In respite for NSE, SAT sets aside Sebi’s co-location ruling

The tribunal also overturned the regulator’s orders against NSE’s former top executives, Chitra Ramkrishna and Ravi Narain, while partially upholding Sebi’s order against OPG Securities.

SAT directed NSE to pay ₹100 crore instead toward Sebi’s investor protection and education fund for its lapses pertaining to the alleged co-location facility scam where certain brokers received preferential access to its secondary server at the expense of other trading members.

“Even though NSE has not indulged in any unethical act or has unjustly enriched itself, the direction to disgorge, in our opinion, cannot be sustained,” SAT held. “Directions given by the Sebi’s whole time member prohibiting NSE from accessing the securities market, directly or indirectly, for a period of six months and, further, directing NSE to carry out system audit at frequent intervals after a thorough appraisal of the technological changes introduced from time to time is affirmed.”

The SAT order was particularly critical of the regulator’s conduct.

“We find that Sebi had adopted a slow approach and, in fact, was placing a protective cover over NSE’s alleged misdeeds. It is only when questions were placed on the floor of Parliament that Sebi woke up and instituted an investigation. Considering the gravity of the alleged charges, Sebi should have conducted an investigation/enquiry instead of delegating it to NSE to conduct an investigation. It is strange, and it does not stand to reason as to how Sebi directed NSE to conduct an investigation against itself. It is clear that a casual approach was adopted,” a 235-page order by the tribunal said.

It also observed that when serious allegations were made against a first-level regulator—the NSE—Sebi should have been proactive and conducted the investigation seriously.

Co-location allows brokers to place their servers on exchange premises for a fee. This enables them to receive price data feeds fractions of a second before other participants. However, the Sebi order contended that certain brokers were given preferential access to price feeds on the NSE’s co-location facilities to the detriment of other brokers on the same premises.

The co-location issue surfaced in 2015 following three written whistleblower complaints to Sebi, which alleged that some traders got preferential access to NSE’s co-location facility. Sebi thereafter began a probe into the whistleblower’s allegations.

On Ramkrishna and Narain allegedly benefiting by allowing certain brokers unfair access to the exchange’s server, the SAT order said, “…there is no finding to the fact that Mr. Ravi Narain or Ms. Chitra Ramkrishna have made profit or wrongful gain which is a prerequisite for issuance of a direction under Sections 11 and 11B for 190 disgorgement. …we are of the opinion that no direction for disgorgement can be made, especially when there is no finding of fraud, unfair trade practice or collusion with any TM (trading member).”

The market regulator, in its 2019 order, asked Ramkrishna to disgorge 25% of her salary for 2013-14 and former Narain to disgorge 25% of the remuneration for 2010-11 and 2012-13.

In the matter of OPG Securities, the Sebi direction for disgorgement of ₹15.75 crore, along with interest of 12% each per annum, from April 2014, was set aside by the tribunal on Monday. The quantum of disgorgement is to be considered afresh by Sebi. The securities tribunal, however, upheld the violations related to the crowding-out of other market participants against OPG.