Madras HC issues notice to Sebi, MCA, ED in NSE co-location case

The Madras High Court has admitted a Public Interest Litigation (PIL) filed by the Chennai Financial Markets and Accountability (CFMA) in the National Stock Exchange (NSE) co-location case and issued notices to the SEBI, the Ministry of Corporate Affairs (MCA), the CBI, Enforcement Directorate (ED) and the NSE.

It has also issued notices to the Serious Fraud Investigation Office (SFIO) and the Financial Intelligence Unit (FIU). The High Court has directed the noticees to respond on November 11.

The petition stated that NSE has violated the fundamental objective inside the trading and thereby in the process and given illegal preferential access to certain trade members to access NSE trade data at the cost of entire securities market.

According to the PIL, SEBI has not taken any effective steps to unearth the scam, "one of the biggest financial frauds ever taken place".

The order copy dated September 27 also said that the PIL brought to the knowledge of the court that the third respondent, the Central Bureau of Investigation (CBI) filed the first investigation report bearing "No.RC AC1 2018 A0011" on 28.05.2018, in relation to NSE co-location Scam and there appears to be a slow progress in the said investigation.

"We state that the NSE Colo Scam have tarnished the reputation of a major market infrastructure institution and severely challenged the integrity of the securities market. Millions of investors, mostly retail investors, would have suffered huge losses due to relatively delayed dissemination of order-book data to them and in the absence of the awareness that some select TM's were able to access the order book data ahead of them," the PIL said.

It further said that the terms of reference (TOR) for SEBI approved auditor and NSE approved internal auditor for the data centre and also the broker "OPG: must be investigated to see if they were adequate to unearth the illegalities and complicity and whether cognizance of all the findings of these auditors was taken by the authorities.

"Surprisingly this was not done by the 1st respondent SEBI at all," it said. It also noted a slow progress in the CBI investigation into NSE co-location scam.

The PIL further said: "It is shocking that the 1st Respondent (SEBI) had absolved the 7th respondent NSE and its officials of all allegations under the SEBI (Prohibition of Fraudulent and Unfair Trade Practices relating to the Securities Market) Regulations, 2003 ("PFUTP Regulations") in the relevant SCNs."

"It is submitted that when there is a serious fraud and misdemeanors committed by the top officials of the NSE who were acting hand in glove with the TMs towards manipulating the market and providing unfair trade access, NSE cannot be allowed to go scot free."

The co-location case dates back to 2015 when a whistleblower wrote to SEBI alleging that NSE was giving a few high-frequency traders and brokers preferential access to its trading platform which benefited both the parties at the cost of others.

The whistleblower had alleged that some trading member of NSE in collusion of employees or management of the exchange including preferential treatment to certain trading members to obtain faster access to market trade data.