NSE had put aside Rs 2,000 crore to deal with the co-location fallout

Sebi directed the National Stock Exchange to disgorge Rs 625 crore, along with interest at 12 per cent per annum since 2014, for lapses at its co-location facility

The Securities and Exchange Board of India (Sebi) has asked the country’s largest stock exchange by traded volume, the National Stock Exchange (NSE), to pay over Rs 1,000 crore pertaining to a scandal that allowed some brokers to make money through gaining preferential access to the bourse’s servers.

A look at the NSE’s disclosures shows it had set aside Rs 2,000 crore from its revenues, pending directions from the stock market regulator.

“Sebi has directed that pending completion of the investigation being to Sebi’s satisfaction, all revenues emanating from the co-location facility, including the transaction charges on trades executed through the colocation facility with effect from September 2016, be transferred to a separate bank account. Accordingly, as of December 31, 2018, an amount of Rs 1,994.77 crore was transferred to a separate bank account and the same has been invested as per the company’s investment policy, as approved by the Board of Directors,” said a note with the December 2018 financial statement.

However, the amount is not in the nature of a provision. This means any that pay-out will be reflected in the profit and loss, or balance sheet, in subsequent periods.

“The management is of the view that pending conclusion of the matter with Sebi, a reliable estimate of the obligation with respect to this matter cannot be presently made, and therefore no provision/adjustment to this effect has been made in financial results,” the December 2018 financials stated.

Notes to the financial statements also mentioned that the investment has been shown as ‘restricted’.

It was placed in the restricted category given investigations into the charges were ongoing at the time.

The FY18 balance sheet shows investments of Rs 3,403.25 crore under non-current assets. There are also investments of Rs 2,873.89 crore under current assets. 

(Current assets are those held for one financial year, while non-current assets are held for a longer period.)

A letter by a whistleblower had detailed the issues relating to the bourse’s co-location servers. These servers are located close to the exchange and allow brokers to shave fractions of a second off the time it requires to execute a trade.

Some brokers had unfair access to these servers as compared to others who were also availing the service. This allowed them to make money at the cost of other market participants.

The regulator asked the exchange to pay Rs 687.47 crore through multiple orders, on Tuesday.

One order required the NSE to disgorge “an amount of Rs 624.89 crore, along with interest calculated at the rate of 12 per cent per annum from April 1, 2014   onwards, to the Investor Protection and Education Fund (IPEF).”

A second order required an additional pay-out of little over Rs 60 crore.

“Noticee no. 1 (NSE) is directed to deposit a sum of Rs 62.58 crore... along with interest calculated at the rate of 12% p.a. from September 11, 2015 till the actual date of payment, to the IPEF of Sebi,” it said.  

The amount increases to over Rs 1,000 crore after taking interest into account. This works out to over two-thirds of its last available annual profit. It had a profit of Rs 1,461.47 crore for the financial year ending March 2018 (FY18). Profits stood at Rs 1,343.32 crore for the first nine months of FY19.

A spokesperson did not immediately respond to an email seeking comment.