NSE, ex-chiefs Ramkrishna, Narain get SAT relief in colocation case

Tribunal sets aside Rs 625-cr disgorgement order against the bourse, finds no 'unethical act'

The Securities Appellate Tribunal (SAT) on Monday set aside the market regulator’s disgorgement orders against the National Stock Exchange (NSE) and its former top executives Chitra Ramkrishna and Ravi Narain in the colocation case. The tribunal noted that the NSE had not indulged in any unethical act or unjustly enriched itself.
 

The Securities and Exchange Board of India (Sebi), in an order issued in April 2019, had directed the NSE to disgorge Rs 625 crore along with an annual interest of 12 per cent, to be calculated from April 2014, for alleged violations of the Stock. Exchanges and Clearing Corporation (SECC) Regulations due to lapses at its colocation facility.

The SAT set aside this penalty and, instead, directed the NSE to deposit Rs 100 crore for lack of due diligence in following its own norms and circulars. This will be adjusted against the amount already paid by the NSE, and Sebi will have to refund the excess amount to the exchange within six weeks. The tribunal also observed that there had been no finding that Ramkrishna or Narain, former MD & CEOs of the NSE, had made profits or wrongful gains.

The SAT Bench presided over by Justice Tarun Agarwala also substituted the debarment of Ramkrishna and Narain from associating with any listed company or market infrastructure institution from five years for the period undergone by them. 

The tribunal also set aside Sebi’s direction to disgorge 25 per cent of the salary from Narain and Ramkrishna.

Coming down heavily on the market regulator, the SAT noted, “We must observe that when serious allegations were made against a first-level regulator, namely the NSE, Sebi should have been proactive and should have conducted the investigation seriously. We find that Sebi had adopted a slow approach and, in fact, was placing a protective cover over the NSE’s alleged misdeeds.”

The NSE had launched the colocation facility in 2009, which allowed traders and brokers to establish their IT servers within the premises of the bourse’s data centres in return for a fee. These participants could access the stock prices’ information faster, resulting in faster trade execution. In 2015, a whistleblower wrote to Sebi, alleging market manipulation by a few brokers using the facility. The implementation of the colocation technology was carried out under the supervision of Narain and Ramkrishna.

The SAT said there was laxity at the NSE, resulting in unequal distribution of IPs on the servers. The tribunal allowed Sebi’s direction to initiate enquiry against NSE employees. It directed Sebi to consider the charge of connivance and collusion of OPG Securities and its directors with any employee/official of the NSE.

As violations committed by OPG have been affirmed, Sebi has been provided with four months’ time to recalculate their disgorgement. “In spite of issuance of warnings, OPG continued to remain connected to the secondary server,” said the SAT. Due to low load on the secondary server, OPG gained advantage in accessing the data faster than other brokers.

The SAT bench also picked up many holes in the various orders passed by Sebi in the colocation matter. The tribunal noted that there were contradictions in the findings arrived at by the whole-time member (WTM).

“The WTM, in the order against the NSE held that early log in by TM (trading member) and OPG created an advantage. The WTM held that a TM who logs in first would be disseminated the data first at the start of the trading day and, therefore, has an advantage over other TMs. On the other hand, the WTM, in the OPG matter, held that the early log in by OPG did not make any unfair advantage. This anomaly is one such instance and there are more,” said the tribunal.

However, the SAT has affirmed the Sebi WTM’s decision to prohibit the NSE from accessing the securities market for six months and directing it to carry out system audits at frequent intervals.

Law firm The Law Point represented Sebi in the matter, while OPG Securities was represented by Ravichandra Hegde, partner, Parinam Law Associates.

The Central Bureau of Investigation (CBI) has also been investigating the matter. It had arrested Ramkrishna in March last year. However, she was later granted bail.

The NSE declined to comment on the SAT order. Sebi didn’t respond immediately to queries sent.