A modest Rs25 lakh penalty imposed on the Bombay Stock Exchange (BSE) by the Securities and Exchange Board of India (SEBI) last week triggered a small storm on social media. Why should BSE walk away with a token fine of a serious violation when the National Stock Exchange (NSE) has faced a barrage of show-cause notices from the regulator, along with expansive and inconclusive probes by the central bureau of investigation (CBI) and the enforcement directorate (ED)?
This question harks back to NSE’s infamous co-location (Colo) scandal which first surfaced in 2015 when I published the letter of a whistle-blower. He had alleged that certain high-frequency traders received privileged access to low-traffic servers, raking in large profits at the expense of other investors.
A consequence of that investigation and various appeals filed by NSE is that its initial public offering (IPO) has been on hold for nearly decade, much to the chagrin of its institutional and retail investors, whose number has swelled to 100,000 under the benign eye of the regulator.
In a bid to ensure listing, NSE has now offered to settle all pending cases and has readied a settlement corpus of Rs1,400 crore kitty in addition to Rs643 crore already paid to settle a separate Colo-related case in October 2024. This raises a simple question: Is India’s most profitable exchange now paying its way out of trouble after years of stonewalling? And is there any basis to the claim that BSE has got away lightly for a similar issues? Let us examine the facts.
For starters, the two cases are vastly different. In the NSE Colo scandal, SEBI officials had shielded the Exchange by suppressing the whistle-blower’s letter (until I published it). NSE had flatly denied wrongdoing, or that preferential access was even possible with its sophisticated technology. When a serious investigation was finally initiated, multiple independent audits commissioned under SEBI orders disproved NSE’s false claims decisively.
By contrast, the BSE findings arose from a SEBI inspection covering February 2021 to September 2022. SEBI found that BSE’s systems permitted certain employees and paid clients to access corporate announcements before public release. In addition, it failed to penalise brokers who repeatedly modified client codes (CCM), and created systemic risk by relying on broker certifications for compliance.
SEBI could not establish actual misuse due of early access to announcements, nor show disproportionate gains to BSE or loss to investors. However, it concluded that the Exchange, as first line regulator and a gate-keeper, had failed to maintain fairness, transparency and proper oversight in the dissemination of price-sensitive information and the monitoring of broker activities. Meanwhile, BSE had addressed all the issues raised by the inspection.
The BSE case stands in stark contrast to how SEBI handled NSE’s Colo issue. Its adjudication order held that BSE has a “…fiduciary duty to the entire ecosystem requires that even the possibility of information asymmetry be avoided.” Hence, the penalty.
Yet, although the NSE scandal was exponentially more damaging, SEBI came across as a captured regulator that was timid, hesitant and slow to act against a powerful exchange. It also turned a blind eye to blatant failures of governance, conflicts of interest and irregular appointments at NSE. It took four years to issue the first set of show-cause notices in 2019. A subsequent regulatory overdrive based on a weak investigation led to poorly drafted orders that included and gratuitous, unproven remarks by a whole-time member (WTM) which damaged SEBI’s case in appellate proceedings.
Both episodes reveal how SEBI relies on vague, ambiguous statutory provisions and, often, fails to substantiate its charges in appeals. In the BSE matter, SEBI’s own adjudicating officer dismissed certain charges as vague and unsustainable. In the NSE Colo scandal, the Supreme Court ordered SEBI to return Rs300 crore out of the Rs625 crore disgorged (in addition to the Rs1,000 crore penalty) because the SEBI order lacked a statutory basis for disgorgement without proving unlawful gains.
Delay Explained
This brings us to the peculiar dilemma that SEBI faces in clearing the NSE IPO. NSE has already won some cases in its appeal against SEBI orders, while others are pending in the appellate tribunal or apex court. Ten years later, there is almost no progress in some show-cause notices. The same is true of the CBI and ED investigations. In this situation, how would SEBI structure an NSE settlement? There are two key questions:
1.Will SEBI withdraw pending appeals in order to facilitate the IPO? That would mean that NSE would enjoy status quo on the cases it has won and will settle others. It still does not explain what happens to the show-cause notices to various brokers, including those against Ajay Shah, Infotech Financial Services, etc. Will all of them be given the same option of settlement? (https://www.moneylife.in/NSEAlgoscam/pdf/ SEBI-Order-NSE-Ajay-Shah-Others-30-April-2019.pdf ).
2.Alternatively, will NSE pay up over Rs1,400 crore, to appease the regulator and get its listing, despite having won a few cases? A well-known securities lawyer thinks this is, indeed, a possibility. “A settlement proposal can be made to close all issues by accepting and abiding by SEBI orders. The exact details and terms of settlement will be kept out of the final settlement order,” he notes. Moreover, such a settlement would apply to all pending matters, treating SEBI’s orders as final, regardless of who has prevailed in the interim.
Whatever route SEBI chooses, it would be a very opaque way to close a serious episode in the history of India’s largest market infrastructure institution. It does not speak well of SEBI’s investigative and enforcement capacity. In the end, SEBI’s leverage is not derived from the strength of its investigation but from its power to stall the IPO indefinitely—while ignoring active, illegal trading of NSE shares on websites that openly offer daily buy-sell quotes and price charts mimicking secondary market trading.
It will be instructive to see what terms the final settlement order discloses. In global markets, regulators typically issue detailed settlement orders, even when no guilt is admitted or denied. SEBI orders, by contrast, tend to conceal crucial facts behind vague statutory references. Neither the finance ministry nor the parliamentary standing committee on finance has shown any inclination to scrutinise such practices or question the glaring inconsistencies in SEBI’s enforcement.
SEBI officials are fully aware of the problem, but there is enormous pressure to approve NSE’s listing which is expected to unlock a valuation exceeding US$20bn (billion) and create a major new stock for institutional investors.
Another profound irony is that NSE once used its privileged position to block BSE’s and MCX’s listings by lobbying the same regulator. In 2010, the Bimal Jalan committee report recommended draconian restrictions on listed exchanges, including caps on profit distribution and income from listings. All of this changed when NSE’s public-sector promoters (large institutions and banks) wanted an exit, paving the way for foreign portfolio investors eager to buy into India’s fastest-growing and most profitable exchange.
In time, SEBI allowed BSE and MCX to list without most of Jalan committee’s restrictions. Meanwhile, NSE’s own IPO has remained in a limbo, since it filed its red herring prospectus in 2016. During this period, SEBI has studiously turned a blind eye to the open unregulated trading in NSE’s unlisted shares. (Read: NSE's Co-location Scandal: Close Issue, List and Usher Transparency).
Lessons from a Decade of Delay
On paper, the proposed settlement looks like an elegant resolution: SEBI can claim a record payout; NSE can shed its regulatory baggage; and India’s largest exchange can finally tap public markets. But if there is a unifying dark theme to this saga, it is the danger of regulatory inconsistency all around. SEBI, which hid behind the Jalan committee to block BSE’s listing, is now looking to close a huge scandal with a settlement, primarily to enable NSE’s listing. That this hides its failure to bring the investigation to a proper conclusion is a bonus.
The NSE, a first line regulator which lobbied hard to prevent listing of exchanges under a different management, is now paying a record settlements to end its own controversies to ensure what may be the largest listing in Asia. Meanwhile, it remains extraordinarily profitable and continues to dominate trading near-monopoly in the derivatives segment.
In the end, the story of NSE’s IPO is not simply about one exchange’s quest for capital. It is a cautionary tale about what happens when a regulator mistakes opacity for prudence and expediency for resolution. No settlement, however large, can redeem a decade of drift.
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