Sebi keeps NSE's consent petition on hold in the co-location case

Regulator will take a call on consent plea only after final judgment by the Madras High Court on writ petition filed against exchange

Capital markets regulator Securities and Exchange Board of India (Sebi) has kept the National Stock Exchange’s (NSE’s) consent plea on hold in the co-location (colo) case, until the Madras High Court (HC) decides on the writ petition filed against the exchange and others in the matter, said two persons privy to the development. NSE filed its second consent application with Sebi in October to settle the matter, after its first settlement plea was returned by the regulator in 2017.

In August, the Madras HC issued a notice to Sebi on a writ petition filed by a lawyer, seeking appropriate action against NSE employees for giving preferential access to certain people who made unlawful gains by misusing its co-location facility. 

“We have submitted our response to the high court on the allegations made by the petitioner in the colo case. The adjudication proceeding is underway and will soon conclude,” said a regulatory source. However, the decision on the consent plea cannot be taken until the court passes its final judgment in the case, said Sebi sources, adding that the petitioner in the court had raised objections over the consent plea filed by NSE. 

Emails sent to NSE and Sebi remained unanswered. 

A Kumar, the petitioner in the case, had submitted to the court that Sebi should take action against the concerned people involved in the case irrespective of the criminal case filed by the Central Bureau of Investigation (CBI).  

The petitioner alleged that the NSE had launched the co-location facility — which allowed rental space with low latency connectivity to the exchange — in 2010 without any approval from the regulator, adding that the guidelines for the high frequency trading came into force in 2012. Further, he also alleged that certain brokers caused monetary loss to investors.

The petitioner also claimed that wrongful gains to the aggrieved parties were not quantified properly despite the petitioner making various representation to the regulator. “Wrongful gains by the select brokers cannot be quantified exactly, but it is likely to run in crores per year over a period of five years,” he said. 

So far, Sebi has issued two sets of show cause notices to the exchange and others. The first set of interim notices were issued in 2017 against 14 individuals. The second set was issued early last year to NSE and 20 others for alleged violation of SECC (Stock Exchanges and Clearing Corporations) Regulations, and the Prevention of Fraudulent and Unfair Trade Practices norms. 

The markets regulator is conducting two separate actions in the matter. One is the action under provisions of 11(B) of the Sebi Act, where charges were levied against the exchange, employees and brokers, and show-cause notices were issued accordingly. Meanwhile, under the adjudication proceedings, Sebi will levy a monetary penalty on the people if they are found to have made unfair gains.

BONE OF CONTENTION

• Madras HC issued notice to Sebi in August, based on a writ petition seeking action against NSE staff 
• Petitioner alleged the exchange had launched the co-location facility in 2010 without approval from the regulator
• Petition also claims wrongful gains to the aggrieved parties were not quantified properly