Will NSE IPO hit the market in 2017?

Exchange's pending co-location issue with Sebi has caused uncertainty

Securities and Exchange Board of India (Sebi) Chairman Ajay Tyagi on Monday said the National Stock Exchange (NSE) may have to refile the offer document for its much-awaited initial public offer (IPO), which could potentially raise more than Rs 10,000 crore from investors.

NSE, the country’s largest stock exchange, filed its prospectus for Sebi approval in December 2016. Following which, the exchange has gone through a lot of material changes that need to be updated in the offer document. For one, it has appointed Vikram Limaye, MD & CEO of IDFC, as the next chief. More importantly, the financial numbers for a company going public cannot be more than two quarters old. Now, the IPO hinges on what happens to the 'unfair access' controversy at its co-location facility.

Both Sebi and NSE have maintained that the IPO cannot proceed unless the co-location (co-lo) issue is put to rest. Given the stage at which the case is, experts say that it could take up to six months for the co-lo controversy to settle.

NSE, on its part, is trying to settle the case through the consent route to avoid lengthy proceedings. Tyagi recently said it is "too early to comment if the NSE issue can be settled through the consent mechanism". The Sebi chief added that NSE and 14 key managerial personnel of the exchange have replied to Sebi's show cause notices, which are "under examination". The regulator will take a view only after it has studied the replies.

Under the consent mechanism, an alleged wrongdoer settles the matter with Sebi without admitting or denying guilt. The regulator may levy a penalty on the wrongdoer, impose a market ban, or opt for both. In the past, a lot of companies, including Reliance Infrastructure, Suzlon, RBL Bank, and JP Morgan, have used the consent route to settle outstanding matters with Sebi.

However, not all offences can be settled through the consent route. Sebi has kept out serious violations such as insider trading and front-running from the ambit of the route.

Legal experts say that Sebi will be able to proceed with the consent route once it is able to ascertain the gains made by brokers or any other entities due to alleged lapses at NSE’s co-location facility.

Experts also say Sebi has moved to a more formula-driven approach for consent settlement. Under the new framework, it is important to ascertain unlawful gains in order to decide monetary terms for the settlement, add experts.

While there have been several audits on NSE so far, none of them have been able to quantify the gains made by entities involved.

Recently, Sebi appointed another forensic auditor to ascertain gains made by brokers or any other entities involved by gaining preferential access to NSE’s co-lo facility.

The agency could take two to three months to submit its findings. After which, Sebi will be able to arrive at the penal action, if any, to settle the matter through consent, say experts.

Once the dust settles, NSE may update and re-file the IPO document with Sebi. Typically, Sebi takes more than two months to clear an IPO document. However, to NSE's good fortunes, investment bankers say the exchange may get a quick clearance as Sebi had already done part of the work on the IPO document.

While the exchange said that it can launch its IPO before the end of 2017 if the co-lo issue is settled, looking at how things stand, it seems far-stretched that the exchange will be able to hit the markets in the next six months.