Co-location case: Sebi directs senior NSE officials to stay 'out of action'

Securities and Exchange Board of India (Sebi) has directed the NSE to keep four senior officials, served show-cause notices (SCN) in the co-location case, out of action. Sources said these four key managerial personnel (KMP) will have to remain out of the bourse’s “sensitive” and “confidential” matters until the probe is complete.

The move is to ensure a fair trial in the colo case, which is nearing conclusion.

“These KMP have also been directed to recuse themselves from key decisions of the NSE. Further, they have been told not to participate in any of the core activities,” said a regulatory official. Meanwhile, the NSE has filed another consent application with Sebi based on fresh SCNs served on July 4.

Notices have also been served to about 20 individuals. These include Ravi Varanasi, the exchange’s chief of business development, and Suprabhat Lala, senior vice-president (regulatory and investor services cell).

Sebi had, in March, returned the NSE’s previous consent application citing pending investigations.

Experts say Sebi’s directive may not serve any purpose as it comes years after the investigation was initiated.

“Such an action should have come immediately after the investigation began. The matter has been going on for four years. Barring senior people from core activities would serve limited purpose and may not address the issue,” said J N Gupta, managing partner, Stakeholder Empowerment services (SES).

People with knowledge of the matter say Sebi’s directive has come after the CBI intervened and filed a first information report against Sebi officials and others in the colo case. CBI is probing a complaint of abuse of the tick-by-tick architecture of the NSE server.

ALSO READ: NSE in talks with Sebi, seeks inspection of documents in co-location case

It is alleged that exchange employees may have deleted important mails, texts and logs with the intention of destroying electronic evidence.

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 2017, Sebi had issued interim show-cause notices to the exchange and 14 officials — both former and existing — asking them to explain alleged irregularities in the functioning of the co-location system.

That notice was related to violation of SECC (stock exchanges and clearing corporation) regulations by NSE and its officials. The regulator has been probing alleged lapses in high-frequency trading offered through NSE’s co-location facility since 2015.

Industry experts say Sebi provisions allow for stringent action against those found guilty of market manipulation.

Sebi has the powers to impose a heavy penalty and impose prohibition from accessing the securities market for at least five years. The aggrieved party, however, may take the judicial route to challenge the decision.

Story so far

January 2015: Sebi gets complaint letters highlighting flaws at NSE’s algorithm trading systems

March 2016: Sebi’s expert committee report says NSE violated norms of fair access

September 2016: Sebi directs NSE’s board to conduct an independent probe

December 2016: NSE submits Deloitte’s report to Sebi; report suggests NSE’s systems were prone to manipulation

January 2017: Sebi directs NSE to submit a comprehensive action plan to address the issues and findings raised in the forensic report

March 2017: NSE appoints EY to conduct forensic audit of cash and currency derivatives segment

March 2018: Sebi returns NSE’s consent application citing pending investigations

May 2018: Sebi issues second show-cause notice to the NSE and 20 individuals