore all small/big, new/old investors should understand and despise it. transparency is a fancy word and joke with no meaning in India.
One is always free to jump to conclusions ... 1) we have documented the history of the exchange - especially the modernisation part AND the colo scam in our book. We have NOTHING to gain by encouraging ignorance or burying the colo scam 2) NOBODY is condoning the colo scam... if you bothered to read all our articles on it -- it is meandering all over the place, the wrong people have been targetted and it is nowhere near conclusion. If you think that like the 1992 Securities scam (where the special court and hearings continue at the Bombay high court after 32 years) this should go on for another 20 years or maybe 50 years -- then I am sorry, we should indeed agree to disagree!
I disagree with the contents of this article. Madam you are trying to condone the Co-Loc scam by NSE. all efforts should be put into to book the culprints in this case. We all should suport SEBI in this case.
NSE was set up to set new standards in stock trading and bring in transparency. Who would have thought that its shares and own shareholders would end up trading in opaque grey markets !
SEBI/MCA/FINMIN not stopping grey market trades suggests it is legitimate. Going forward other Limited companies too need not bother to jump the hoops set up by SEBI to get listed. In this digital age this is very feasible to set up such a market for companies preferring to get the benefit of a liquid market for their stock without the shackles of listing agreement etc. In fact there is already a large market for formerly listed but now unlisted companies. The only missing link is the market maker for providing 2 way quotes on an ongoing basis.
As it is the large listed firms do keep a close watch on the large block holders and arrange for buyers for their large institutional investors - sort of grey market for the large blocks validated later by putting those trades through preferred slots in the exchanges. The NSE listing saga is now lifting the veil over the functioning of SEBI !
Recently a listed firm Maithan Alloys has been reporting about its acquisition of NSE Ltd almost daily on the NSE. Wonder whther this is needed for acquiring shares for investment of other unlisted companies too.
For all the pretensions of sophistication and claims of a better understanding of the workings of free market institutions the SEBI officials with a fig leaf of past tenure as leaders in private organisations, are no better than the beauracrats of Albania.
I may mention here that I do not hold any shares or interest in the shares of NSE.
I'm all for free markets minus regulations. Let the markets punish errant players and decide what's optimal. This might be a bit "too libertarian" but that's how things should be. The way I see it, SEBI is finished and lost every shred of credibility. SEBI's downfall began in Bhave's tenure, and it had plenty of time to course correct its own toxic culture. NSE is no different from SEBI to be frank. Both are equally bad. The markets need a sucker every once in a while.
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This means access to other articles (outside the subscription period) are not included.
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SEBI/MCA/FINMIN not stopping grey market trades suggests it is legitimate. Going forward other Limited companies too need not bother to jump the hoops set up by SEBI to get listed. In this digital age this is very feasible to set up such a market for companies preferring to get the benefit of a liquid market for their stock without the shackles of listing agreement etc. In fact there is already a large market for formerly listed but now unlisted companies. The only missing link is the market maker for providing 2 way quotes on an ongoing basis.
As it is the large listed firms do keep a close watch on the large block holders and arrange for buyers for their large institutional investors - sort of grey market for the large blocks validated later by putting those trades through preferred slots in the exchanges. The NSE listing saga is now lifting the veil over the functioning of SEBI !
Recently a listed firm Maithan Alloys has been reporting about its acquisition of NSE Ltd almost daily on the NSE. Wonder whther this is needed for acquiring shares for investment of other unlisted companies too.
For all the pretensions of sophistication and claims of a better understanding of the workings of free market institutions the SEBI officials with a fig leaf of past tenure as leaders in private organisations, are no better than the beauracrats of Albania.
I may mention here that I do not hold any shares or interest in the shares of NSE.