On 13th September, media headlines said that the market regulator had completely exonerated the former management of the National Stock Exchange (NSE) in the co-location (Colo) scam of 2015. Some speculated that this had cleared the path for a listing of the National Stock Exchange (NSE) amidst the turmoil at the Securities and Exchange Board of India (SEBI).
But nothing is as new or simple as it seems. When you look at the sequence of developments, it is clear that the order only reiterated the exoneration by another whole-time member (WTM) in 2019. In the bizarre wonderland of SEBI investigations, a WTM had seen fit to order a huge disgorgement (not penalty) against NSE and its two former managing directors (MDs), despite a weak investigation. So January 2023, that order was largely quashed and partly sent back to SEBI by the securities appellate tribunal (SAT), accompanied by scathing criticism of the regulatory body and its contradictory findings.
Last week, WTM, Kamlesh C Varshney, issued two orders on the specific directions of SAT: the first, reaffirmed SEBI’s 2019 stand that no conclusive evidence of collusion was found against NSE or its top officials; the second, enhanced the disgorgement of illicit profit earned by stockbroker OPG Securities from Rs15.75 crore to Rs85.25 crore plus 12% interest from May 2015.
But more about that later. First a brief recap.
Recap of Colo Scam: Introduced in 2009, NSE’s co-location services allowed institutional investors to park their trading servers within the Exchange premises for a fee, granting them expedited data feeds crucial for high-speed algorithmic (algo) trading, which executed trades worth crores of rupees in milliseconds. The competition centred on securing the lowest latency connections for rapid trade execution.
In 2015, a whistle-blower wrote to me (after SEBI officials had ignored his complaints) about how NSE officials were selectively allowing brokers, specifically OPG Securities, to profit from preferential access to low-latency servers of the Exchange. NSE filed a defamation case against Moneylife and me for publishing the whistle-blower’s letter but lost the case.
The problem of selective access was eventually corrected by switching to a different technology with load balancers and randomisers, to ensure fair and equal access. But the letter and its aftermath triggered an WIDE-RANGING investigation, leading to several SEBI orders and a change in NSE’s top management after 23 years. (Our book Absolute Power).
SAT on SEBI’s Shoddy Investigation
Despite the sweeping action, SEBI’s core investigation remained weak, contradictory and failed to conclusively establish wrongdoing, even as it concluded that the NSE management had failed to provide fair and equitable market access. That is why SAT’s January 2023 ruling on appeals filed by NSE and OPG Securities was caustic in its indictment of the regulator.
Paragraph 255 of the 2023 order says: “Before we conclude, we must observe that when serious allegations were made against a first level regulator, namely, NSE, SEBI should have been proactive and should have conducted the investigation seriously. We find that SEBI had adopted a slow approach and, in fact, was placing a protective cover over NSE's alleged misdeeds. It is only when questions were placed on the floor of the Parliament that SEBI woke up and instituted an investigation. The scope of investigation was limited and not made under Section 11(4) but was conducted by another agency under Section 11C. In our opinion, considering the gravity of the alleged charges, SEBI should have itself conducted an investigation / enquiry instead of delegating it to NSE to conduct an investigation. It is strange and it does not stand to reason as to how SEBI directed NSE to conduct an investigation against itself. It is clear that a casual approach was adopted."
On the SEBI WTM’s contradictory orders, it said: “It is not worthwhile to cull out all the contradictions but it is suffice to state that the same Officer who has passed the orders on the same date cannot make different analysis on the same subject/issue.” One order of the WTM held that early log-in (central to the Colo issue) did not give any broker an advantage, thus helping NSE; the second order, against OPG Securities, concluded that early log-in had given it an advantage. Read more here: NSE Colo Scam: SAT Sets Aside Disgorgement Orders against NSE, Ravi Narain & Chitra Ramakrishna.
SAT overturned SEBI’s order imposing a six-month ban on NSE and disgorgement of Rs624.89 crore with interest, as well as a claw-back of 25% of the salaries of two former MDs, Ravi Narain and Chitra Ramakrishna. Instead, it levied a penalty of Rs100 crore as a deterrent for failure of diligence expected from a first-line regulator. However, while it upheld the finding of unfair trade practice against OPG Securities, it asked SEBI to re-examine the disgorgement of Rs15.75 crore with interest and investigate possible collusion between NSE officials and the broker.
