SEBI Fines NSE Over Rs 1,000 crore in Co-Location Scandal

Market regulator Securities Exchange Board of India (SEBI) on Tuesday, April 30, has ordered National Stock Exchange (NSE) to pay a fine of over Rs 1,000 crore in relation to a co-location scandal through which NSE favoured a set of brokers to make illegal gains through preferential access to the exchange servers.

The regulator also barred NSE from entering any new derivatives contracts (any form of fundraising) for the next six months. On April 30, SEBI released five separate orders, all related to the co-location scandal.

These orders emanate from several investigations undertaken by the regulator after a whistleblower complaint in 2015 that alleged irregularities on the part of co-location facility of NSE.

Under the NSE co-location facility, brokers can place their servers in the exchange’s data centre, where they get faster access to the price feed, helping in swift execution of trades. But this system was rigged by several insiders of NSE, providing preferential access to the exchange servers and garnering thousands of crores.

The SEBI found Ravi Narain and Chitra Ramkrishna, both former Managing Directors of NSE as guilty in the case and banned them from associating with the market for five years. It ordered Narain to disgorge 25% of his salary drawn between 2011 and 2013 and told Ramkrishna to do the same for the financial year 2013-14 for violating the Securities Contracts (Regulation) (Stock Exchange and Clearing Corporations) Regulations, 2012.

One order directed NSE to disgorge “an amount of Rs 624.89 crore, along with interest calculated at the rate of 12% per annum from April 01, 2014, onwards to the Investor Protection and Education Fund (IPEF),” which amounts to over Rs 1,000 crore.

The investigations found that NSE helped three brokers- OPG Securities, GKN Securities and Way2Wealth Securities, and gave preferential access to its trading servers between 2011 to 2014. These brokers also got unauthorised optical fibres setup in NSE premises which allowed them in accessing exchange servers.

In another order, the regulator barred several persons – Ajay Shah, Krishna Dagli, Sunita Thomas and Suprabhat Lala, NSE Assistant Vice President, Trading Operations, from being associated with any entities recognised by the market regulator for a period of two years. The Board also directed NSE to take legal action against them for the violations. The regulator observed that these persons have “misused the confidential and sensitive data provided by NSE for being used in Liquidity Index (LiX) computing project, to develop algorithmic trading software for sale in the securities market, thereby compromising the integrity of securities market”.

In response to the developments, NSE Managing Director Vikram Limaye, in an interview to Business Standard said that the orders “will not impact regular trading on NSE and the trust on NSE and the Indian markets for all investors is rock solid”.