Deficient regulation

Sebi needs capacity to protect investor interests

The Securities Appellate Tribunal (SAT) has set aside much of the disgorgement-cum-penalties imposed on the National Stock Exchange (NSE) in the co-location case in an April 2019 order by the Securities and Exchange Board of India (Sebi). The tribunal has also revoked the penalties imposed on Chitra Ramkrishna and Ravi Narain, who were senior officers of the NSE. It has asked the markets regulator to reconsider the extent of disgorgement imposed on another company, OPG Securities, which was indicted. However, reports indicate that Sebi is likely to approach the Supreme Court. The co-location case refers to preferential access given to some high-frequency traders on the NSE’s platform. These select entities received advance price information, and allegedly profited by front-running. In another investigation of the NSE’s functioning, Sebi discovered Ms Ramkrishna had bypassed the NSE board in appointing Anand Subramanian group operating officer and advisor to the managing director (herself) at a very high compensation.

The Sebi order said there were multiple violations of the Sebi Act, 1992; the Securities Contracts (Regulation) Act, 1956; and the Securities Contracts (Regulation) (Stock Exchanges and Clearing Corporations) Regulations, 2012. However, while the tribunal confirmed many violations had occurred, it reduced the extent of penalties. The SAT order also questioned the investigative process, asking a rhetorical question: “How did Sebi direct the NSE to conduct an investigation against itself?” The tribunal noted Sebi should have itself conducted an investigation or enquiry into such grave charges instead of asking the NSE to do it. It further noted that a casual approach was adopted in this matter.

The Sebi order of April 2019 imposed a disgorgement of Rs 625 crore on the NSE, along with interest at 12 per cent per annum from April 2014. It debarred Ms Ramkrishna and Mr Narain from associating with any listed company, a market infrastructure institution, or any market intermediary for five years. Sebi also imposed a disgorgement order of Rs 15.6 crore plus interest on OPG Securities and its directors. However, the SAT has reduced the NSE penalty to Rs 100 crore, to be paid into the Investor Protection and Education Fund. This is to be adjusted against the payments made and Sebi will have to return the excess amount to the NSE. The debarments will be adjusted against the time already served by Ms Ramkrishna and Mr Narain. Sebi has also been asked to review the disgorgement order against OPG Securities and compute a revised amount within four months, though the violations committed by OPG Securities were confirmed by the SAT.

The SAT justified the relief by saying the NSE itself did not indulge in any unethical acts, nor did it unjustly enrich itself. Hence, the directions to disgorge were excessive even though provisions of various Acts were not adhered to. There are many layers to this case. It’s clear that there were governance lapses at the NSE. It’s also apparent the co-location facility was misused. The SAT rightly pointed out that Sebi should not have asked the NSE to investigate itself. But the regulator may have lacked the technical skills required to analyse and untangle the data of multiple trades placed within microseconds of one another.

However, given an environment with the increasing use of algorithmic trading, the regulator must develop and continuously upgrade the capacity to investigate such complex situations in-house. Sebi needs to do this to protect the interests of investors and maintain the integrity of securities markets.