Sebi to issue fresh notices to NSE, other entities in co-location case soon

Sebi seeks explanation from violators on why monetary penalty should not be levied

The Securities and Exchange Board of India (Sebi) is in the process of issuing a fresh set of show-cause notices to the National Stock Exchange (NSE) and over a dozen other entities in the co-location (colo) case. According to people in the know, these notices are part of the adjudication proceedings, and seek an explanation from alleged wrongdoers as to why a monetary penalty should not be imposed on them.

Earlier, Sebi had issued two sets of show-cause notices to the exchange and others.

The first set of interim notices was issued in 2017 against 14 individuals. The second set was issued early this year to NSE and 20 others for alleged violation of SECC (Stock Exchanges and Clearing Corporation) Regulations and the Prevention of Fraudulent and Unfair Trade Practices norms. 

A regulatory official said two separate actions are underway 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,” explained a regulatory source. 

Under this Act, an accused is restrained from accessing the securities market and prohibited from buying, selling or dealing in securities either directly or indirectly for certain period, the official said. 

Meanwhile, under the adjudication proceedings, Sebi levies monetary penalty on the people if they are found to have made unfair gains. 

All entities issued show-cause notices will be offered a personal hearing before Sebi in the matter, said another person in the know. 

The NSE is said to have provided a written submission to Sebi on the charges levelled against it. 

However, the bourse is yet to appear before Sebi for a personal hearing under the on-going adjudication proceeding, said a source.

An email sent to the exchange did not elicit any response. 

The second set of notices was issued after completion of investigations into NSE’s practices and systems by Sebi and various auditors.

It was found that the NSE’s systems were prone to manipulation that allowed certain brokers access ahead of others. 

The NSE and some of the involved entities had filed a consent application after it was served the second show-cause notice, to settle the matter. Sebi is yet to respond to the settlement plea. Meanwhile, Sebi had directed the NSE to keep out its four key managerial personnel (KMP), out of action of the bourse’s sensitive and confidential matters until the probe is complete. 

In May 2017, Sebi had formed an internal investigative team to look into potential connivance between NSE officials and brokers accused, of misusing the co-location facility. Sebi has also appointed two forensic auditors to audit the money trails and undue gains made out of preferential access at the exchange server. 

In addition, Sebi had also appointed an enquiry officer to look into the potential connivance between NSE staff and brokers.
 

Story so far
 

• March 2016: Sebi’s expert committee report says NSE violated norms of fair access
• January 2017: Sebi directs NSE to submit comprehensive action plan to address issues and findings raised in the forensic report
• March: NSE appoints EY to conduct forensic audit of cash and currency derivatives segment
• July: Sebi issues interim notice to NSE and 14 individuals
• May 2018: Second show-cause notice issued to NSE and 20 others
• August: NSE files consent application with Sebi; yet to be considered

Cracking the whip

• Fresh notice to be issued under Sebi’s adjudication proceedings
• Adjudication proceeding has been initiated for imposing monetary penalty
• Notices will be served to dozen entities including exchange, employees and brokers