RBI/SEBI/NABARD Important Topics: SEBI’s order in the co-location case – a bane or boon for NSE

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Are you preparing for RBI, SEBI, NABARD exams? Then you very well know the importance of being fully acquitted with the current affairs and all the happenings in the market. All RBI, NABARD, SEBI aspirants should keep in mind that each and every mark counts in your final selection and therefore you need to be on your toes to beat the huge competition out there. You must be going through various newspapers and different websites to be updated with current affairs which are important for RBI, NABARD, SEBI exams.

ixamBee will be bringing you short notes on all the important topics for RBI, NABARD, SEBI exams.

Let us look at one important topic which was in news recently: 

SEBI’s order in the co-location case – a bane or boon for NSE

After four years of investigation and seven expert committee reports/forensic audits, SEBI’s order against National Stock Exchange (NSE) in the co-location case, is a revolutionary judgment by SEBI.

Following a whistle blower complain by Ken Fong in 2015 against NSE’s co-location facilities, SEBI had initiated an investigation to determine if NSE’s co-location infrastructure was indeed leading to fraudulent or unfair trade practices. Co-location allows brokers to locate their servers in the stock exchange’s premise (here NSE’s) for faster access to data and exchange systems.

Although SEBI could not establish any violation under the Prohibition of Fraudulent and Unfair Trading Practices (PFUTP) Regulations, it found NSE guilty of lapses in its high-frequency trading offered through its co-location facility leading to violation of the Stock Exchanges and Clearing Corporation (SECC) Regulations. As such, NSE has been penalized by SEBI as follows:

  • to pay the penalty of approximately Rs.1000 crore (625 crore plus 12% interest per annum from April 1, 2014) for misuse of its co-location facility to the Investor Education and Protection Fund (IEPF) within 45 days. (the penalty of Rs.625 crore is based on the profit from co-location operations during the period under investigation)
  • prohibited from accessing the securities market directly or indirectly for six months from date of order i.e. April 30, 2019 (i.e. NSE cannot come out with its proposed initial public offering (IPO) for another six months)
  • to carry out System Audit at frequent intervals
  • reconstitute its  Standing  Committee  on  Technology  at  regular intervals to take stock of technological issues
  • to frame a clear policy on administering whistle blower complaints

 While NSE has been found guilty and been penalized by SEBI, NSE has more to gain than lose by this decision. Firstly, the overall monetary impact on account of payment of penalty on the financials will be nil to negligible. This is because NSE has already been depositing a portion of earnings from the co-location business in an escrow account since December 2016, as per SEBI’s earlier instructions. As of March 31, 2018, the deposited amount was Rs.800 crore and as of date would likely be covering the entire penalty amount. Secondly, the judgment removes the overhang from NSE for finally coming out with the impending IPO that the stock exchange has been intending since 2016. NSE had filed its draft prospectus with SEBI in December 2016 for an estimated Rs.10,000-crore IPO. After the conclusion of 6 months, NSE will be in a position to come out with the IPO and raise capital.

Not to forget, NSE also has the option to appeal with Securities Appellate Tribunal (SAT) and thereafter with Supreme Court. However, it is unlikely that it will do so as it would lead to another few years of investigation and inquiry. NSE is better off to plan its IPO and gain the lost ground to Bombay Stock Exchange (BSE) that listed itself in February 2017.

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