The Securities and Exchange Board of India (Sebi) on Tuesday directed the National Stock Exchange (NSE) to disgorge Rs 625 crore, along with interest at 12 per cent per annum since 2014, for lapses at its co-location (colo) facility, which allowed unfair access to certain brokers. The regulator also barred the exchange for a period of six months from accessing the securities market.
The markets regulator also came down heavily on NSE’s former managing directors (MDs) and chief executive officers (CEOs) Ravi Narain and Chitra Ramkrishna, who were at the helm when the exchange servers were exploited. Sebi asked Narain and Ramkrishna to disgorge a fourth of their salaries drawn from FY2010-11 to 2012-13 and for FY2013-14, respectively. It also barred them from associating themselves with a listed company or market intermediary for five years.
Narain's gross remuneration during FY11-13 stood at Rs 24.3 crore, while it was Rs 4.5 crore for Ramkrishna in FY14, show the NSE's annual reports.
A spokesperson for the NSE said the exchange was in the process of examining the Sebi order and would take appropriate steps as may be legally advised. Others impacted by the order couldn’t be reached immediately.
In separate orders, Sebi imposed penalties on brokers OPG Securities, Way2Wealth Brokers, and GKN Securities.
Between June 2010 and March 2014, the NSE had deployed so-called tick-by-tick (TBT) architecture at its colo facility. TBT disseminated data feed sequentially, giving preference to trading members (TM) that had connected first to the colo server. Taking advantage of the system, little-known broker OPG Securities frequently obtained first access to the exchange system in connivance with certain NSE staffers. The issue was brought to light by a whistle-blower, Ken Fong, who sent three complaint letters to Sebi in January, August and October of 2015 following which the regulator initiated multiple probes and forensic audits into the matter.
In a 104-page order, G Mahalingam, whole-time member, Sebi, said, “Even though sufficient evidence is not available before me to conclude that the NSE has committed a fraudulent and unfair trade practice…I find that it is established beyond doubt that the NSE has not exercised the requisite due diligence while putting in place the TBT architecture.”
The order says the failure of the NSE to ensure equal and fair access was in violation of Regulation 41(2) of the SECC Regulations, 2012.
Sebi arrived at the disgorgement amount of Rs 625 crore by computing the profits made by the NSE between FY11 and FY14 from its colo facility. The exchange generated revenue of Rs 811 crore with an average net profit margin of 77 per cent during this period.
“Applying the margin on the NSE’s revenues from co-location facility (excluding rack charges) from 2010-11 to 2013-14, I find that the profit from co-location operation comes to Rs 624.9 crore,” the order says.
In another order, Sebi directed OPG Securities, its MD Sanjay Gupta, three others to disgorge Rs 15.6 crore, with an interest of 12 per cent per annum since April 2014, it made “unlawfully”.
Sebi also barred OPG, Gupta and two other directors from accessing the capital markets for a period of five years and imposed one-year ban from acquiring new clients on the brokerage.
“OPG Securities had made unlawful gains of Rs 15.57 crore, which could not have been made but for the illegal connections made to the secondary POP server, I am inclined to direct disgorgement against the aforesaid TM and its directors in the instant proceedings,” the order says.
The regulator observed that OPG Securities’ market share fell sharply after the NSE deployed multicast TBT broadcast at its colo facility.
In a separate order, Sebi acted against dark fiber connectivity provider Sampark Infotainment, two brokers and exchange officials for facilitating “unauthorised” connectivity. Sebi barred Sampark from providing telecom services to any securities market intermediary. The regulator directed the NSE to deposit another Rs 62.6 crore with interest, Way2Wealth to deposit Rs 15.34 crore with interest, and GKN Securities another Rs 4.9 crore with interest.
All the money will have go to investor protection and education fund (IPEF) within 45 days with 12 per cent interest since September 2015.
Sebi barred Ravi Varanasi from associating with any stock exchange or market intermediary for a period of two years. Varanasi is currently a senior vice president and chief of business development at the exchange.
Sebi order says Way2Wealth and GKN “fraudulently availed of P2P connectivity with the help of an unauthorized telecom service provider (Sampark) at the colo facility of NSE, in a manner to gain undue advantage in terms of low latency and high bandwidth in data transmission as compared to other stock brokers in securities market”.
Sebi has also charged Ajay Shah and his wife Susan Thomas of Indira Gandhi Institute of Development Research (IGIDR), Infotech Financial, Krishna Dagli and NSE’s Suprabhat Lala with governance lapses at the exchange. The regulator said the NSE unfairly awarded Infotech Financial and these individuals a project to calculate liquidity index (Lix).
Sebi directed Shah Infotech Financial, Dagli and Thomas from providing any services to a stock exchange or other market intermediary for a period of two years.
Sebi has also directed the NSE to take necessary legal actions against Shah, Infotech Financial, Thomas and Dagli (directors of Infotech Financial Services) for violating the provisions of the "professional service agreement" signed with Infotech in connection with Lix project and for misuse of data made available to them by the exchange.
Legal experts said most affected by the Sebi orders would appeal before the Securities Appellate Tribunal (SAT).