Pending Appeals
SEBI appealed the SAT order quashing disgorgement, but not the charge of collusion and conspiracy with NSE officials. The Supreme Court (SC) refused to stay the SAT order and, instead, asked SEBI to refund Rs300 crore to the Exchange. OPG Securities also filed an appeal. Since the SAT order was not stayed in both cases, SEBI had to re-examine issues the issue as directed, leading to the 13th September orders.
Did Varshney Exonerate NSE?
SEBI issued a fresh show-cause notice (SCN) to the same NSE officials and again failed to dig deeper or establish collusion or fraud. Consequently, Mr Varshney has merely reiterated the 2019 findings that no case was made under the Prohibition of Fraudulent and Unfair Trade Practices (PFUTP). He has also upheld the failure to ensure fair and equitable treatment to market participants.
Some would say that SEBI’s weak investigation had already set the stage for such a conclusion. But the penalty of Rs100 crore imposed by SAT still stands, unless the apex court decides otherwise.
The second order against OPG Securities is more interesting. It reworked and enhanced the penalty against the broker from Rs15.75 crore (with 12% interest from 2014) to Rs85.25 crore, plus a six-month ban on trading in addition to the five-year debarment ordered earlier. This was for gaining a trading advantage through unfair access to the secondary server. The order is interesting because OPG’s legal team attacked SEBI’s actions every step of the way—from its decision to expand the scope, time period and methodology for calculating disgorgement, inclusion of cash markets and currency derivative transactions, extensive cross-examination of all consultants involved in the investigation, to attacking the credibility and competence of the team from the Indian School of Business, Hyderabad. The SEBI WTM was clearly undeterred by this blitzkrieg. A small concession may be the fact that the final disgorgement figure is lower than the Rs132.28 crore proposed by SEBI in its SCN to OPG Securities after re-examination of issues. Mr Varshney also held that no collusion was found between NSE officials and OPG Securities and rejected another charge that OPG gained an advantage by crowding out other brokers from less used servers.
So, two SEBI investigations and a SAT order have now held that OPG Securities profited from repeated, unauthorised access to secondary servers because NSE officials failed to initiate decisive action or correction. And that this happened without any collusion or connivance with the broker. So was the failure due to gross incompetence of NSE officials, when it was obvious that every millisecond of faster access impacted the profit earned? The answer perhaps lies in which officials SEBI chose to target and those who were left out, even though they were directly connected with the issue.
Clearly, OPG will use all legal avenues to fight the SEBI order and the legal wrangling will continue. Importantly, this is just one of the five or six other orders in the Colo matter which NSE had hoped to close or settle to be able to list its shares after nine long years. I understand that SEBI has not bothered to respond to NSE’s request.
This is yet another example of why the market regulator, already facing a serious credibility crisis, needs a complete overhaul of its processes, priorities and operations. Unfortunately, the government’s silence reflects a complete lack of concern about the long-term damage this can inflict on the capital market.
Comments
rmganatra
2 weeks ago
It is clear that SEBI is burying the CoLo scam. The result is further undermining of SEBI's credibility.
This is a multi-decade train wreck happening in slow motion, starting from Bhave onwards. It's not just governance mishaps but an institutional and cultural failure. MPB, a from private sector couldn't clean it up either. She got sucked into a vortex (known as government) she thought she could handle and paying then price for arrogance and ignorance. The whole leadership needs to change and maybe half of the staff needs to be fired. SEBI is unrecognisable. I don't know if North Block realises it.
It's so obvious that the guilty are left scot free just cos of an IPO.. but someone has surely an interest in this whole saga, else why on earth they can do this?? Sebi chitra may be spilling the beans against Busch
SEBI's callous approach is reprehensible. It botched up investigation deliberately and essentially says that a murder has been committed but by none! With further litigation, OPG will wriggle out. Not only that, even Chitra & Ravi Narain might also manage to get the penalty reversed. It's time now to penalise SEBI team for its cavalier attitude!
Time for second version of Absolute Power focussing on SEBI which can mess around with impunity!
Madam, You recommended the closure of Colo scam on 8/9th August 2024: NSE's Co-location Scandal: Close Issue, List and Usher Transparency, now ehy are you critisizing latest orders?
Sir, I am afraid you seem to draw your own conclusions from my column, which are unique to you -- nobody else arrives at the conclusions that you do. So I will not waste time explaining and justifying things when there is WHOLE body of writing on this issue. You may want to read again or consider whether this amounts to needling and trolling. best SD
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Time for second version of Absolute Power focussing on SEBI which can mess around with impunity!